Table of Contents
- Executive Summary
- Situation as of November 23: Fundamentally favorable valuation of the real estate portfolio
- Unattractive market and negative cash flow in the existing portfolio
- Countermeasures taken by management
- Further/accelerated sale of real estate
- What else? Scenarios for the turnaround
- Disclaimer
- Further resources
Executive Summary
Starting point: Fundamentally favorable valuation of the real estate portfolio
- Noratis AG specializes in the “flipping” of residential properties and had approximately 4,390 residential units in its portfolio as of November 2023.
- According to an external valuation report, the real estate portfolio is currently valued favorably:
- As of H1 2023, the balance sheet value of the real estate totaled EUR 432 million, plus approximately EUR 10 million for investment properties and approximately EUR 10 million from capitalized ground lease agreements… for a total of approximately EUR 452 million (21 times net cold rent).
- The value determined by the external appraiser amounts to approximately EUR 495 million after tax effects (24 times the net capital value)
- At the end of November 2023, the real estate was valued at approximately EUR 400 million on the stock exchange
- In terms of individual shares, this means the following (as of H1 2023: 4.818 million outstanding shares and financial debt of EUR 392 million):
- Book value of approximately EUR 17 per share
- Appraisal value of approximately EUR 26 per share
- Stock market valuation of approximately EUR 5-8 per share
- As a result, there appears to be a substantial undervaluation (>300%)
Negative interest rate environment: Negative FFO/cash flow for the entire portfolio and possible liquidity crisis
- The current undervaluation can essentially be attributed to two causes, both of which are related to the key interest rate hikes regularly decided by the ECB since 2022:
- There is currently no functioning transaction market for residential real estate, which means that it is difficult for Noratis to sell properties at reasonably attractive terms (no transactions have been announced in H2 2023 to date)
- Noratis has financed almost 100% of its properties on a variable basis based on the 3-month Euribor, which is why the interest rate hikes are fully reflected in the income statement (apart from a certain hedged volume).
- As a result, the portfolio generates an annualised negative FFO/cash flow of approximately EUR 12 million, which is not offset by regular sales proceeds (implying negative interest coverage (EBITDA or EBIT/interest expense)).
- In addition, Noratis has a relatively even maturity structure for its financial liabilities. A promissory note loan of EUR 5 million is due for repayment by the end of 2023, and the EUR 30 million bond is due by the end of 2025, which will probably have to be replaced due to the expected high interest rate on a new bond or unsecured bank financing.
- This results in a cash requirement of approximately EUR 50-55 million by the end of 2025.
Countermeasures taken by management
- In order to counteract the cash burn in the short term, management has initiated several countermeasures, some of which have already been implemented:
- A program of measures that, in addition to focusing on rent increases and reducing vacancies (currently at approximately 9-10%), also provides for cost savings
- A 5:2 capital increase (KE) with subscription rights (in the region of EUR 8 million) for existing shareholders to repay a promissory note loan due immediately (EUR 5 million) and to strengthen liquidity (~EUR 3 million), as well as a further KE (~EUR 2 million) reserved exclusively for the major shareholder Merz Real Estate
- A review of the portfolio with a view to the short-term saleability of individual properties
- A rough assessment of the measures leads to the following conclusions:
- Action plan: Even assuming consistent implementation of all revenue and cost measures, FFO / cash flow is still expected to be negative at around EUR 5 million in 3-5 years
- Capital increase: The capital increase already implemented at the beginning of December 2023 will only marginally reduce the interest burden and, in addition, the remaining cash will be quickly depleted by the negative FFO if no proceeds from sales are generated. The book value per share has decreased from approximately EUR 17 to EUR 13.5 per share as a result of the capital increase, while the appraised value has decreased from EUR 26 to approximately EUR 19 per share
- Disposals to secure liquidity or repay debt: Given the current interest rate environment (~4%), rational investors such as family offices or pension funds are likely to be willing to accept a net initial yield (NAR) of 5.0% at best (equivalent to an equity return of approximately 2.0-3.5%). This return roughly corresponds to Noratis’ current stock market price and could therefore lead to a further write-down on the balance sheet. In addition, any interest payments and ancillary costs saved through the disposals would be almost completely offset by the loss of rental income, so that there would be no substantial positive effect on sustainable cash flow.
- Overall: Even taken together, the measures are most likely not sufficient to bring the existing portfolio into a “positive” position in a market and interest rate environment that remains difficult.
What else? Scenarios for a turnaround
- As a result, there are two scenarios for a turnaround, although Noratis itself can only influence these to a limited extent:
- A short- to medium-term interest rate cut by the ECB (possibly in combination with a “small” capital increase to ensure liquidity)
- A “large” capital increase with the participation of the current or a new anchor investor (or, if necessary, a sale of shares by the majority shareholder Merz Real Estate)
- Short- to medium-term interest rate cuts:
- Leading banks (including Goldman Sachs and Deutsche Bank) are already forecasting major interest rate cuts for spring/summer 2024. Deutsche Bank is assuming a decline of 150 bp
- An interest rate cut of this magnitude would, on the one hand, reduce annualized interest payments by ~EUR 6 million (and thus – assuming all measures are implemented – lead to a return to positive cash flow), but would also reopen the possibility of profitable disposals, as the minimum returns could then be reduced to around 4.0-4.5% (with a target return for the family offices of between ~3 and 5%).
- Further capital increase(s):
- In order to put the business on a sustainable footing regardless of interest rate developments, a “major” capital increase would be necessary with the aim of repaying debt and streamlining the balance sheet. Such debt repayment could probably only be contributed by a new anchor or majority shareholder
- A further “small” capital increase in the previously announced amount of ~ +/- EUR 10 million could help to overcome the liquidity bottleneck in the short term and bridge the “dry spell” until a measurable interest rate cut (the company would still be dependent on this, however). Due to the continued low share price level in the foreseeable future, such a capital increase could have a significant dilutive effect, depending on its structure
Bringing it all together: valuation scenarios and key takeaways
- Based on a net initial yield (NAR) of ~5% and total rent of EUR 21 million, the current realistically achievable portfolio value is ~EUR 420 million.
- After deducting net debt of EUR 362 million, the fair value of equity is approximately EUR 58 million, which corresponds to a price of approximately EUR 8 per share (after capital increase).
- An investment in Noratis shares would nevertheless be very risky due to the high level of debt, negative cash flow, and illiquidity
- Purchasing Noratis shares would essentially be a gamble… either on interest rates falling in the near future or on a takeover (which would restore the company’s financial stability)
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