As our subscribers are probably aware, but included here for context — real estate assets are long duration in nature — meaning their valuations are highly sensitive to interest rate movements. Higher interest rates also reduce real estate market liquidity, leading to wider bid/ask prices for property assets as the market readjusts. This creates ‘rising cap rates’ phenomena, eroding property valuations.

Transaction volumes were so low in Q4, making it difficult for valuers to gauge market prices. Manuel Pirolt, the CFO revealed that their conference call, originally planned for the last week of April, was delayed because CBRE and other evaluators were taking longer than expected to complete theIr appraisals as “there are less comparable transactions out there.”

Despite the poor transactional backdrop, SIGNA has earmarked €500m+ of property disposals for 2023, with two transactions in ‘exclusivity stages’. Up to €50m of bond-buybacks are being contemplated, subject to the success of the disposal pipeline in Q2 and Q3 23

The FY 2021 dividend of €114m, approved in summer last year, was supposed to be paid on 31 December 2022, but this has been delayed as SIGNA is waiting for the negative sentiment to improve. The dividend could be payable by the end of June 2023 depending on how project completion and disposal plans unfold, management added. Another sign of the company hunkering down, is that no portfolio acquisitions are planned for this year. 

SIGNA’s €300m 5.500% Green SUNs due July 2026 are indicated at 52-mid, equating to a YTW of 29.5%. Post yesterday’s (16 May) earnings call, the notes gained four-and-a half points. The upward move is likely to be on the back of asset sale and bond-buyback news, as we cannot see any other positive news from the report, driving the prices higher. 

No dependency on public debt

SIGNA management in their conference call said it has “no dependency on the public capital markets….[as] less than 10% of the balance sheet is in public bonds”.

The company’s ability to raise project debt, profit participation debt together with planned asset disposals should be sufficient to repay ~€290m outstanding of the green SUNs due in June-2026 if refinancing conditions don’t improve, said management. 

“If we would have to refinance a lot of debt through bond markets today, we would have the same problems as a lot of our so-called peers have”, management continued.

When quizzed on how SIGNA plans to address its 2023 project debt maturities (€473m due), management replied that project debt is usually repaid once the real estate project is completed and sold. They added: “if the project is delayed, then you would typically prolong the loan.”

In 2022 alone, SIGNA raised over €750m via various funding tools including equity, project debt and subordinated profit participation notes. Year-to-date 2023, SIGNA said it has raised project debt of ~€200m and is in the process of raising another €30m at a credit spread of 200 bps

Link: Table

Realigning focus to closing of projects, no acquisitions planned

Source: Q4 2022 Results Presentation

Closing the existing development pipeline before starting new projects is going to be the prime (pun intended) focus for SIGNA during 2023. 

SIGNA already has a significant development pipeline — 77% of Gross Asset Value (GAV) is under planning or in construction phase — with €300m of funding needs in the next two years (reduced from €500m as of Q2 22, partly due to some project completions being postponed).

Having a large development portfolio amid a cost inflationary environment has created a precarious situation for SIGNA. 

Firstly, additional funding needed to get the assets to completion could potentially lead to a higher LTV. Per SIGNA, construction costs in FY 22 went up for each of the segments — office (+6.7% YoY), residential (+18%) and retail (+36%) — but selling prices improved only for the residential segment (+10%).

Secondly, further project level indebtedness would continue to prime the green unsecured bondholders (€470m raised last year and ~200m YTD). Although we note that as long as SIGNA remains able to raise capital and close the projects in a timely fashion, unsecured bondholders would be happy with flow of cash stream.

GAV shrinks, LTV expands

The 11% decline in property portfolio (LfL basis, based on €365m revaluation) was mainly down to rising cap rates, and not due to cost inflation impacting net operating income (NOI). The development portfolio faced the sharpest decline, while the yielding portfolio was ‘nearly stable’.

This is because the yielding portfolio generates rental income, still on the rise in Germany due to indexations and strong tenant demand. This offsets the inflation burden on the NOI, which explains why yielding portfolio saw a reduced fall in value relative to the development portfolio, which is mainly in the planning or construction phases.

However, this was a surprise to us, as during the Q3 22 conference call management had portrayed a different outlook regarding cap rates — stating that a rise in cap rates were counter balanced by “stronger than expected rent.” In FY 22, Cap rates widened by approximately 50bps for offices and 20bps for retail segment, translating into €365m of value erosion.

Source:Q4 2022 report