Editor's Choice: Glowing reports at half time for listed sector

With a few exceptions, Europe's listed property companies delivered stellar first-half earnings reports over the summer, reflecting the rebound across real estate markets.

If there was one word which characterised the first-half earnings reports published by Europe’s listed property companies over the summer, it was: 'strong'. Keen to get their upbeat message across to financial markets and shareholders, companies big and small peppered their financial reports for the period with the word and similar – in many cases stronger - qualifiers.

The improved performance was seen across all property sectors (from retail to residential and logistics), national boundaries (northern and southern Europe) and key financial metrics (from operating and rental income to earnings, portfolio valuations and financing positions). Clearly, listed companies are being lifted by the surge in market sentiment and economic recovery, which together with record low interest rates is fuelling unprecedented interest in European real estate. This is spurring the deals machine into overdrive and oiling new investment and development ventures.

Three trends stand out from this season’s earnings crop:

1. Several companies have raised their earnings outlook
2. Return to specialisation; disposal of non-core activities and assets
3. Return to financial health with sharply improved debt positions

Based on their strong first-half performances, several listed companies have upgraded their earnings forecasts for the full year and even beyond. Industry heavyweight Unibail-Rodamco raised its earnings per share guidance for the full year, while French peer Klépierre, reporting its first combined operating results since taking over European retail specialist Corio, said it was confident that its net current cash flow per share guidance for 2015 would be 'in the high end of the target initially announced this year'.

Over in Germany, property stalwart Patrizia Immobilien upgraded its earnings forecast for both 2015 and 2016 after lifting operating profit to €9.3 mln in the second quarter from €5.5 mln the previous year. The company has also hit the acquisitions trail big time, saying it expects to make another three to seven investments in the order of around €200 mln each by the end of the year.

Smaller players also put in a strong showing. Frankfurt-listed DIC Asset has raised its disposal target for 2015 to at least €180 mln after reaching its earlier projected volume of €150-170 mln in the first half of the year.

German resi rally
As expected, German residential companies had a field day following a consolidation wave which added muscle to the already big players. Market leader Deutsche Annington, with 350,000 housing units valued at over €21 bn, said it more than doubled its earnings in the first six months of 2015 following the integration of peer Gagfah earlier this year.

LEG Immobilien increased its earnings outlook for both 2015 and 2016 following a 'continued strong operating performance' in the second quarter. Portfolio appreciation was the big story at Deutsche Wohnen, which saw the value of its mainly 144,000 residential properties increase by more than €700 mln to around €10.3 bn at end-June. The company raised its full-year FFO forecast to between €285 mln and €290 mln after posting a 25% higher figure of €142.7 mln in the first half.

Over in Southern Europe, Spain’s largest listed property company and investor darling Merlin Properties has yet to report first-half earnings, but all the signs point to good news at the €2.1 bn REIT. The company recently completed a €1.03 bn rights issue – almost eight times oversubscribed - to help it finance its €1.8 bn acquisition of Testa, the €3 bn property arm of Spanish construction giant Sacyr. During its first year on the stock market, Merlin’s share price rose by 21% and by the time it celebrated its first anniversary as a listed REIT or SOCIMI in June, the company had featured on the watchlist of 10 analysts.

UK REIT Segro received kudos from analysts at Bank of America Merrill Lynch who said the company was ‘very much on the front foot’ with its planned shift from acquisitions to development as a route to further growth. With its strategic repositioning - including the disposal of non-core assets - behind it, Segro can now focus fully on the future direction of the business, they said.

Not all the earnings figures were as rosy. Companies with operations in Russia such as Immofinanz and Atrium European Real Estate were hit by the downturn in the country in the wake of western-imposed sanctions over the Ukraine crisis.

Vienna-listed CEE investor Immofinanz slumped into the red, revealing a net loss of €361 mln for the 12 months ended 30 April compared to a profit of €72 mln a year earlier. Likewise, CEE shopping centre developer Atrium European Real Estate reported lower earnings and rental income as the economic slump in Russia continued to take its toll. The company said its first-half performance was impacted by rental discounts provided to tenants in its Russian portfolio which were granted to protect occupancy levels.

Back to the core
Several companies announced they planned, or had benefitted from, paring back their activities to a core business. Atrium disposed of 72 non-core properties in the Czech Republic for €69 mln as part of its strategy of reweighting the asset base towards larger scale, dominant shopping centres in the company’s core markets Poland, the Czech Republic and Slovakia.

Together with its H1 earnings announcement, Immofinanz broke the news that it was in talks to sell its 1 million m2 logistics portfolio, valued at around €500 mln, as part of a strategic reorientation to concentrate on the office and retail property sectors.

Unibail-Rodamco, which now has €37.5 bn of assets under management, has been reshaping its portfolio since 2009 to focus on very large shopping centres and in 2014 sold over €2 bn of non-core assets.

Over in Italy, loss-making Prelios said it planned to transfer its investment activities, including co-investments, into a special purpose vehicle as part of its goal of focusing on its asset management and service business. The group is targeting €75-80 mln in revenues from the management and service platform in 2015, rising to €100-105 mln in 2016 and €120-125 mln in 2017.

Driving down costs
Getting into financial shape has been a key theme in recent years and the fruits of various cost-cutting measures are evident from many earnings reports. Helped by record low interest rates, several listed players have also refinanced existing loans at far more attractive terms to previous rates and secured longer maturities for their debt.

Unibail-Rodamco said its average cost of debt reached a 'historically low level' of 2.3% while the average debt maturity was extended to 6.4 years. Sector peer Klépierre had a similar story: it refinanced €2.4 bn of loans, reduced the average cost of net debt from 3% to 2.5% and increased the debt duration from 5.4% to 5.6 years while its LTV remained at 40%. LEG Immobilien refinanced around €900 mln of loans in July, securing an average loan maturity of around 10 years and average financing costs of less than 2.1%.

Can anything derail this formidable momentum among listed companies? To be sure, there are countless potentially disruptive forces – a hike in interest rates, the ongoing Greek saga and a further slowdown in the Chinese economy to name but a few. But going on first-half performances, the sector is headed for a dazzling finish to the year.

Marianne Korteweg
Managing Editor