Corestate Capital – Part 3: 2021

So this post is to share my expectations for FY21.

First stop, my expectation for FY20 below, actuals will be provided Feb 24:

As it does not really matter anymore (the market knows the financials are going to be terrible), I have not spent time on it and am simply going with the midpoint of their guidance. But note how a 30% drop in revenues leads to a 60% decline in EBITDA and wipes out net profit. Remarkable operating leverage.

Since the new CEO joined Nov 2020, if there are impairments, writeoffs etc, I do hope they kitchen sink the year, also where possible push transactions from Q4 2020 into Q1 2021. It will make growth momentum for FY21 look better.

My expectations for FY21:

Let’s dig in:

  • Acquisition fees: Mngt projects €2-3bn in transaction volume, CIO Hübner mentioned in a Reuters article closer to €3bn. FY19 transaction volume was €2.5bn, which resulted in €35m acquisition fees. Compared to FY19 though, they are shifting from club deals in the value-add and opportunistic segments to institutional business in core/core+. Institutional deals yield relatively lower fees, but are of higher value, so I assume things balance out to FY19 levels.
  • Asset & property mngt fee: Generally depends on AuMs, which are set to grow mid-single digit, FY20 impacted by negative performance and development fees, due to letting rates in micro living, projecting increase in FY 21 due to growth in AuM and no negative fee impact
  • HFS coupon participation fee: Solid in FY20, despite Covid disruptions. Projecting more or less the same for FY21, high demand for HFS mezz loans from the developer side, demand from the institutional investor side remains to be seen, depending on their appetite for risk, I am assuming they can at least replace churn
  • Income mezz loans: Stable, they have said as much
  • Alignment capital: This is difficult, I project €10m in dividends given size of alignment capital book and €5m in share of p&l (negative in FY20), meaning no more Covid impact after Q1 2021
  • Warehousing: This needs to be closely watched as they will exit the Giessen inventory this year. They remodeled/refurbished the shopping center, see reports from local newspapers. Giessen generates €6m in annual rent income, valued at €64m in Corestate’s book (hence 10x). Mngt sees transaction comps at 15x-20x, meaning Giessen deal could be valued between €90m and €120m, but I caution this is a retail property and the sentiment towards retail is currently not positive. So I am assuming a €12m gain from the sale and the sale to close in Q3 2021, so half a year of rent income (€3m) comes on top. But obviously big impact on EBITDA and net debt.
  • OPEX: FY20 includes €5-€10m in one-off costs for an ‘efficiency program’, which is supposed to result in €10m of savings going forward. They project total cost ratio to be in the range of 45%-50%, I am being conservative and lean towards 50%.

In total, I would like to see €120m-ish in EBITDA, which is an 90% increase from FY20E.

Operating leverage cuts both ways.

Dear reader, please note the following: My expectations for FY21 are in line with consensus. Hence the market is seeing these projections (+90% in EBITDA) – and the stock is at all time lows!! That’s how bad the situation is. I wonder if things would be different if Klaus Schmitt (with the credibility of 14 years in Patrizia) would still be the designated CEO.

But on the other side, that’s why the opportunity exists. The stock trades at 5.3x FY21E EBITDA, compared to Patrizia, which trades at 12x FY 21 EBITDA. If we assume a 10x EBITDA multiple for Corestate, which I find not ambitious for a company with 50% EBITDA margins, the stock would be at 36 Euros. But we will speak of financial leverage on a different part of this series.

In terms of multiple rerating, most will depend on the performance of the new CEO, specifically his ability to communicate, reassure and guide the market. And whether the market in turn places trust in him.    

Come Feb 24, he absolutely needs to address the following concerns:

  • In general, make it clear no bodies have been buried. Nobody would care about a kitchen sink goodwill write-down, but there should not be any serious issues fundamentally altering the profitability or growth trend of the business going forward.
  • Address the concern, Corestate’s business will not bounce back with the economy (by setting attainable guidance).
  • Address concerns relating to the repayment of the ’22 convertible and the refinance of the ’23 bond. They have a credible debt reduction plan, he needs to be able to sell this to the market.   

I will write about the deleveraging process in the next part of this series and once the guidance for FY21 is out, we will also look at valuation.

If you have thoughts on FY21 and beyond and would like to discuss, please comment or contact me at parimutuel.bets@gmail.com

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