The acquisition of the Warsaw Spire, which closed in July, has brought IMMOFINANZ once more towards a portfolio value of close to EUR 5 billion. The stock market approves.
Guest commentary by Christian Drastil, Publisher Boerse Social Magazin
Interview: Christine Petzwinkler, Editor in Chief, Boerse Social Magazine
Mr Schumy, in the past weeks IMMOFINANZ has purchased office properties with a value of nearly half a billion euros, including the Warsaw Spire, the tallest office tower in Warsaw and in the whole of CEE. One gets the impression that some market participants were almost surprised at the scale of the acquisitions?
With the purchases in Warsaw and Prague, we are doing exactly what we've said in the past we intend to do. In the first step, in the last few years we repositioned our portfolio and made it more efficient, with a focus on office and retail. At the same time, we developed a very solid financial profile with an investment grade rating and built up liquidity of over EUR 600 million. This has enabled us to now acquire these prime properties, which significantly strengthen our standing investment portfolio and our sustainable earnings power, our FFO 1.
In April 2017, when our repositioning - which has since been completed - was still under way, we made a commitment to investors to generate FFO of over EUR 100 million in the 2019 financial year. And we are currently well on track to do this.
But it's true to say that the acquisition of the Warsaw Spire, valued at around EUR 386 million, is the largest real estate investment that IMMOFINANZ has made in many years, and it's therefore an important step in terms of growth. Overall, we are now as a result once again approaching a portfolio value of close to EUR 5 billion.
We've visited the Warsaw Spire in person - it's a superb building in an attractive and lively setting. What were the key considerations in choosing Warsaw and this office tower?
Warsaw ranks among the most promising office markets in our core region, due to its dynamic development and the favourable economic indicators. The Polish economy has been growing very robustly for many years. This goes hand in hand with falling unemployment and increasing purchasing power within the population. As a result of the good economic backdrop, the office property market in Warsaw has been growing strongly for a number of years. The demand for new office space, however, currently exceeds the existing supply in central locations and a further reduction in vacant premises is therefore anticipated. A potential Brexit also gives rise to the expectation of a further increase in demand for office space, as Warsaw has established itself as an important CEE financial centre and many international companies are relocating their offices from London to Warsaw or expanding their existing offices. A number of financial firms are looking for rentable space of 20,000 sqm or more.
The Warsaw Spire is an ideal combination of top quality and optimal infrastructure. This has resulted in a distinguished tenant mix, including firms such as Goldman Sachs, Samsung, JLL and Mastercard, which have around 5,000 employees in the building. Consequently, the Warsaw Spire is also ideal for our myhive international office concept, with its focus on community building and a comfortable atmosphere.
And, very importantly: We bought at a rental return of 5.1%, which is very good for the Warsaw market and for a landmark property. The return on premium office property in Warsaw has now declined to around 4.5% due to the very positive market trends. And we’ll probably see one or two transactions below this level.
Then why were you able to purchase at above the 5% mark?
Firstly, we succeeded in entering into exclusive negotiations at an early stage. And secondly, we are a recognised, experienced and financially strong player in the market, with the ability to swiftly execute this type of large transaction.
And outside of Warsaw, are further purchases in Poland also of interest?
With our office properties, we are only present in capital cities, or in the case of Germany in larger cities such as Düsseldorf. However, with our STOP SHOP and VIVO! retail formats we focus on medium-sized and smaller cities in CEE, and thereby on regions with shopping center densities significantly below the level of Western Europe. It's also typical of the offering that many of the tenants are discounters and local suppliers. We currently have four VIVO! shopping centers and seven STOP SHOPs in Polish cities, and with respect to STOP SHOP, further sites are being developed and we're also evaluating acquisitions. This year, we will increase the number of retail parks to around 90 locations in total across nine countries. The goal for the next two years remains unchanged, to bring the number of locations to above 100.
Since autumn 2018, Poland has been classified as a developed market instead of an emerging market by the FTSE EPRA index provider, putting it in the same league as Austria and Germany. Does this also play a role in your portfolio strategy? IMMOFINANZ shares were, after all, previously included in the EPRA Developed Index a number of years ago.
Yes, that’s also a factor in our considerations. The EPRA Developed Index is an important reference index for many real estate investors and inclusion of the shares would bring additional capital - in particular passive money. However, becoming an index constituent requires that a minimum of 75% of EBITDA comes from developed markets - in our case Austria, Germany and Poland. We haven't yet reached this level. In this respect we have a medium-term perspective.
Sentiment towards the stock has recently improved - according to Bloomberg there are currently five Buy and four Hold recommendations. The share price has risen by around 16% since the start of the year. Satisfied?
The repositioning and the significant improvement in the key figures are being reflected in our share price. In 2018 we produced very good results, and we also delivered on our commitment with the figures for the first quarter of 2019. We're now back on a growth trajectory and are strengthening our portfolio through acquisitions, also for example in the office sector in Prague, and with our own development projects.
Although you always emphasise that you're not a developer? What does the future pipeline look like?
We view ourselves as the owner of a portfolio of properties, with a clear brand strategy and a high degree of customer orientation. We also develop our own projects, but ensure that we have a very sound ratio of development projects to the overall portfolio. In general, no more than 10% should consist of development projects. This is also important with respect to our investment grade rating. Following the handover of both of our large German projects in Düsseldorf, the trivago Campus and FLOAT, to the tenants, we’re currently constructing our first myhive office building in Germany, which is also located in the Düsseldorf Medienhafen. This will comprise around 22,000 sqm. Our refurbished hotel and office tower located at Wienerberg will be opened in the near future. We have invested substantially here in recent years, including renovation of the mall and the forecourt and the rollout of our myhive brand. Other office buildings - such as in Ungargasse in Vienna and in Bucharest - are also being converted into myhives. And we have a number of STOP SHOP developments. Furthermore, two of our shopping centers in Bratislava and in Cluj in Romania are currently also undergoing modernisation. So, there’s quite a lot going on.
But overall you prefer acquisitions to new developments?
That of course always depends on the market and the product, so it's flexible. With our STOP SHOP development projects in CEE, we are, for example, generating very attractive returns, in some cases in the double-digit area. However, we generally prefer acquisitions due to their immediate positive effect on rental income and FFO.
Several analysts have recently expressed the view that a planned combination with S IMMO - not least after IMMOFINANZ's latest property purchases - has become more of a topic for the medium term. Can you give us an update?
We've always said that, due to the reciprocal investment on the part of both companies, there are naturally various options and we are evaluating these. When there's more to report, we will do. Overall, we’re very pleased with S IMMO's performance. All of the figures have improved significantly - which shows that we made the right investment. When we closed the acquisition of the block of shares in September last year, the EPRA NAV per S IMMO share was around EUR 18. This now stands at approximately EUR 24. That's a more than respectable increase of one third. FFO has improved, and the dividend payment was very good. Based on the acquisition price, we are receiving a dividend yield of 3.5% on our S IMMO holding. That's a higher return than the yield on some prime office properties in Germany.