Reducing complexity and lifting dividends
Fair Value Reit AG Inh. On (FVIG.F) reported strong full year underlying profits of €6.4m (2012 restated €5.9m) and has made significant progress in its efforts to enhance valuation by reducing complexity and sustainably lifting distributable income; DPS was increased from €0.10 to €0.25. Direct and indirect portfolio exits provided the opportunity to cancel high-cost derivative financial contracts, and further focus the portfolio on direct investment and the retail sector that is preferred by management. The adoption of IFRS10 sees all remaining associates fully consolidated; once investors have digested the accounting changes, the added transparency eases comparison with peers and, we think, supports the valuation.
Underlying profits exceed guidance
Underlying net profits of €6.4m (on an EPRA basis, adjusted for one-off items and unrealised valuation movements) exceeded guidance (and our estimate) of €5.3m. The statutory (IFRS) loss of €5.2m included €8.4m (net of minorities) of negative property valuation movements and €3.5m of swap termination costs. Swap costs were already reflected in IFRS equity, which, with other derivative valuation movements, rose marginally despite dividend payments. EPRA NAV does not benefit from these swap effects and fell from €9.58 per share to €8.86. The swap cancellation reduces interest expense materially, allowing for the dividend to more than double. We believe FVI is near the end of its portfolio simplification and will seek opportunities to grow its direct investments, particularly in retail.
IFRS10 adoption improves transparency
FVI’s share of its former associate property investments (57% of its total proportionately owned opening 2013 portfolio) was previously equity accounted for as simple one-line P&L and balance sheet entries. Full consolidation of the remaining former associates under IFRS10, reflecting FVI’s voting control, will give a clearer picture of the breadth of FVI’s portfolio and the drivers of performance, making comparison with peers easier. Including portfolio sales, our revised EPRA EPS and NAV estimates are both c 10% lower than previously.
Valuation: Discount looking anomalous
FVI continues to trade at a c 40% discount to 2013 EPRA NAV, much larger than for peers (c 7% on average), despite a similar NAV total return over the past five years and the yield differential being closed by FVI’s more than doubling of the DPS. Improved transparency should help to highlight this difference.
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