Investment thesis

I think Wereldhave (OTCPK:WRDEF) still offers a good medium-term investment opportunity once residential gains (1.6-1.85 EUR/share) are recorded in 2023 and beyond. However, after the recent appreciation, the stock is trading at a slight premium (net initial market implied yield of around 7%) to its listed Belgian subsidiary Wereldhave Belgium (net initial implied market yield of around 7, 4%) who benefits from a very conservative loan. to-value (LTV) of 28.2% compared to 41% for Wereldhave. While the difference is largely explained by the residential capital gains to be accounted for by Wereldhave, some residential projects also concern Wereldhave Belgium. Overall, in the short term, Wereldhave Belgium shares seem to offer a better entry point. Nonetheless, the implied market yield of 7% is very healthy compared to Klepierre (OTCPK:KLPEF) at around 5.9% or Unibail-Rodamco-Westfield (OTCPK:UNBLF) at around 5.5%, both of which offer slightly more limited opportunities for redevelopment. retail trade.

Operational overview

Wereldhave managed to generate a direct result of 0.41 EUR/share in the fourth quarter of 2021, which would place the current run-rate at the top of the management forecast of 1.5 – 1.6 EUR/share for 2022:

Interestingly, management has reduced the LTV target from 30-40% to 35-40%, which I believe expresses confidence that valuations have bottomed out and depicts less urgency for the divestiture of the 2 last remaining French assets.

Market Implied Net Initial Yield Valuation

To calculate the implied net initial market yield, I will take the EPRA net disposal value (NDV) which amounted to 20.89 EUR/share in the fourth quarter of 2021:

Market Implied Net Initial Yield = Valuation Net Initial Yield / Division Factor where:

Split factor = Price/Book Ratio * ( 1 – Loan-to-value ratio) + Loan-to-value ratio

with the parameters of Q4 2021, namely:

1. EPRA NDV = EUR 20.89

2. LTV = 41%

3. Net initial yield valuation = 6%

4. Closing price at time of writing = EUR 15.79

You get a P/B ratio of 15.79 /20.89 = 0.76, a split factor of 0.86 (0.76 * (1-0.41) + 0.41 ) and a net initial yield implied market value of approximately 7.01%.

By way of comparison, Klepierre was around 5.9%, Unibail-Rodamco-Westfield delivers around 5.5% and Wereldhave Belgium around 7.4%.

Valuation based on current cash forecasts

As you can imagine, the more heavily leveraged your company’s capital structure, the better it looks in terms of cash flow multiple. For example, Wereldhave trades at around 10 times its management forecast of 1.5-1.6 EUR/share. Wereldhave Belgium, with an LTV of only 28.2%, trades north of 11 times its management forecast of 4.7-4.8 EUR/share. Unibail-Rodamco-Westfield with net debt of €22.6 billion and a market capitalization of €9.6 billion looks the cheapest, trading at 8.3 times its management forecast range of 8, 2-8.4 EUR/share.

The Residential Opportunity

I think the main differentiator for Wereldhave will be residential gains to book in 2023 and beyond:

Taking the midpoint of the EUR 1.6 to EUR 1.85/share range, EUR 1.72/share would represent a one-time advantage of 11% over the current share price of EUR 15.8/share . Of course, these gains will take several years to fully materialize.

A period of abnormal returns

The paragraph above on residential opportunities leads me to say that from 2023 Wereldhave is expected to experience a brief period of abnormally large returns. Firstly, although there is limited visibility on the COVID-19 restrictions that will be in place next year, this may well be the first year in which there are no significant restrictions for businesses. For example, 2022 still had days in January where stores and restaurants operated at very limited capacity, which will weigh on 2022 results. In addition, management expects direct earnings per share (DRPS) growth in 2023-2026 higher than inflation:

Combining all the elements mentioned so far, namely a net initial return of approximately 7%, a contribution of 2.75% (11% divided by 4) for 2023-2026 residential gains and a management forecast of 3.7% for growth without debt, we get a very healthy expected return of around 13.45% per year for 2023-2026. If we assume that overhead consumes around 0.5% of the return and that 20% of the net initial return is allocated to non-performing CAPEX (around 1.4%), we end up around 11.55% for the next 4 years, followed by around 7.1% thereafter (net initial return of 5.6% after non-performing CAPEX and indexation to inflation of 1.5%):

Returning components in the period 2023-2026	Contribution in percentage
Initial net implied market yield at current price 15.8 EUR/share	seven%
Residential gains at current price 15.8 EUR/share	2.75%
Growth without leverage	3.7%
Management overheads	-0.5%
Non-productive CAPEX	-1.4%
Total return without leverage in 2023-2026	11.55%

It is important to note that Wereldhave’s current capital structure, with €634 million in equity and €788 million in net debt, is still heavily leveraged and the above unleveraged calculations should be taken with a grain of salt. Beyond that, it remains to be seen whether or not Wereldhave manages to navigate the headwinds of online retail. In any case, conversion to alternative uses will be less burdensome in Wereldhave compared to its larger counterparts, given the lower land valuations in absolute terms.

The risk of rising interest rates

As the impact of COVID-19 on valuations appears to be fading, interest rates have started to rise. Although 88% of Wereldhave’s debt is fixed percentage, the average maturity of 3.8 years will force the company to refinance in the coming years. If the ECB were to normalize its policy over the 2023-2026 period and the deposit facility rate reaches a more normal level of 1.5%, the 2% rise from current levels of -0.5 % is expected to increase annual interest charges by approximately EUR 15.8 million, or EUR 0.39/share, strongly impacting direct results.

Similarly, an increase in the net initial yield used for valuations from 6% to 8% would reduce the value of Wereldhave’s properties by around €485 million and push the LTV up to 54%. In this scenario, the IFRS NAV would drop from 21.6 EUR/share to approximately 9.55 EUR/share.

Key takeaway for investors

Wereldhave still offers a good medium-term yield opportunity, but looks vulnerable in the short term given Wereldhave Belgium’s lagging valuation and recent strong share price performance. Nevertheless, I believe that a correction will prove to be a buying opportunity as long as interest rates do not rise excessively. So, I think combining the position with a long exposure to bank stocks seems appropriate. Personally, I will sit on my hands until the March options expire and assess the situation then.

Thanks for the reading.