Wereldhave Belgium REIT: Not Only Waffles And Beer In The Belgium Retail Market
Nov. 22, 2021 9:20 PM ET
Summary
The Belgium stock market has a developed REIT field with a lot of different types of REITs.
Specifically, Wereldhave Belgium has a strong ~50% P/NAV discount and ~50% lower P/EPRA (FFO) multiple compared to peers.
WEHB has a resilient portfolio of suburban properties, making 90% of total assets and 85% of rental income.
Investment thesis
Our investment recommendation is a BUY as WEHB can be a good growth story for the REITs portfolio because:
WEHB has a considerable discount by a fundamental multiple P/NAV (~ 50% potential upside)
At the same time, the stable cash flow of WEHB is valued only 11x P/FFO (EPRA) metric (vs. 24x industry average)
Also, the future recovery of the Belgian office market gives an opportunity to catch a 9-10% EUR dividend yield in subsequent years
Belgium Market Outlook
Belgian economic growth is gradually bouncing back to pre-COVID levels. 10-year bonds are in the positive zone.
Intro
Belgium is well-known for its waffles and beer. Did you know that till the 1970s, Belgian pupils could buy light beer in bars without a passport? I did not either. With the silent envy, I am starting to examine the one new thing you have to know about Belgium – the local REITs market (one of the oldest in the world since 1995) and its tastiest waffle: Wereldhave Belgium (EBR:WEHB).
Analysts from C&W also forecast a strong rent growth and office space demand in Antwerp and Brussel (basically, where WEHB's offices are located).
According to the report, the retail market is still at full speed with a robust Q3. Indeed, 110,000 sqm of take-up has been recorded, setting the total for 2021 to an impressive 342,000 sqm despite the unprecedented economic climate. Six hundred eighty deals were closed since the start of the year, demonstrating retailers’ willingness to continue their expansion.
Footfall in Flanders and Wallonia is around 80% of the pre-COVID levels – a good signal for the WEHB retail portfolio. According to the C&W MarketBeat retail report Q32021, footfall (the measurement of the number of people entering a shop or shopping mall) across regions is witnessing a positive recovery since the ease of containment measures in April 2021. However, the situation is different in Brussels and Wallonia / Flanders. Indeed, according to the latest figures available, footfall in Flanders and Wallonia is around 80% of the pre-COVID levels while footfall in Brussels is still 50% lower.
Wereldhave Belgium Business Model
Wereldhave Belgium is a public subsidiary company of the Dutch REIT - Wereldhave (AMS:WHA) (OTCPK:WRDEF) (owning ~ 65% stake), which previously had three core real estate businesses in Europe - in France, Netherlands and Belgium. However, In 2020 Wereldhave decided to phase out from France, sold 4 out of 6 French assets as of Q3 2021, and finished its divestment program in other two countries, focusing on ascending the internal efficiency of the business.
Today Wereldhave Belgium is a Retail REIT focusing on shopping centers and retail parks in Belgium and Luxembourg (~89% of the portfolio) with a modest allocation to office space (~9% of the portfolio). In terms of geographical breakdown, it has a good diversification within the country with less than 20% share of each region.
Firstly, let’s look at the public market to understand the WEHB share on the market.
For this purpose, I have created a pie chart with NAV of top-12 Belgium REITs.
As you can see, WEHB’s market share is relatively small, though it assumes there can be additional growth opportunities, while majors (with industrial portfolios) have the highest valuations.
Secondly, 8 out of 12 REITs operate in more than two countries, while WEHB operates only in Belgium, which allows its team to focus on the local market.
Thirdly, WEHB real estate portfolio. Office and Retail properties are primarily located in the South part of the country, with 85% of the rent from shopping centers and retail parks. To better understand the WEHB’s portfolio, you should know that Belgium has two separate regions in terms of everything. As I discuss Commercial Real Estate, Flanders and Wallonia have different rental rates, occupancy rates, infrastructure, etc.
Key drivers in details
Dividend rain
Even though WEHB’s dividend policy was quite specific (management used “optional stock dividends” instead of cash),
this REIT collected almost all rental income in 2020 and is on the good track in 2021. The stock is currently trading around 48.55 EUR, which means a 9-10% dividend yield. Thus, it should stay stable, not depending on the dilution (since cash should be effectively invested in redevelopment to increase rental income). At the same time, WEHB has a relatively low LTV ratio (around 30%).
P/NAV~35% discount gives rational reasons for BUY
NAV is a measure that provides a clear residual value of properties after deducting all liabilities that a company holds. Therefore, P/NAV (stock price to NAV per share) is one of the most valuable ratios to estimate a fair value of a REIT. However, I should note that NAV is different for investors in Europe and the US. Simply speaking, Europe has additional regulations in the reporting system for REITs called EPRA. Therefore, they have, for instance, their own EPRA Earnings and EPRA NAV. The most crucial difference is that properties are reevaluated every year and always have a market price. In other words, they don’t have D&A for the Real Estate in the usual way of US GAAP.
EPRA Net Asset Value
However, it is not so different. I can use the standard NAV metric and get possible future upside to the current property fair value. Generally speaking, NAV represents the net value of an entity and is calculated as the total value of the entity’s assets minus the total value of its liabilities. Based on the current real estate portfolio, I have got a potential 50% upside. Moreover, our waffle could be even taster with a future increase in rental income because of inflation and decreasing vacancy rates.
By the way, my rough estimates of Implied Cap Rate is (~ 7.5%) and WACC (~ 1.4%) as of November 2021 gives a huge margin of Cap Rate Spread investing safety = 7.5% - 1.4% = 6.1%!
P / EPRA (a.k.a. FFO) driver
REIT shows resilient rental income during pandemic, and it gives additional reason to consider a purchase. I also checked P / NTM FFO metrics for REITs in Belgium. The equivalent for FFO in Europe is EPRA Earnings. EPRA Earnings is similar to NAREIT FFO (NAREIT FFO means net income (computed by U.S. GAAP) of a property, excluding gains (or losses) from sales of depreciable property and impairments of depreciable real estate assets, plus D&A, and after adjustments for unconsolidated partnerships and joint ventures). However, the measures are not the same – as EPRA Earnings has its basis in IFRS, and FFO is based on US GAAP. As a result, WEHB has a ~50% discount towards the average market P / NTM FFO of the Belgium REIT market.
If I try to analyze only similar Retail and Mixed-use REITs in Belgium, then there is still a reasonable discount!
Conclusion
To sum up, I think that WEHB can be an excellent addition to a diversified portfolio of European REITs for a value investor due to its risk/reward profile and reasonable cheapness due to relatively low P/NAV and P/EPRA multiples, compared to other Belgium REITs. I am looking forward to seeing H2 2021 report, which may reveal two potential triggers for future share growth: a) rebounding of the occupancy of the office portfolio, and b) changes in dividend policy strategy.