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Vonovia SE is a European Dividend Real Estate Investment trust that held its IPO back in 2013. Since then, It has quickly grown to be one of Europe’s biggest private Real Estate Company. As the first REIT listed on the STOXX50, Vonovia currently owns around 415k residential units is Germany, Sweden and Austria. They also manage 73,000 apartments within a portfolio that is worth roughly €56 billion.
What is Interesting about Vonovia is that they have roots that dated back to 1929 after the WW1. Around the turn of the millennium, international investors began to change the German real estate market. Deutsche Annington and its owner Terra Firma became the largest German housing company in 2006 with the takeover of Viterra AG. In 2015, Deutsche Annington and GAGFAH merged and Vonovia was born.
On a recent episode of Dividend Talk I had mentioned that I am looking to explore more European REIT’s. The community did not disappoint and I was given a couple of suggestions. But Vonovia SE, which was suggested by a pragmatic Danish investor, Dividend Dane caught my attention.
Vonovia Operating Segments
Vonovia business model is based on the rental of good quality, modern and affordable homes. They develop and construct new apartments for its own portfolio but also for sale to third parties. They also provide housing related services which include caretaker and environmental organization.
Vonovia operates in 4 main segments: Rental, Value add, Recurring Sales and Development.
Rental
The Rental Segment combines all of the business activities that are aimed at the value enhancement management of their own residential real estate. The segment is split across Germany, Austria and Sweden. 81% of the revenue comes from Germany. 14% from Sweden and 5% from Austria. In the first 9 months of 2020 this segment has seen a 3.6% Organic rent growth rate while decreasing the vacancy rate to 2.6%.
Value add
The Value add segment bundles all of the housing-related services that they have expanded their core rental business to include. These services include both the maintenance and modernization of their residential properties. They allocate activities relating to environmental organization, cable TV, metering services and energy supplies to the value add segment.
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Recurring Sales
The Recurring Sales segment includes the regular and sustainable disposals of individual condominiums and single family houses. It does not include the sale of entire buildings or land.
Development
The development segment encompasses the project development of new apartments. This covers the value chain starting with the purchase of land without any development plan or dedicated purpose and ending with the completion of new buildings and new construction measures. This segment typically deals with projects in Berlin, Hamburg and Vienna.
Overall Vonovias portfolio management has seen them concentrate on urban growth areas. This provides sustainable rent growth where there is a high demand for property. This has also lead to high occupancy rates which has been in a downward trend since 2013.
Vonovia Company Growth
Vonovia SE has a market cap of €31.55 Billion and a book per share value of €32.65. Its price-to-book ratio stands at 1.47.
Since 2016 organic rent growth has grown just over 3.5% on average. The total segment revenue growth has growth 18% on average in the same time period. They expect this trend to continue in 2021 with a total segment revenue of €4.9Bln
Funds from Operations per share (FFO/Share) has grown from €0.95 in 2013 to €2.25 in 2019 which gives a compounded annual growth of just over 15%.
Adjusted NAV/Share has grown from €21.5 in 2013 to €55.4 in 2020.
The total debt/equity is 114.50%, Interest coverage is 4.9 and the loan to value is roughly 41%. They have a diverse funding mix with the majority coming from corporate bonds but there is no more than 12% of debt maturing annually.
Vonovia Dividend History
Vonovia SE have paid a dividend from 2013 at an impressive rate. The first dividend €0.67 and it is estimated to be €1.57 in 2020. The final dividend will be proposed at the AGM in 2021 but they aim to pay 70% of FFO. Since 2013 the dividend CAGR has been a little over 15%.
Vonovia Dividend Payout Ratio
The Payout Ratio is a good indicator of the sustainability of dividends. I have discussed the different methods for calculating the Payout Ratio here.
As this is a REIT, I will use Funds from Operations (FFO) instead of EPS. The payout ratio is generally around 70%. FFO/Share has typically being growing at the same rate of the dividend.
Vonovia Fundamental Analysis
Please see my disclaimer before reading on. These are my thoughts and are not to be used as investment advice. I am simply outlining my thought process when deciding if I should buy a company or not. Please do your own due diligence and check all data for your self.
This will be broken into 6 different sections with the maximum points per section are outlined below.
| Section | Max Point |
|---|---|
| Financial Strength & Future Proof | 25 |
| Management Quality | 15 |
| Dividend Quality | 20 |
| Valuation | 20 |
| Story of the Stock | 15 |
| Momentum (TA) | 5 |
| Total | 100 |
If you would like a copy of the template I use to perform fundamental analysis then feel free to grab your copy below. I explain how I use the template here!
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Financial Strength and Future Proof
When starting to analyze a companies’ financial position, I start with the income statement. I generally look through 10 years of statements where I am interested in the average growth of Revenue, net Income, and Earnings per share. Basically, I m looking to see if there is a demand for a companies products, they generate profit after costs and taxes and their earnings are growing.
Revenue, FFO, and Free cash flow have all been growing which is a good sign.
I also note the net profit margin and operating profit margin, over the last 10 years to ensure they are at least maintaining their margins.
In 2019 the Operating margin was 38.8% which is higher than the 7 year average of 34.8%. The Gross margin was 61.5% which is higher than the 10 year average of 50.44%.
While I’m on the income statement I like to compare profitability ratios against the industry. For US companies I like to use Ready ratios. For Vonovia I found the comparisons on Investing.com
Balance Sheet
The next step is to analyze the balance sheet. The first step is to check how much assets and liabilities a company has and to calculate the book value, or shareholder equity.
Some of the assets may be listed as “goodwill”. If goodwill and other intangible assets are excluded from total assets when calculating shareholder equity, then you get the tangible book value.
When a company acquires another company and pays a price that is higher than the tangible book value of that company, they’ll incur a loss on their balance sheet and income statement. To avoid this problem, the acquiring company can put the difference between the purchase price and tangible book value of the acquired company on their balance sheet as “goodwill”. Whenever you see an increased amount of goodwill over a number of years you can assume the company can be buying other businesses. depending on the business they bought this can be seen as a good thing.
Acquisitions
The Vonovia Group has been growing in recent years thanks to a large number of acquisitions.
- Suddeutsche Wohnen were acquired in 2015
- O-Tec Hausverwaltung were also acquired in 2015
- Buwog were acquired in 2017
- Hembla were acquired on 2019
- They also signed a partnership deal with France’s SNI Group as it looks to expand beyond its German home market
- In 2020 they bought a 2.6% stake in the Dutch Vesteda Residential Fund
Debt
At the end of 2019, Vonovia had a D/E ratio of 1.14. This means the company has €1.14 of debt for every €1 of equity. This is a perfectly acceptable debt ratio for me. It has a low 1.4% cost of debt. As most of its debt is fixed if interest rates were to go up, Vonovia’s income and assets would rise while the cost of debt stays low.
FFO Interest coverage is over 12 which is greater than the 3:1 ratio that I look for. They have a credit rating of BBB+ which the company is keen to protect as outlined in their acquisition strategy
Is the Balance sheet healthy
According to the 2019 reported balance sheet, Vonovia SE had a net debt of €23 million. The net debt divided by EBITDA is how many years it would take a company to pay back its debt. Assuming that the net debt and EBITDA were held constant. At the time of writing the debt is 1.36 times EBITDA. This along with the Interest coverage above 3 is a good indicator for a solid balance sheet.
Cash Flow Statement
Operating cash flow shows how much cash a company received from operating, after expenses. For me it is good to compare this with the net Income. I am looking for the operating cash flow to be healthy and larger than net income.
Instead of FCF real estate investment trusts use FFO to define the cashflow from their operations. As we have seen earlier FFO have been rising steadily since 2013.
Dividend Quality
At current prices, and a current yield of 3% I have estimated that it will take roughly 8.2 years to reach a YoC of over 10%. The scoring metric that I use awards 5 points if it takes under 12 years to reach a YoC of 10% and 3 points in it take under 15 years.
The current yield is greater than the SP500 by over 171% which is just under what I require to give full marks.
The dividend growth rate has been strong with 15.02% DGI over the last 5 years
Valuation
NAV
The share price tends to track the adjusted NAV quite closely:
The latest reported Adjusted NAV is 55.41 Euros at the end of Sept 20. However, management guided that at the full year it expects the Adjusted NAV to be in the region of 60 Euros . Current Share price is 55.96 which is pretty much on par with it NAV.
Vonovia Dividend Discount Model
Using a multistage dividend discount model, the current estimated price is €55.14. This makes Vonovia SE fairly valued at current prices.
Discounted Cash Flow
Using a discounted cash flow model with a discount rate of 7% the fair value for VNA was €67.85
Taking an average of all 3 methods the estimated fair value is €59.47 which makes them slight undervalued at todays price.
Conclusion
My Scoring recommendations are as follows
| Recommendation | Score |
| Strong Buy | 90 – 100 |
| Buy | 71 – 90 |
| Hold | 51 – 70 |
| Sell | 31 – 50 |
| Strong Sell | 0 – 30 |
In total, Vonovia scored 80 out 100 and have a dividend safety of 84 out of 100. Which puts them into my buy category.
Vonovia SE make a compelling Investment case. They are Europe’s largest residential landlord and the long-term owner and full-scale operator of a multifamily housing portfolio with ca. 415k apartments for small and medium incomes in metropolitan growth areas. They have positioned themselves in under supplied markets in key urban growth areas.
The dividend yield is a modest 3% but they have shown good growth and the dividend looks safe for years to come.
As I didn’t already have VNA in my portfolio, I added 10 shares to my portfolio. This will keep me interested in them while I do further research into their management , risks and future growth drivers over the next coming months.
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