Today, we reinitiate coverage on Belgian’s largest REIT, Cofinimmo with a Hold recommendation and € 96 TP.
From pure office play to fully-diversified
Cofinimmo has evolved from a pure office player into a fully-diversified Belgian REIT active in France, Belgium and the Netherlands. The company has a € 3.3bn portfolio of offices (48.6%), nursing homes (33.9%), cafes (ABInBev) & insurance branches (MAAF) (16.1%) and some other assets (1.4%). Its strong position in the healthcare sector made it the European market leader in nursing home properties.
In 2011, a revaluation of the company’s portfolio reduced the value by € 9.6m. This negative adjustment was driven by the office portfolio, as all the other segments reported higher fair values. The office portfolio was further reduced through the sale for € 167.1m of offices and only a limited € 29.9m investment. The nursing home segment was expanded by € 159.8m in assets spread over Belgium and France. Finally, the company bought a second distribution network, when 282 sites of the French insurer MAAF were bought for a total of € 107.6m.
On March 23, Cofinimmo announced its acceptance of Serge Fautré’s resignation as CEO. After ten years as Director and Chief Executive Officer of the company, he is leaving to become the new CEO of the non-listed AG Real Estate.
In the coming years, we will focus on operating costs and rental income. In our opinion, Cofinimmo’s debt structure is sustainable and we expect no surprises. On the other hand, we are keen to see whether the company will be able to consolidate its results given the wide-ranging diversification strategy. Management expectations for 2012 are flat, pointing to earnings and a dividend in line with 2011.
Positive: i) LT indexed lease contracts (>11y), ii) diversified portfolio (95.34% occupancy) active in promising markets, iii) experienced and capable management team, iv) 11.8% discount to adjust. NAV and recurring dividend of € 6.5.
Negative: i) 50% of office portfolio exposed to poorly-performing periphery and decentralized area, ii) diversification affects operating margin.
Valuation & share rating
We based our valuation on two models (Economic Value Added-model and Discounted Cash Flow-model) and applied an explicit 5-year forecasting period. We set our target price at € 96 and reinitiate coverage with a Hold rating supported by a recurring € 6.5 dividend.