Vonovia: A New Buying Opportunity Emerged
Summary
- The shares of Vonovia, Europe's largest real estate group, are currently in a consolidation phase and 10 percent below their all-time high from September 2020.
- I welcome this correction since it was overdue. I also took advantage of the share price weakness and increased my stake in the company.
- If macroeconomic conditions remain, investors will find a good opportunity to benefit from rising rent and real estate prices in Europe.
The shares of Vonovia (OTCPK:VONOY) (OTCPK:VNNVF), Europe's largest real estate group, are currently in a consolidation phase and 10 percent below their all-time high from September 2020. The correction is overdue, as the stock climbed 45 percent after the 2020 COVID-19 crash. Fundamentally, the share is not a bargain, but I nevertheless took advantage of the share price weakness in April and increased my stake in the company. Vonovia is a growing whale in a pond full of small fish. If macroeconomic conditions remain, investors will find an excellent opportunity to benefit from rising rent and real estate prices in Europe. Investors should also keep an eye on regulatory developments and adjust their risk compliance accordingly.
Vonovia is a whale in the residential market
Vonovia holds and manages a total of 415,688 properties in Germany (355,285), Sweden (38,248), and Austria (22,155), making the German company Europe's largest residential landlord in a somewhat fragmented market. The target group is low- and middle-income tenants in growing European cities. Vonovia operates its business through the four segments "Rental" (management of residential real estate), "Value-add", (housing-related services such as maintenance and modernization), "Recurring Sales" (disposals of houses from portfolio), and "Development" (project development). The following is how one could describe Vonovia's business model in a nutshell:
This gives the company the opportunity to sell the apartments or demand higher rents. Furthermore, instead of commissioning external companies, Vonovia now takes on many tasks with its own subsidiaries. Hence, the company do not have to pay third parties but can collect the profits for its own. The business move is clever: usually, landlords have great freedom in whom they entrust stairwell cleaning or winter services, for example. And Vonovia can also decide for themselves whether, for example, a playground is checked once a month or once a week.
Additionally, Vonovia has massively expanded its portfolio through acquisitions. Fortunately, the acquisitions were very well chosen. The company was able to integrate the acquisitions into its own business and provided the housing services here as well.
The growth achieved through the business model and acquisitions is impressive. Revenue increased from €574 million to €4 billion in the period from 2000 to 2020. FFO has also risen massively in recent years. Per share, the increase amounted from €0.88 in 2011 to €2.38 in 2020. So the management has done a few things right. This development is expected to continue in the coming years. Analysts expect the revenue to increase to €4.7 billion by 2024. FFO per share is also expected to grow from currently €2.38 to €2.84.
It is also quite possible that Vonovia will expand its portfolio via further acquisitions and joint ventures in other major European cities. In this context, Vonovia is benefiting from low-interest rates, allowing the company to borrow cheaply or issue corporate bonds (62% of all debt) with a low coupon. Nevertheless, the company should not stretch its balance sheet much further. The net debt/EBITDA multiple of 12.3 is relatively high and has increased again since 2019 (11.5x). On the positive side, the average maturity is almost eight years.
Source: Debt maturity profile for Vonovia
Growth amid difficult circumstances
It is impressive that Vonovia was also able to grow in the COVID-19 year 2020. Revenue increased by 6.3 percent in 2020. Rental income increased by 10.1 percent. Except for the Value-added segment (-4.3 percent), all segments contributed to growth. FFO increased by 10 percent. This resilience demonstrates the nature of the European real estate market. Especially the rent development is relatively less volatile than, for example, in the USA. Below you see a comparison with the rental market in Germany. In the years of the financial crisis, we see that the development of rents was more or less detached from the GDP development in Germany. In contrast, in the USA, rent growth was strongly correlated. This peculiarity of the European market makes Vonovia particularly interesting for investors with a defensive investing approach.
Source: High degree of stability
In this respect, Vonovia was also able to increase its dividend again amid the challenging economic environment. The dividend increase is also sustainable as a strong operative business backs it. Vonovia aims to distribute 70 percent of FFO to shareholders as a dividend every year. For 2021 the company increased its annual payout (ex-dividend was in April) by 8 percent, making it seven years in a row in which it has raised its payouts.
Source: Investor relations
Keeping an eye on regulatory measures and fundamental risks
Investors should pay particular attention to the regulatory environment. Real estate price developments have brought listed real estate companies under the scrutiny of governments and political influence. Germany's capital, Berlin, was the first region in which Vonovia owns real estate to introduce a rent cap. Vonovia was somewhat vulnerable since it owns 40,000 apartments in Berlin. But as I said in 2019, the rent cap is probably illegal, and I do not expect it to stand. And now, the German Federal Constitutional Court has ruled that the rent cap does indeed violate the constitution. I have already shared my thoughts on this issue elsewhere. In a nutshell, investors should note the following:
The development is still no reason for Vonovia shareholders to rejoice. The court merely ruled that the federal state of Berlin had no authority to implement the rent cap. At the federal level, Germany's government can still implement such tools.
Noteworthy are the federal elections in Germany in September. Here, the decisive factor will be which party provides the next chancellor. The party "Grünen", which currently has excellent poll ratings, is taking a somewhat more restrictive approach here than the current governing "CDU/CSU" party. Nevertheless, I think a nationwide rent cap is unlikely because that would require an alliance of the Greens with the social democrats from the SPD and the Left Party. Honestly, I am a little short on imagination for this coalition right now. Yet there is some uncertainty.
From my perspective, these political debates and their possible consequences are the biggest threat to the business model in the short and mid-term. Additionally, Vonovia is tied to the fundamental development of the real estate markets. In this respect, investors must take the critical voices warning of real estate bubbles into account. However, this is a general dilemma that affects the entire industry. However, Vonovia has certain economies of scale here and is positioned in several countries. Likewise, the business model does not only consist of buying, selling, and renting out real estate. The company also generates income from other services (see above), cushions depending on market price fluctuations.
Great buying opportunity from a value perspective
Vonovia's share price has been moving in a very consistent upward trend for many years. You can see what I mean from my childish drawing below. I don't care much for charting, but I find it quite fascinating in this case. The lower end of the corridor has been a good indicator of a favorable buying opportunity in the past.
Infantile chart technique, but you get the point.
In addition, the above observation correlates with the fundamental data. While Vonovia is not necessarily a bargain with an adjusted P/FFO ratio of 23, the share is below its long-term average multiples. If we look at the expected results, there is an annual upside potential of 11 percent through 2024.
Source: www.Dividendstocks.cash
Conclusion
Investing in Vonovia comes not without any risks. Regulatory headwinds and real estate prices moving in the opposite direction are possible downside scenarios investors must be aware of. But anyone wishing to benefit from the current development of the real estate market in major European cities will find Vonovia to be a decent long-term anchor investment. Decisive for my additional investment were the safe dividend (under the current macroeconomic conditions), a slightly better valuation than a few months ago, and further growth potential.
This article was written by
Analyst’s Disclosure: I am/we are long VNNVF, VONOY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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