At the beginning of February, I disclosed an investment in three additional Italian REIFs (Amundi RE Europa, Europa Immobiliare Uno, Valore Immobiliare Globale) after buying shares in Unicredito Immobiliare Uno in January. I have already published the investment case for Valore Immobiliare Globale which can be found here.
Today, I will give you a heads up regarding Amundi RE Europa (ARE) and Europa Immobiliare Uno (EIU). As the names of the two funds suggest, their properties are not only located in Italy, but throughout Europe. Based on gross asset value, ARE’s portfolio ex Italy is 40%, while EIU has allocated 56% outside of Italy. More importantly, these assets are located in the more stable parts of Europe (i.e. UK, Germany, France, Sweden and the Netherlands). ARE and EIU hedge their foreign currency exposure, but do not hedge interest rates.
Both funds are trading at significant discounts to their NAV’s (ARE: 54%, EIU: 55% or 48% if one excludes a EUR 25 m claim against a third party). At the same time the fund managers only make modest use of debt (ARE’s LTV: 38%, EIU’s LTV: 32%) and also reduced debt levels over the last years. At the moment, I can buy the portfolios at attractive running yields (= gross rent / (market cap + debt – cash) of 12.1% for ARE and 13.6% for EIU. However, looking at what is left over after operating costs, fees and interest payments ARE yielded only 3.2% and EIU 4.5% in 2014 (based on market cap). While this is everything but spectacular, this is still 200 bps to 330 bps above the yield of 10 year Italian government bonds. Reason for the divergence between gross and net yields are relatively high fees paid to the fund managers. ARE is charging 2% of NAV and EIU is charging 1.5% of gross assets (1.25% from the beginning of 2015).
Each of the two funds owns a number of problematic assets (i.e. single tenant buildings located in the periphery which make it quite difficult to re-lease them in case the existing tenants decide to move out). However, with weighted average lease terms (break up options considered) of 4.1 years for ARE and 6.5 years for EIU, there is some visibility regarding future rental income. I think that the issues each fund has with a number of properties has already been partially reflected in the appraised values. For ARE current appraised asset values are roughly 18% below acquisition prices (37% for EIU). While there might be additional negative news flow on the horizon, at current prices both funds offer a large buffer. While ARE’s property values can fall by another 39% before an investor loses capital, for EIU this number is even higher at 47% (33% ignoring the claim against the third party).
Hence, I believe that these vehicles offer good value at current prices over a three to five year investment horizon.
Officially, ARE matures in December 2019, but fund management can make use of a grace period by extending the fund life by another 3 years until 2022. Officially, ARE matures in December 2016, but management has already made use of a grace period by extending the fund life by 3 years to 2019 and can make use of another extension of 2 years afterwards. So the fund’s maximum life ends in 2021. EIU’ maximum life ends in December 2017.
At the end of 2014, Capstone Equities placed a bid for 33% of EIU’s units outstanding at a price of EUR 720 per unit. An interview with Joshua Zamir, Capstones MD, can be found here. However, fund management rejected the offer as too low. In addition, PWC undertook a valuation based on a dividend discount model using discount rates from 10% to 11% for the period until the fund’s maturity in 2017. Based on this valuation method, PWC concluded that a fair price for the units would range between EUR 1,095 and EUR 1,127. Ultimately, only a fraction of unitholders accepted and Capstone Equities removed the offer. Apart from that, EIU’s fund management reported in Q3 2014 that an unnamed institutional investor carried out a due diligence over several months. However, after completion of the due diligence, the investor did not proceed with a potential acquisition of the fund’s properties.
Let’s have a closer look at each of the fund’s portfolios:
Almost the entire portfolio consists of office type real estate. While the fund is holding a total of 12 properties, the six largest holdings add up to 73% of equity. Please note that the foreign investments and Cinisello Balsamo are held via SPV’s. Four assets are held together with Amundi’s other listed REIF Amundi RE Italia, where both funds own 50% of the respective property (please click on the picture to enlarge):
The office building on Via Cristoforo Colombo (100% leased) is located between Rome’s city centre and the city’s office district close to Rome’s third largest railway station Ostiense. A debt financing for this asset together with Via sul Muro matures in 2016 with the option to extend for another three years. ARE bought the asset in 2011 from BNL Portfolio Immobiliare, which is another Italian REIF. The lease term with H3G expires in 2019, but the tenant has a break up option in 2016. H3G is an affiliate of Hutchison Whampoa. H3G is the fourth largest mobile network operator in Italy. Plans of a merger with TIM stalled in 2013, but a consolidation from four network operators to three which has already been the case in Germany, Austria and Ireland is likely to happen over the next years. Hence, there is the risk that H3G, after a merger with a larger competitor, decides to leave the building. The asset generated EUR 3.8 m of rental revenue or 19% of the fund’s total revenue in 2014.
The Galileo Business Park located in Cinisello Balsamo (60% leased) north of Milan. The fund has a debt financing for this asset in place together with Viale Monza and Via Amoretti. In January 2015 ARE repaid EUR 14.2 m or 62% of the outstanding loan. The remainder of EUR 8.7 m (allocated to Viale Monza and Via Amoretti) will mature at the end of 2016. The fund is paying 3 month Euribor plus 250 bps over this period. Sony decided to move out of the building as of March 2015. This tenant makes up 50% of the asset’s rental income. So far, fund management brought in two new tenants for roughly 20% of Sony’s rent. As a consequence, one can expect rental income for this property to fall by at least 40% in 2015.
Richmansworth Denham Way (100% leased) is leased to Swedish construction company Skanska until 2023. The property can be reached by car in 15 min from Heathrow airport. A debt financing for this asset and the other UK property Watford Reeds Crescent matures at the end of 2016. As far as I understand, the fund is currently paying 75 bps over Libor.
Via Temolo (100% leased) is located in Milan close to the Pirelli headquarter which Unicredito Immobiliare Uno recently sold to Partners Group. This is a good location where many international companies have their offices. The building is also opposite to the Universitario della Bicocca. Equitalia is the single tenant of the building and the lease term matures in 2021.
Via Isonzo (100% leased) is located outside of Bologna close to Autostrada 1. The problem here is that Nike will leave the building at the end of 2015. This tenant makes up 38% of the assets rental revenue.
Place d’Iena (100% leased), is a prime office building in Paris leased to Eversheds. The asset is cross-collateralized with Nahmitzer Damm.
The fund has two separate credit facilities in place. The first is maturing at the end of 2017 and concerns all the properties located in Italy. The Italian assets are cross-collateralized meaning that sales proceeds from asset sales have to be used to repay debt first. The fund is paying 475 bps over three month euribor. The second also matures at the end of 2017 and concerns the properties located in Germany (Gelsenkirchen) and the Netherlands (Amstelveen and Almere). In case one of these properties is sold the fund has also to make a reduction for the debt outstanding of the other properties. Though the Swedish retail portfolio is not carrying any debt, in case of a sale of the Swedish assets, part of the sales proceeds have to be used to reduce the second credit facility. The fund is paying 240 bps over one month euribor.
While the fund is holding a total of 13 properties, the seven largest holdings add up to 84% of equity:
The fund owns two retail parks in Sweden, the larger on in Köping (150 km east of Stockholm) rented to Willi’s, ICA, Intersport and H&M, the other one outside Gävle (180 km north of Stockholm) leased to Elgiganten and Siba. Some days ago, Axa Immoselect (a German real estate fund I invested in) announced that they had to make significant downward adjustments to the appraisal value of their Swedish retail assets in Malmö. While part of this is due to the departure of an anchor tenant, a general decline in market rents is also responsible for the reduction. Hence, the current appraisal value based on a gross yield of 7.8% for Köping and Gävle might not be achievable in a sale of the assets.
The fund owns a leisure park in Croydon located in the South of London in close vicinity to private Whitgift School. Yearly fees for “full boarding” are GBP 35 k. The complex itself comprises a bowling centre, a hotel and different fast food chains.
Mora di Liscate is a logistics property located 20 km outside of Milan and leased to DHL. At the end of 2014 the fund and the tenant came to the agreement to extend the original lease term which ends in 2018 until 2022. In addition, from 2018 the rent will be roughly 30% higher than the rent charged in 2014.
Via Bisceglie in Milan is leased to Vodafone. As far as I understand the property fits the special needs of a network operator. Therefore, should Vodafone decide to move out in 2017, the property itself might be worthless.
Bahnhofstrasse is located in the pedestrian area in the city centre of Gelsenkirchen. While the city itself is definitely not the most attractive with regards to job opportunities and quality of life in Germany, the property itself is very well located.
Almere is located 50 km outside of Amsterdam. While the Dutch office market still faces a lot of difficulties, the good thing about this asset is the remaining lease term of 13 years.
I pointed out the leasing risk many of the funds’ properties face. Apart from that, a potential break up of the Eurozone has been a Sword of Damocles over financial markets. However, if this seems to be a probable outcome, investors should keep away from Europe as a whole incl Germany and not only from Italy. To put it simply, as always it is a matter of the price you pay. From my perspective, there is potential upside coming from increased demand for “high” yield European assets, while the downside seems to be protected due to the discount to appraised values.
So far I have acquired a 1.5% position for the portfolio in ARE from February 3rd to February 12th of 2015 at a VWAP of EUR 1,108 assuming that I am trading one third of daily volume. In addition, I bought a 1.3% position in EIU from February 3rd to February 25th at a VWAP of EUR 689.
Together with Unicredito Immobiliare Uno and Valore Immobiliare Globale, I have currently invested 6% (adjusted for upcoming distributions) of my portfolio in Italian REIF’s. Adding my current exposure to German real estate funds currently in liquidation, I have allocated a total of 10% to real estate funds holding assets throughout Europe. All these investment vehicles are hated or just neglected due to their poor past performance and illiquidity. However, with the ongoing wind down of these vehicles, their underlying properties might offer attractive yields to potential buyers who have to handle the current low interest rate environment.
The content contained on this site represents only the opinions of its author(s). I may hold a position in securities mentioned on this site. In no way should anything on this website be considered investment advice and should never be relied on in making an investment decision. As always please do your own research!