An encouraging start to the year
Fair Value Reit AG Inh. On (XETRA:FVIG) has reported Q1 earnings slightly ahead of management’s expectation and that implied by our own full year forecast. Despite the planned reduction in portfolio size, underlying (EPRA basis) earnings actually increased slightly compared with Q113, reflecting a significant decline in interest expense. 2013 saw significant progress in FVI’s efforts to enhance valuation by reducing complexity and sustainably lifting distributable income. The shares offer an attractive dividend yield (prospective 4.8%), on a par with peers but with a much lower price to NAV multiple.
Q1 performance supports full year expectations
Underlying Q114 net profits of €1.29m (on an EPRA basis, adjusted for one-off items and unrealised valuation movements) were higher than the €1.18m earned in Q113. Gross rental income was 15% lower, reflecting planned portfolio reduction, but the decline in net rental income was limited to 10% by a 22% decline in property operating expenses. A material decline in net interest expense resulted from the lower level of debt (resulting from disposals) and lower debt costs, largely reflecting the contractual expiry and cancellation of expensive interest rate swaps. At this early stage of the year we are leaving our estimates unchanged; management guidance of €5.1m underlying net profit is similarly unchanged.
Management continues to seek growth opportunities
Over the past two years, management has been focused on shedding non-strategic assets, simplifying the group structure, and reducing complexity. Substantial progress has been made, supporting an increase in distributable income and a sustainable increase in dividends. However, commercial real estate market conditions remain favourable, and we believe FVI is near the end of its portfolio simplification and will seek opportunities to grow its direct investments, particularly in retail.
Valuation: Discount continues to look anomalous
FVI continues to trade at a c 40% discount to 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. A simplified group operating structure and improved transparency from the adoption of IFRS10 should help to highlight this difference.
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