If you do the work, there are still undervalued, attractive looking value opportunities to be found within Europe and one of the sectors that has become fashionable during recent months is Spanish property.
Inmobiliaria Colonial SA (BME:COL) is a Spain-based REIT, one of the country’s largest, with operations throughout Europe.
Inmobiliaria Colonial is both a property developer and owner, making a living off commercial and residential property throughout Spain. The company’s assets are located within key cities. As a play on Europe’s recovery Colonial could be worth a bet, although I’m not going to be able to cover the whole case for investment within this one article. So, if readers want to know more I’ve linked in Colonial’s English FY 2013 results at the bottom of this piece.
Inmobiliaria Colonial undergoing restructuring
Inmobiliaria Colonial SA (BME:COL)’s is currently undergoing a restructuring, designed around reducing debt to 50% loan-to-value. This plan involves three lines of attack, all of which, as far as I’m aware, have been, or are in the process of being carried out.
Firstly, the company secured placing with institutional investors, including the Qatar Investment Authority and Goldman Sachs Group Inc (NYSE:GS) for €1,000 million.
Seondly, Inmobiliaria Colonial SA (BME:COL) refinanced debt and thirdly the company divested a holding in Asentia, a Spanish property subsidiary. There were also plans to divest Colonial’s 53% share of French property company, Société Foncière Lyonnaise, although this plan has been shelved as Villar Mir group, which acquired 30% of Colonial as part of the restructuring, insisted that Colonial retains its share of the French firm, widely considered to be Colonial crown jewel. Instead of the SFL sale, Colonial undertook a €266 million rights issue.
News on the restructuring has been patchy but the groups Q1 earnings release is slated for 15th May and this should shed some more light on progress.
Aside from the restructuring, Colonial’s underlying business appears to be performing well. FY 2013 results show a 5% fall in revenue to €213 million, while like for like EBITDA ticked higher by 5%. Equity income from the SFL holding added €21 million to Colonial’s bottom line but higher costs hit operating profit by 22%.
Inmobiliaria Colonial’s gains from the change in fair value of assets
However, Colonial did report a €37 million gain from the change in fair value of assets, implying that the Spanish property market is showing some signs of recovery. This gain was up 100% year on year. The big red flag in Colonial’s income statement was the amount paid out in interest, €213 million to be exact; 143% of operating profit.
Obviously this high level of interest is a concern and the problem is the group’s low level of income in comparison to assets.
For example, at year end 2013, Inmobiliaria Colonial SA (BME:COL) reported a total asset value of €5,347 million and debt of €3,543, a LTV ratio of 66% — not excessive (American Tower Corp (NYSE:AMT) and Vornado Realty Trust (NYSE:VNO), two of the US’ largest REITs have LTV values of 72% and 50% respectively). Colonial’s revenue was €213 million for 2013 and operational profit was €149 million, implying an asset yield, based on revenues of 4% and 2.8% based on operational profit. Meanwhile, Colonial’s cost of debt was 3.43% for full year 2013 with an average maturity of 3.1 years.
The recent refinancing should go some way to reducing the cost of debt. A €1,000 million reduction will take debt to around €2,500, interest rates of 3.43% implies annual interest costs of around €86 million, down significantly from the €213 million reported during 2013.
What’s more, the figures indicate that Inmobiliaria Colonial SA (BME:COL)’s equity value is in the region of €2,800 million, although this is a ballpark figure. Nevertheless, with a current market capitalization of just under €2,100 million there could be some value to be found in the shares.
Further information: Colonial’s 2013 results
The author owns shares in Inmobiliaria Colonial SA