This post describes why i sold my Vonovia position. If you have any thoughts or counterarguments, feel free to share.
I considering selling Vonovia already for a while for the following reasons:
- Bond Covenants issues. If the value of Vonovia assets falls 26% based on Q1/23 numbers covenants might be triggered. According to the prospectus of Vonovia EMTN program under which it issues all its bonds creditors could seize assets and force sell them in order to redeem their bonds early.
- Inability of Vonovia to sell assets and worsening real estate valuation situation. From my understanding, Vonovia was not able to liquidate any significant portion of its assets without heavy discounts/controversial structures.
- Rising interest costs. In case interest rates incl. in Europe would rise even further (which is what markets seem to fear right now) the situation on real estate markets should get even more difficult.
(Obvs. the development of mid-longterm interest rates is the key to vonovias future as their enormous debt needs to be be incrementally refinanced) - Modernization Costs. Inflation causes material and construction costs to rise while there are pending law changes that could force higher modernization costs like the widely debated heating law.
Apparently, according to Bloomberg, this causes a growing spread between newly constructed and existing home prices. While law changes might not be imminent this might cause an ongoing mid to long-term burden on existing home valuations and therefore the value of Vonovias portfolio. - Low conviction bet and small position. Vonovia is a low conviction bet which means that significantly less time was invested in understanding it compared to other investments. Given the small size, it is questionable how much additional time should be invested.
More adverse findings from current research:
- I looked up some of the last conference calls and searched for “covenant” and “LTV”.
During the Q1 2023 conference call analyst Charles Boissier suggested that 50% LTV is a threshold for rating agencies. That threshold is not far to Vonovias 45.4% LTV. Given that Vonovia did not mark down it’s portfolio yet significantly reaching 50% is not unlikely. - During the Q3 2022 conference call analyst Rob Jones suggested that the capacity for further secured debt is limited as a decline in valuations could also hurt the unencumbered asset ratio covenant.
- It appears that there is consensus among analysts and management that a fire sale of assets or an emergy capital raise are the only options in case property valuations fall and covenant ratios get dangerously close to being triggered.
- An additional worrying sign is the announcement of CFO Helene von Roeder leaving the company in Q1 2023. She has been with the company since 2018 before Vonovia’s Deutsche Wohnen acquisition. The department might indicate internal/cultural/oversight problems if considered alongside other problems like the current investigation at Vonovia or the potential lawsuit from elliot which concerns a 2billion euro loan which was advanced from Deutsche Wohnen to Vonovia. (Edit: Helene von Roeader was replaced by former Deutsche Wohnen CFO Philip Grosse already at the beginning of 2022 and continued in a role of chief transformation offer)
- I largely agree with this bearish assessment of Seeking Alpha analyst Roberts Berzins.
Decision:
I am liquidating the position for the following key reasons:
- There might be the real possibility that Vonovia gets into a death spiral with rising interest costs, rating downgrades, and fire sale attempts which might force them to reevaluate their asset portfolio and make trigging covenants more likely.
- It seems unlikely that any large buyer is going to buy parts of vonovias portfolio at book valuations with gross yields of 3.9% (Q1 2023 presentation p.27) and EPRA net yields of 2.7% (Annual report 2022 p. 278) in the current interest rate environment. Given Vonovia’s significant debt, it might be difficult to get enough interest to raise large amounts of money in an emergency raise that is necessary to move the needle on LTV ratios.
- I believe that there are more attractive and safer opportunities in the market to focus on. In my opinion, an investment in Deutsche Wohnen has way fewer downside risks given their more conservative debt profile but captures a significant portion of Vonovia’s upside as well.
Sell: I’ve sold my position at a price of 17.70€ after purchasing it for 19.27€ and getting a dividend of 0.85€. Taking into account transaction costs my loss have been around 4%.