Highlights from the real estate companies attending our Austrian Conference in London Our conclusion

•  CA Immo, S Immo and UBM attended our Austrian Conference in London last week.

•  Austrian ménage-à-trois more distracting than value enhancing, in our view: We have the situation in Austria that due to consolidation ambitions, listed companies became the shareholders of each other. CA Immo started by buying a 5.6% stake in IMMOFINANZ (IIA). IMMOFINANZ responded by buying a 26% stake in CA Immo and is now pursuing a merger with CA Immo. Finally, S Immo announced at the beginning of the year that it had bought a ~4% stake in both CA Immo and IMMOFINANZ, with the main arguments being the dividend yield achieved and the high discount to NAV of the two stocks (which we, however, do not regard as convincing). As a result, the possible merger of CA Immo and IMMOFINANZ and the further involvement of S Immo are a main topic in each meeting. We continue to believe that synergies are rather limited and even on the financing costs side (where the potential probably is highest) it will depend on whether a combined CA Immo/IIA will be able to keep CA Immo’s Baa2 credit rating (IIA does not have one). The first large hurdle for the merger remains the disposal of IIA’s Russian assets (no news on that, though). In order to keep the timeline with the AGM’s deciding mid 2018 about a merger, the disposal should happen by end of October 2017. The recently announced full potential of CA Immo’s development pipeline in Germany amounting to EUR 4.1bn (vs. no development potential for IIA once current developments are finished) should have a positive effect on CA Immo’s merger ratio, in our view. Overall, we stick to our view that CA Immo’s merger ratio negotiation position is improving. S Immo confirmed that they see their stakes as pure financial investments, not as strategic ones.

•  Market environment: Germany remains the by far most interesting market and all three companies want to grow in this market. Rising construction costs are an issue in Germany (+5% yoy in 2016 according to UBM).

  Facts & Analysis

  •  CA Immo: Development pipeline and possible merger with IMMOFINANZ were in the focus: CA Immo’s focus will be on monetizing the EUR 4.1bn development potential in the quickest and most profitable way, as that will be the growth driver over the next years. More details with regard to the yearly investment volume, projects done with Joint Venture partners etc. will be delivered with the 2Q results. While it is the aim to accelerate the execution of the pipeline, there has to be a sound balance between the share of income producing and development assets. Disposals are also a topic (and a potential share price trigger, in our view) not only for the financing of the development pipeline. The next large disposal will probably be the 1/3 stake in the Tower 185 in Frankfurt, which is in the books for EUR 195mn (share CAI) and a 5.2% gross yield. A 30% margin should be doable, in our view. We would not be surprised to hear of other disposals as well, given the big spread between disposal yields (~4%, in Munich rather 3%) and development yield on costs (still 6-6.5%). There is no news with regard to the possible merger with IIA as IIA first has to have a signed contract about the disposal of its Russian assets before any talks between the two companies will be resumed.

  •  S Immo: Some things we like, some things we do not like: From an operational point of view, S Immo will focus on the execution of its EUR 600mn (re)development pipeline (vs. EUR 2.1bn portfolio value 1Q17) over the next 4-6 years and on disposals (OMV headquarter and Serdika Center in Bulgaria represent gross assets value of EUR ~330mn, in our view). Part of the money will be used to lower LTV, which we regard as positive. Due to the low yield environment, investments will be limited and opportunistic. The acquisition targets are usually relatively small size (up to EUR 50mn) in growing German secondary cities (good locations). We also regard the cautious investment approach as positive. The management is optimistic that a good part of the EUR 200mn write-downs done in Eastern Europe since the financial crisis will be revised. While transaction markets are improving also in the smaller Eastern European countries, these transaction markets are still limited and we therefore believe that appraisers will continue to be rather cautious. With regard to the shares bought in CA Immo and IMMOFINANZ, management confirmed that they see their stakes as pure financial investments, not as strategic ones. However, it was also stated that in case S Immo becomes the next takeover target of the large CAI/IIA, they wanted to have some weight in the talks. We stick to our view that a listed company should not become a passive investor in another listed company. There have been no talks yet with the new core shareholder, Ronny Pecik (holding 11.35%) and he also does not want to have a representative in the supervisory board for the time being.

  •  UBM: Confident with regard to the execution of the deleveraging: According to the CEO, three main topics are ongoing at UBM. First, the accelerated sales program is on track and 2Q should show “good evidence” of that. Secondly, the efficiency improvement program is implemented with a focus on structuring processes for the group (that is a leftover from the merger with PIAG). Last but not least, the option program for top executives, which aims to turn managers into entrepreneurs, seems to be very well accepted (execution price for options is EUR 36.33 per share to be vested in 3 or 4 years). While investment markets and therefore demand for UBM’s products continues to be very strong, the company already started to reduce the risk of projects through e.g. forward sales, forward funding, doing projects in joint ventures or doing projects with an ongoing yield while being developed. Focus will be on Germany, office and hotel. Rising construction costs are an issue for the whole industry in Germany, with construction costs having increased by 5% yoy in Germany in 2016. The CEO also stated that there should be a further net debt reduction beyond FY17 in order to prepare the company for a market downturn.