IMMOBEL. Will Poland lay the golden egg?

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1 100% IMMOBEL COMPANY NOTE Will Poland lay the golden egg? REAL ESTATE INVESTMENT & SERVICES CURRENT PRICE ACCUMULATE BELGIUM TARGET PRICE INITIATING COVERAGE M J J A S O N D J F M A M Share performance BEL20 performance Source: Thomson Reuters Datastream FY/e E 2014E 2015E Sales ( m) REBITDA ( m) Net earnings ( m) Diluted adj. EPS ( ) Dividend ( ) P/E EV/REBITDA Free cash flow yield -15.0% 37.0% 2.5% 11.0% Dividend yield 5.3% 9.0% 5.9% 6.2% Source: KBC Securities Bloomberg IMMO BB Reuters IMMO.BR Market Cap 133m Shares outst. 4.1m Volume (Daily) 0.06m Free float 64.42% Next corporate event Results 1H13: 30 August 2013 Performance 1M 3M 12M Absolute 2% 4% 23% Rel. BEL20-4% -3% -4% 12-m Hi/Lo 32.67/25.05 Immobel has a strong track record in delivering long-term leased high-quality assets in Belgium & Luxemburg. It is now also searching for growth opportunities in Poland. Over the years, the company has achieved wide geographic and segmental diversification, thereby enhancing its risk profile while also managing the balance sheet with care. We see opportunities in the rapidly-changing sustainability standards. We initiate coverage with an Accumulate rating. Conservative BS management. As a pur sang developer, Immobel differentiates itself by its cautious approach to sustainable and profitable growth. In FY12, the LTV amounted to only 44%, while the Net Debt to Equity and interest cover ratio stood at respectively 85% and 3.0x. Good pipeline rotation. Going forward, we expect the residential and land banking activities to provide some income stability, but the cyclicality of the office segment will persist. We bank on FY13 EPS of 5.96 and FY14 EPS of 3.98, while we presume a pay out ratio close to 50%. Koen Overlaet-Michiels Financial Analyst - Brussels KBC Securities NV koen.overlaet-michiels@kbcsecurities.be Investment case. Immobel is a pur sang developer with a diversified >350m development pipeline that is active in three countries and segments. Management has extensive experience in the sector and handles the balance sheet with care in pursuit of sustainable and profitable growth. The company has a strong track record in delivering high-quality and long-term leased projects. Our 5-yr DCF valuation points to a theoretical fair value of 36 and this is where we set our TP. We initiate our coverage with Accumulate. kbcsecurities.com Refer to important disclosures, disclaimers and analyst certifications at the end of the body of this research.

2 CONTENTS EXECUTIVE SUMMARY 3 INVESTMENT CASE 4 SWOT ANALYSIS 4 BUSINESS DESCRIPTION 6 COMPANY HISTORY 7 PORTFOLIO EVOLUTION: LEAVING THE CRISIS BEHIND 7 SHAREHOLDER STRUCTURE 8 COMPANY STRATEGY 9 FOCUS ON CORE ACTIVITIES 10 REFLECTION ON IMMOBEL S STRATEGY 10 DEVELOPMENT PORTFOLIO 12 MOTHER COUNTRY BELGIUM 12 SUSTAINED PROGRESS IN LUXEMBURG 14 POLAND; LAND OF GROWTH? 15 COUNTRY-SPECIFIC MARKET TRENDS 17 BELGIUM SHOWS TWO FACES 17 LUXEMBURG HAS LOW VACANCY 17 POLAND: A DYNAMIC MARKET 18 BALANCE SHEET 20 DIVERSIFIED DEBT COMPOSITION 21 NAV EVOLUTION 22 FINANCIAL OUTLOOK 23 VALUATION 26 COMPARISON OF BELGIAN LISTED DEVELOPERS 27 2

3 EXECUTIVE SUMMARY Pur sang developer with a 351k m² pipeline active in 3 countries and segments Prudent approach based on diversification & clear selection criteria Poland: still room for growth, but is there room for an additional developer? Conservative balance sheet management with >350m development pipeline EPS forecast: 5.96 in FY in FY14 Immobel is a pur sang developer with a long history in property development in Belgium. Since recently, the company has been diversifying its activities geographically towards the Grand Duchy of Luxemburg (2004) and Poland (2011) in order to mitigate countryspecific risks. Furthermore, it is active in three segments offices (55%), residential (25%) and land banking (20%) the land bank of 345ha (+ 71ha CP) exists only in Belgium. The current development pipeline consists of 351k m² (own share and excl. the land bank). Caution is the keyword in the company s development strategy. Not only does the segmental diversification towards the residential and land banking sector stabilize the cyclical movements in the office segment, but projects are also selected based on clear criteria. Next to the most important factor location, there is also a focus on quality, the risk/return balance, environmental standards and the size and phasing of the projects. Noteworthy are also the strong relationships with local and federal governments that Immobel has built up over the years. This is a significant plus for a developer who wants to attain the correct permits for its projects and in time. We question however whether the entry into the Polish market is not happening too late. Many developers already have stable positions and significant office developments are underway, while research shows that buyers are getting increasingly cost conscious. Furthermore, entering a new market requires the costly setting up of a local team and the time-consuming creation of good local connections. Immobel however sees sufficient opportunities and evaluates the market on a regular basis. Its reference shareholder, Eastbridge, can also provide market information within the governance code limits. Going forward, we expect Immobel s pipeline to fluctuate at a value above 350m. The disposal of significant projects within the office segment (BelAir, Black Pearl, WestSide Village, Gateway, etc.) will create cyclicality, while we predict more stability from the residential and land banking activities. We also believe the company applies conservative balance sheet management with a Loan-to-Value ratio of 44%, Net Debt to Equity ratio of 85% and an ICR of 3.0x in FY12. We bank on EPS of 5.96 in FY13, 3.98 in FY14 and 4.07 in FY15. The drop in FY14 results mainly from our prediction of fewer office sales in that year. Our forecasts include a payout ratio close to 50% (management applies a 40 to 50% pay out ratio range). We value Immobel using a discounted cash flow model over a 5-year forecasting period with a 1.5% long-term growth rate. Using a WACC of 8.9%, we attain a theoretical fair value of 36.1 p.s. and therefore set our target price at 36. This target reflects 12% upside and corresponds to a dividend yield FY13E of 8% and EV/EBITDA13E of 6.7x. Hence, we initiate our coverage with an Accumulate rating. 3

4 INVESTMENT CASE Strong track record in delivering qualitative, long-leased assets Uncertainty re the Polish market and limited transparency Accumulate, 36 TP TP triggers: New projects Confirmation of Polish market Improved transparency Over the years, Immobel has established a strong track record in the Brussels office market. While maintaining a solid balance sheet, the company has delivered high-quality, long-leased projects that have generated significant earnings. We underline the company s diversification strategy which mitigates country- and sector-specific risks. Poland is the current earnings driver, lagged by the Brussels office market. The segmental diversification into residential and land banking activities provides more stability in the income stream as a response to the more cyclical office sector. It is management s ambition to have the operating and financial charges covered by this recurring income stream. We however would like to see a confirmation of the opportunities and earnings potential of the Polish activity, as we are concerned that the entry into this market might come late. Furthermore, we believe the company could further improve its transparency, as this is currently lacking to its listed peers. For example, after different completions, no historic average gain on disposals is provided, making it hard to make accurate forecasts. Based on the pro and cons of our investment case and our valuation that indicates a fair value of 36.1 p.s., we rate the stock Accumulate. Target price triggers are the announcement of new projects, the confirmation of profitability in the Polish market and an improved transparency. SWOT ANALYSIS STRENGTHS Proven track record in delivering qualitative, longleased assets Geographic and segmental diversification mitigates risk Conservative balance sheet management Relationships with local and federal government Good pipeline rotation WEAKNESSES Offices segment creates earnings cyclicality Limited share liquidity OPPORTUNITIES High sustainability requirements Demand for grade A assets Further increase in transparency THREATS Competitive and costly market entry into Poland Sustained pressure in the Brussels office market Fiscal uncertainty in Belgium weighs on investments Excessive price tags of redevelopment projects (Parc Seny at 1,200 per m²) 4

5 PORTFOLIO PER SEGMENT GEOGRAPHIC PRESENCE Landbanking 20% Grand Duchy of Luxembourg 12% Poland 16% Residential 25% Offices 55% Belgium 72% Source: Immobel Source: Immobel DEBT MATURITY PROFILE LOAN-TO-VALUE EVOLUTION % 80% % 70% % 50% 60% 50% % 40% % 20% 30% 20% % 10% % E 2014E 2015E 2016E 0% Debt maturities ( m) Average maturity (y) - rhs Loan-to-value ratio Bank cov. Debt ratio REITs legal cov. Source: Immobel, KBC Securities Source: Immobel, KBC Securities EPS DPS EVOLUTION NAV EVOLUTION E 2014E 2015E 2016E E EPS DPS NAV (IFRS) Share price Source: Immobel, KBC Securities Source: Immobel, KBC Securities 5

6 BUSINESS DESCRIPTION A pur sang developer with a long history in Belgium Immobel has a long history in property development in Belgium, while it has recently been diversifying its activities geographically towards the Grand Duchy of Luxemburg and Central Europe (predominantly Poland). This diversification fits the company s strategy to reduce its exposure to country-specific risks. It is active in three segments: offices (55%), residential (25%) and land banking (20%), but retail is also on the scope of interest. The land bank contains 345ha (+71ha CP), all of it in Belgium. Active in Belgium, Luxemburg and Poland In Belgium, the company is active in the Brussels region (offices and residential developments) where it aspires market leadership, while its land banking activities are mostly based in the Walloon region. Over the last 2-3 years, Immobel has also acquired a small number of land banks in Flanders. The projects in Luxemburg were recently expanded to three (1 residential and 2 in offices). Note also the diversification towards Central Europe, with the first projects in Poland, located in Warsaw and Poznan and 2 smaller land banks in Gdansk and Krakow. PORTFOLIO PER SEGMENT PORTFOLIO PER COUNTRY 100% 90% 18% 19% 23% 20% 20% % 19% 16% 80% 70% 60% 50% 40% 30% 20% 20% 63% 21% 60% 30% 47% 22% 58% 25% 55% % 81% 15% 66% 12% 72% 10% 0 0% Offices Residential Landbanking Belgium Grand Duchy of Luxemburg Poland Source: Immobel Source: Immobel Strong track record in project realization. Current development pipeline of 351k m² The current development pipeline is extensive and amounts to 351k m² (excl. land bank), of which the Bel Air (2013E), Universalis Park (2015E), Black Pearl (2014e) and Gateway (2016E) projects are some examples. Proof of the company s strong performance can be confirmed by the realization of the Lex building (59k m² of offices, let to European Government), the Ellipse building (48k m² of offices, let to Flemish Government) and the recently-delivered Forum project (41k m² of offices, sold to the Chamber of Deputies). These examples also confirm the company s good relationship with public institutions and its ability to find long-term leases for its office projects. Prudent strategy with clear selection criteria Immobel s strategy is characterized by prudence and conservatism. It assesses new development projects by applying clear selection criteria. Next to location, focus is placed on quality, risk/return balance, environmental standards and the size & phasing of the projects. 6

7 Key competences in-house, non-core outsourced As a pure developer, Immobel pursues a combination of designing, promoting and managing a real estate portfolio through the focus on adding-value tasks executed by its in-house specialists and the outsourcing of the non-core functions. The company s past performance shows a strong ability to find long-term leases for its projects, thus enabling the creation of attractive investment assets. COMPANY HISTORY Founded as a land developer. New management since 2007 Management committee: Gaëtan Piret Philippe Opsomer Philippe Helleputte Christian Karkan Immobel was founded in 1863 with the financial support of Société Générale. The primary focus was on land development in Brussels, but the activity spectrum expanded significantly over the years. In 1998, the Belgian REIT Cibix was created (taken over by Befimmo in 2001). This take-over heralded a change in strategic focus towards pure promotion and real estate development. In mid-2007, an organisational overhaul created a new start with a changed management, Board and Chairman. Furthermore, the American company, JER Partners, acquired Tractebel s stake in Immobel. Their vision was however too short-term and this stake was largely replaced by the new reference shareholder Eastbridge Group in 2010, marking the start of a more active and professional company strategy. Today, Immobel operates with a total staff of 50 (15 of them in Poland) and an experienced four-person management team. The CEO, Gaëtan Piret, has been with the company for 21 years, while Philippe Opsomer joined more recently, in 2007, but has more than 15 year's experience as CFO. The other two managers have extensive real estate experience. Philippe Helleputte has been head of the land banking activities for over 30 years and Christian Karkan has only been with Immobel for 5 years, but has almost 25 years of experience in real estate. PORTFOLIO EVOLUTION: LEAVING THE CRISIS BEHIND Portfolio value again on the rise In 2005 and 2006, the portfolio attained peak levels of over 300m of projects. These projects were largely monetized in 2007, marking an economic peak. The onset of the financial crisis then prompted management to maintain a smaller portfolio of projects hovering around 260m. The geographic diversification since FY11 has enabled Immobel to grow strongly again, raising the number of projects and thus the inventory level to a value of 363m today. 7

8 PORTFOLIO EVOLUTION ROE SHAREHOLDER RETURN % 20% % 15% % 10% % 5% 200 0% 0% % -5% % -10% 50-60% -15% % % Portfolio value ROE Shareholder return Avg ROE Avg share. Return Source: KBC Securities Source: KBC Securities Market overestimated the ROE over the past 7 years This portfolio evolution can largely be reflected in the company s return on equity (ROE), which attained record peaks in 2007, before then falling to more moderate levels of between 0 and 10%. Hence, the average ROE over the last seven years is 10%. The company s total shareholder return (share performance + gross dividend + capital reductions) however more than compensated for this performance. The stock crashed heavily in 2008 as a result of economic uncertainty and the pay-out of an exceptional capital reduction, but returns have recovered strongly from 2009 onwards. The average return over this same period comes in higher at 17%. SHAREHOLDER STRUCTURE Shareholder Eastbridge opened the door to Poland Since 2010, Immobel has a very stable and constructive shareholder base. Cresida investments (Eastbridge), Jer Audrey and Capfi Delen AM together hold 35% of the shares. The arrival of Eastbridge can be regarded as an important moment for Immobel. This reference shareholder provides useful information regarding Central and Eastern Europe, where it is one of the largest retail developers. Furthermore, it has a long-term perspective, which enables the support for a long-term investment approach and more varied (in terms of timing and size) development projects. SHAREHOLDER STRUCTURE MARKET CAP EVOLUTION Shareholder % # shares Cresida invest. 25,0% 1,030,484 Jer Audrey 5,5% 228,081 Capfi Delen AM 5,1% 208, CR2: 40.6m Sept 2003 CR3: 40m Nov Free float 64.4% 2,654, CR1: 37.5m May Total 100% 4,121, Source: KBC Securities Trading volume Market cap ( m) Source: KBC Securities CR = Capital Reduction 8

9 COMPANY STRATEGY Immobel: A diversified pur sang developer Geographic expansion mitigates country-specific risks, while residential and land banking activities bring more stability Clear selection criteria: Location High-quality Risk/Return balance Size and phasing Good relationships enhance productivity Immobel is a pur sang developer with a diversified strategy in terms of country, real estate segment and size of projects. The company seeks a healthy mix of cyclicality that enables a certain level of earnings stability. Its strategic plan aims at becoming market leader in the Brussels office market and in the land banking activities in Wallonia. Furthermore, it bears growth ambitions in Poland and Flanders. Prudence and conservatism are important as a way of generating sustainable and profitable growth. In the wake of the economic challenges and their impact, the company underlines its strategy of diversification. From a geographic viewpoint, Immobel tries to limit the exposure to country-specific risks by entering other markets such as Luxemburg (2008) and Poland (2011). Secondly, a recurring income stream is pursued in order to cover operating and financial costs. The company thus tries to alternate the more cyclical movements in the office segment with projects in the residential and land-banking segments. Despite the probable lower margins generated in these latter segments, they are more recurring in nature, thereby providing revenue stability. Finally, a good balance is pursued between large and smaller projects. Taken together, this approach should lower the risk profile. Immobel applies a list of criteria in order to select the most suitable projects. The main focus is undoubtedly on location. Finding the most strategic location for a project remains crucial to its success, be it an office, residential or land banking project. Once the best possible location has been found, the company aims to deliver excellent products (for which it has built up a certain track record). It works with the best materials and tries to obtain recognised sustainability certificates for its buildings, thereby enhancing the total cost of ownership and thus the value for the buyer. Furthermore, this quality is also reflected in the timely executing of the projects, making it possible for the buyer to acquire the asset at the pre-agreed date. Thirdly, it is important to enter projects that offer a good risk/return balance. Different projects will have different profit margins. Typically, margins will be lower for land banking than for residential projects, while the office projects need the highest margins in order to be started. Finally, the size and phasing of the project is important. For every project, Immobel needs to have sufficient resources available in order to fund the project from beginning to end. Immobel s long history in Belgium has enabled it to build strong relationships with local and federal governments, a real advantage for a developer seeking to attain the correct permits for its projects and to receive them on time. In this respect, the high-calibre Board of Directors is a plus. 9

10 Different real estate segments lead to diversification of the investor base (residential vs. offices) Other investors generate other cash inflows The company s segmental diversification not only mitigates the exposure to a single real estate sector and its corresponding cyclicality, but it also diversifies the investor base. Investors in offices invest based on the long-term stable cash flow profile, whereas residential investors tend to be private individuals who are buying the property predominantly for their own use. Furthermore, both investors also add to the diversification of cash flows. Investors in office buildings typically buy the asset after delivery and often only when a long-term lease is concluded with a respectable tenant. The timing of office acquisitions (and thus the cash inflow) differs markedly from the investments in residential assets, which are more usually bought according to a timetable. This method of transaction whereby buyers pay for their apartments in different tranches during the building phase significantly reduces the external cash needs during that phase. FOCUS ON CORE ACTIVITIES Human capital intensive company Human capital intensive company Immobel is a capital intensive company. Literally, in the sense that its projects require the necessary funding but also through the employment of highly-qualified experts in the core value-adding activities of the company. This makes that the company is not fully vertically integrated. Activities such as accounting, designing, constructing and monitoring the yards are predominantly outsourced enabling each employee to spend its time on the core business and adding-value activities. This enables the company to review multiple investment opportunities and to create attractive real estate assets in the market with a staff of only 50. These human qualities and commitment to deliver excellence have resulted in the status of reliability and respect in the market. Also in their projects with public institutions and the government, Immobel has proven its solidity and has delivered on promises resulting in the creation of good relationships. REFLECTION ON IMMOBEL S STRATEGY Was entry into Poland too late? The change in development strategy towards more diversification in segments is typical behaviour that we ve detected at other listed Belgian developers such as Atenor and Banimmo. The increased challenging environment has tempered growth and thus lowered demand for offices in Brussels inducing development activities in other segments. Also the geographic spread is a common phenomenon. We therefore believe Immobel is acting in-line with its competitors. However, the company differentiates in a good pipeline rotation and delivers state-of-the art buildings creating an impressive track record. 10

11 For its recent expansion towards Poland, we are however not yet fully convinced. The construction of office buildings has peaked over the past couple of years and we can question whether the high development margins that numerous developers achieved in recent years can be maintained. High cost of market entry but Immobel is aware of the risk Additionally, the market entry requires the setting up of a local team (staff of 15 in Poland), thereby significantly increasing the company s overheads. Time is also needed to build up local connections with public entities, which is one of Immobel s core strengths in its home markets of Belgium and Luxemburg. Different Spanish and Irish developers have however left the country creating opportunities for Immobel given the sustained need for grade A office buildings. We believe that the reference shareholder, Eastbridge, can provide, in compliance with the corporate governance codes, the company with market know-how and connections in this regard. We understand that Immobel is convinced that its expansion plans are sound, but remains cautious about evaluating market developments. The company therefore carries out a critical review of its strategic expansion strategy every three months. In these meetings, management analyses current market trends in order to be sure that the strategy is still justified. 11

12 DEVELOPMENT PORTFOLIO Portfolio (share of Immobel): 160k m² of offices 191k m² of residential space 345ha (+71ha CP) land banking Immobel is developing 160k m² of offices, 191k m² of residential space and a 416ha land bank. Its home market has become Belgium and Luxemburg, but the diversification towards Poland is gaining momentum. Projects in the latter have supported earnings, which had been squeezed by the economic crisis. Today, the company attaches more importance to its diversification in to different segments and countries. This should lower the risk profile and create more stable income. In the following paragraph, we provide more colour on some key projects in each country. MOTHER COUNTRY BELGIUM Limited growth in absolute inventory value in FY12, but shift from residential to offices Belgium is the only country in which the company has land banking activities. They are mainly located in the southern part of the country, but the company is increasing its interest in Flanders. In FY12, the Belgian portfolio grew only slightly, but there was a shift from residential projects towards offices. Immobel had a good start to 2013, announcing a.o. the Gateway project at Brussels Airport and the residential redevelopment of Parc Seny, thus reflecting the sustained growth of the development pipeline. There follows an overview of some of the more remarkable projects: Belair (148k m²), Black Pearl (11k m²), Gateway (36k m²), Bella Vita (52k m²) & Parc Seny (13k m²). Sustained demand for grade A offices and residential units creates opportunities ANNOUNCEMENTS OVER PAST YEAR Despite the structural overcapacity of offices in Brussels, Immobel has been able to announce several new projects (e.g. Belair & Black Pearl). The sustained demand for Grade A office buildings in Brussels has enabled Immobel to remain active despite the general lower demand. Furthermore, the high vacancy ratios in the decentralized Brussels office market coupled with the persistent need for residential facilities enable Immobel to execute redevelopment projects such as Parc Seny. BELAIR OFFICES BELAIR RESIDENTIAL Source: Immobel Source: Immobel 12

13 BelAir: complete renovation of the 80k m² State Administrative Centre. Preleased for 18 years to federal institution Black Pearl: New 11k m² office building in European district In the centre of Brussels, in partnership with Breevast (60% stake), Immobel is redeveloping the old State Administrative Centre. The project is called BelAir and entails 79,870m² of office space, of which 8,000m² is shared facilities. Initially, an 18-year rental contract was concluded for 65,000m² with the Régie des Bâtiments for use by the Federal Police, but this contract was amended to include the remaining space available. Redevelopment started in 2H11 and is expected to be finalized by end-2013/begin Additionally, two residential towers will be constructed in front of the building. They will contain 64,000m² of residential units and shared facilities. This residential project will also be executed in partnership. In the heart of the European district, Immobel is developing a best-inclass, highly sustainable office building that respects the latest energy requirements and uses high-quality materials. The design makes full use of natural light and includes a special water management system. Furthermore, the heating will be provided through a geo-thermic installation. The building has 11,000m², which is also why Immobel is executing this project speculatively; the building would suit either a single or multi-tenant arrangement. BLACK PEARL GATEWAY Source: Immobel Source: Jasper - Eyers Gateway project: construction of 36k m² for Deloitte s new HQ next to Brussels Airport In January, the company announced the construction of the Gateway project in Zaventem. This 36,000m² office building will become Deloitte s new highly-sustainable headquarters as of Not only is it located near the airport, it will also have a train station underneath offering perfect access for employees. The office complex will be constructed in cooperation with Codic on a land bank that was acquired under a 50-year concession from the Brussels Airport company. An 18-year lease contract has been signed with Deloitte. 13

14 Bella Vita: NEW living together residential project in Waterloo. Currently under construction, but 34% reserved Project Bella Vita (51.5k m² of residential space) is probably the company s most interesting investment at present. It entails the development of a complete living together project with apartments, homes for seniors, service flats, retail centres, a one-day clinic, a library, public spaces and crèches. The combination of senior homes, crèches and apartments responds perfectly to the current and future needs of the society in which the aging population will be fullyintegrated into the day-to-day fabric of a community, in contrast to the current more disconnected solutions for senior housing. Finally, we highlight that 34% of the 269 apartments excellently-located in the green area of Waterloo have already been reserved. BELLA VITA PARC SENY Source: Immobel Source: Immobel Parc Seny: redevelopment of offices into residential units. The company has not yet introduced a permit request In September, Immobel acquired the decentralized office building in parc Seny. This 13,000m² building was acquired in full by the company at an estimated average price of 1,200 per m². Immobel plans to completely redevelop this office complex into luxury apartments and works are expected to start in early-fy15. However, this project is still in its infancy and the available information is therefore limited. The building will remain occupied until end SUSTAINED PROGRESS IN LUXEMBURG West Side village: office project of which phase 2 still needs to be sold (76% let) Green Hill: residential project of 164 apartments (118 already sold) For a couple of years now the company has also been active in the Grand Duchy of Luxemburg, apparently with some success. The first project (WestSide Village, offices) started in 2004 and was delivered in Phase I is now sold and phase II (delivered in 2010) is 76% let. In the remainder of FY13, the focus will be on further increasing the occupancy of the building before the sales process can be launched. Secondly, a residential project was started beside the financial centre of Luxemburg, Kirchberg. The Green Hill project entails 164 apartments of which 118 have already been sold. We bank on a sales price per square meter for the residential project of 5,000, which is well above the Belgian average. Note however that land is also more expensive than in Belgium. 14

15 WESTSIDE VILLAGE GREEN HILL Source: Immobel Galerie Kons: 20.5k m² project of mainly offices (70% let to ING) and some retail and residential units Source: Immobel Recently, Immobel announced plans to redevelop together with Besix Red and CLI the historic Galerie Kons in front of the railway station. The majority of this 20,500m² project consists of offices and most of it (70%) will be rented to ING that will make it its Luxemburg head office. An additional 2,400m² of retail and 3,500 m² of residential space will also be developed. The value of this project is enhanced by its unique location in front of the train station in an area that is undergoing complete transformation and that is also extremely well-served by public transport and retail infrastructure. POLAND; LAND OF GROWTH? Next to the two-mixed projects in Poznan and Warsaw, Immobel also holds a stake in companies holding some projects In February 2011, the company decided to expand strategically in to Central Europe, with the first country of entrance being Poland. Since then, the company has already set up a 15-strong team that consists exclusively of Polish residents so as to ensure a good understanding of the market and good connections. Two office & retail development projects were acquired, one in Warsaw (20,000m²) and a smaller renovation project in the heart of Poznan (7,600m²). POZNAN WARSAW Source: Immobel Source: Immobel 15

16 SUMMARY PORTFOLIO STATISTICS Status Project Location Letting ratio k m² Stake Offices Completed - to let & for sale Westside Village Luxemburg 76% % Okraglak Poznan 50% % Under construction - to let & for sale BelAir (RAC 2) Brussels / % Black Pearl Brussels / % Under construction - leased & for sale BelAir (RAC 1) Brussels 100% 30 40% Brussels Tower Brussels / % Gateway Brussels 100% 18 50% Scheme being worked up Universalis Park Brussels 70% % Kons Luxemburg 70% % Cedet Warsaw 70% % Residential Completed & for sale Under construction Scheme being worked up Source: KBC Securities Espace Midi Ilot D Brussels n.a % Foncière du Parc Brussels n.a % Martyrs 1-4 Brussels n.a % South City Hotel Brussels n.a % Résidence Saint Hub. Liège n.a % Etterbeek Rue Devr. Brussels n.a % Forum Brussels n.a % La Charmeraie Brussels n.a % Sittelles Les Aubépines Brussels n.a % Duinenzicht Bredene n.a % Zur Alten Brauerei Eupen n.a % Bella Vita Waterloo n.a % Green Hill Luxemburg n.a % BelAir RAC3&4 Brussels n.a % Jardins Nord Brussels n.a % Etterbeek Residential Brussels n.a % Parc Seny Brussels n.a % Universalis Park Brussels n.a % Universalis Park Lot 2 Brussels n.a % Universalis Park Lot 3 Brussels n.a % Lindepark Tervuren n.a % Ilot Saint Roch Nivelles n.a % 16

17 COUNTRY-SPECIFIC MARKET TRENDS Belgium: demand = replacement Luxemburg & Poland: demand = growth The gloomy economic situation in Belgium and its effect on the office market has forced the company to diversify geographically into Central Europe. However, the problems in the Belgian office market are only relative, as multiple opportunities are also being created by fastchanging sustainability requirements (even though these drivers have more to do with replacement in comparison to the growth drivers visible in Luxemburg and Poland). We will shortly discuss the Belgian and Luxemburg market, while going into more detail for the Polish office market. BELGIUM SHOWS TWO FACES Difficult office market, but demand for grade A assets Clear differentiation between Brussels Central Business District, Decentralized and Periphery Nobody can pretend that the Belgian office market is flourishing at the moment. The Brussels office market certainly suffers from illiquidity and high vacancies, though we do detect windfalls such as the increased sustainability requirements and demand for grade A offices, which create opportunities for developers despite the weak economic growth. A clear distinction can be made between the Brussels CBD, decentralized and periphery. The CBD is characterized by strong and stable demand from public and European institutions, leading to a limited vacancy of approx. 6%, which supports prime rental levels of up to 285 per m² per year. By contrast, rents in the periphery hover around 165 per m² with vacancies between 15 and 20%. However, this latter area seems to be experiencing increased demand from Corporates striving for easily accessible locations. Going forward, we expect demand for relatively recently-built office buildings to rise, as the level of speculative developments is expected to remain very low (circa 31k m² in FY13 and 47k m² in FY14). LUXEMBURG HAS LOW VACANCY Only 2% vacancy at prime locations Take-up in FY12 to strongly outperform FY11 While the Brussels office market suffers from structural overcapacity in offices (overall vacancy of 11%), the Luxemburg office market is performing at a much better 6%. In the central areas such as Kirchenberg and CBD, vacancies are even limited to 2%. This better supply vs. demand balance is also reflected in the rents, which have shown steady growth over the past years to 40/m²/month. In FY12, the investment volume in Luxemburg clearly outperformed the level of the previous year. Take-up amounted to 516m in 3Q12 vs. 367m over FY11, while the prime yield hovered around 5.75%. In the coming years, we assume even higher interest for new developments as the speculative development pipeline (only 56% of 5- year average) remains small. 17

18 POLAND: A DYNAMIC MARKET Economic growth but also significant developments expected in FY13-15 Warsaw has several assets to attract multi-nationals Clear city polarization comparable to Brussels office market In 2009, the Polish office market was severely hit by the crisis. Ever since, we have seen the market gradually regain its strength, with 2011 being a top year with investments nearing 1bn (vs. a total of 2.1bn in CEE). In FY12 however, demand seems to have been less strong. A significant number of new properties entered the market, while even more (speculative) development projects are expected in FY This will certainly lead to higher vacancies in B-class assets. FY13 is therefore expected to be quite challenging. It is worth noting however that the Polish economy is expected to perform strongly and outperform general European growth. WARSAW IS POLAND S LARGEST OFFICE MARKET Warsaw is by far Poland s most important and well-established office market and many international companies have located their headquarters in the city. The increased political stability, the potential for cost-optimization, the proximity to other companies, public entities and the number of well-educated citizens attract companies searching for headquarters within Central Europe. Furthermore, economic studies anticipate that Poland s GDP growth will outperform general European GDP trends. We therefore presume sustained demand in the coming years and this while the city currently lacks sufficient supply of modern assets. Demand for Class-A buildings will certainly remain buoyant. Like in Belgium, Poland shows a certain polarization within cities. Occupiers are in search of modern offices at prime locations, rather than at secondary locations. In these non-central locations, we expect 400k m² of office space developments (mostly speculative) to come on the market in the following two years, creating the opportunity for higher vacancies. This is why some investors have started to show stronger interest in value-added opportunities in prime locations in order to pro-actively prepare for the anticipated increase in vacancies. In terms of the development pipeline, the cities Wroclaw and Tri-city complete the top three. WARSAW DEVELOPMENTS WARSAW: TAKE-UP BY TYPE (TH M²) IN , ,000 Pre-lets 32% Owner occupations 5% Expansions 3% Renewals 28% 200, , E 2014E New deals 32% City centre Non central Source: CBRE Source: CBRE 18

19 Prime yields of 6.25% correspond to facial rents between 25 and 27 per m² Further polarization expected towards well-located highly-sustainable assets Cost reductions support demand for secondary cities The prime yield in Warsaw amounts to 6.25%, which shows a positive discrepancy of 150 to 200 bps with the non-central locations and 100 bps with top locations in the regional cities. This prime yield corresponds to a facial rent of 25 to 27 per m² or an economic one of 22 to 25 per m² (as market incentives are estimated at 1.5 months per 1-year lease). In the non-central zones, we estimate investment yields fluctuating around 7.5% as market rents hover between 11 and 16 per m² per month. When examining the investment outlook, demand for well-located highly-sustainable assets is expected to continue rising, with the spillover effect towards secondary assets remaining limited. OTHER CITIES WITHIN POLAND The more secondary cities benefit more from the outsourcing trend, with cost cutting being the main driver. Krakow in particular, which is Poland s second largest city, but also Wroclaw and Tri-city, are attractive for BPO investors. This trend alone is already expected to create demand for 200k m² of office space. Below, we provide an overview of the largest Polish office markets. It is worth mentioning the significant difference in rents between Warsaw and Krakow, where the prime rents in A-Class modern offices amount to only 13 and 15/m²/month. Finally, we would like to remark the high vacancy rate in Poznan, amounting to 11%, as this is the third city where Immobel is active. Furthermore, the large amount of new space in the pipeline is expected to further squeeze rents. POLISH OFFICE MARKET City Modern Stock (sq m) Total completions Vacancy rate Gross Take-up 1H12 FY12E Warsaw 3,690, , % 298,000 Krakow 565,000 41,000 6% 72,000 Wroclaw 425, ,000 5% 18,000 Tri-City 348,000 56,000 8% 52,000 Poznan 250,000 52,000 11% 14,000 Katowice 270,000 26,000 10% 18,000 Lodz 261,000 66,000 14% 13,000 Szczecin 109,000 45,000 6% n/a Lublin 111,500 17,000 4% n/a Total 6,029, ,000 n/a n/a Source: CBRE Poland 1H12 numbers 19

20 BALANCE SHEET A development pipeline of > 350m Credit corner We expect Immobel s pipeline to fluctuate at a value above 350m over the coming years. The disposal of large-scale projects within the office segment (BelAir, Black Pearl, WestSide Village, Gateway, etc.) will create cyclicality, while we estimate more stability from the residential and land banking activities. Furthermore, we expect the company to be able to find more interesting projects in the three countries where it is present. These development prospects together with the historic pay out ratio of the dividends (40-50%) make us think the company will maintain a conservative cash buffer. Furthermore, we will remain confident about the company s debt exposure as long as the net debt to equity ratio remains below 200%. Funds from operations are in our opinion also sufficient for Immobel to be able to cover its financing costs. BALANCE SHEET / RATIO ANALYSIS m E 2014E 2015E 2016E Inventory Financial assets Other non current assets Cash and cash equivalents Shareholders' equity Minorities 0.0 (0.0) (0.0) (0.0) (0.1) (0.1) (0.1) (0.1) Net debt Other non current liabilities Net deferred tax liabilities Capital invested Number of shares (m) NAV (IFRS) chg y/y 2% 6% 3% 10% 2% 4% 4% FFO Net debt / EBITDA 1.68x 3.98x 6.22x 8.00x 3.16x 4.79x 4.47x 3.67x Net debt / equity 21% 31% 75% 85% 57% 60% 54% 44% Interest cover 4.0 x 2.8 x 4.5 x 3.0 x 3.8 x 3.3 x 3.3 x 3.3 x ROCE (recurring) 7.5% 5.1% 7.4% 5.4% 10.2% 7.0% 7.1% 7.5% ROCE (total) 6.2% 4.3% 5.6% 3.4% 7.3% 4.7% 4.8% 5.1% ROE (recurring) 11.1% 7.3% 11.6% 9.8% 16.6% 11.6% 11.3% 11.2% ROE (total) 9.3% 6.1% 8.9% 6.2% 11.9% 7.8% 7.6% 7.6% Source: KBC Securities 20

21 DIVERSIFIED DEBT COMPOSITION Well diversified funding structure Average debt cost and maturity of resp. 3.8% and 2.6 years Immobel s total financial debt amounts to 247m. Of this amount, 195m entails long-term debt, while the remaining is classified as short-term. The company diversifies its debt through bonds, corporate credit lines and project financing credits. One syndicated credit line of 85m runs until June 2014, but has been renewed at each maturity in the past. A second (bilateral) credit line amounts to 50m and runs until June Thirdly, there is the privately-placed 40m bond expiring in December 2016 and the recent privately-issued 60m 5- year bond maturing in March Finally, the company has multiple credit lines to fund its projects. Most of these facilities are contracted at a floating interest rate (1 to 12m EURIBOR), but management hedges these floating rates by means of CAP options and IRSes. Over FY12, we calculated an average cost of the debt of 3.8%, which is extremely low for a developer, certainly when taking into account the 7% interest cost payable on the 40m bond. In FY13, we however expect the cost of debt to rise following the newly-issued 60m bond at 5.5%. When taking into account the fixed coupon cost of the bonds and the CAP options and IRS, we calculated a 100% hedging of the company s debt. The weighted average maturity of the hedging instruments amounts to 1.24 years and compares to Immobel s debt maturity of 2.63 years. DEBT COMPOSITION DEBT MATURITY PROFILE Bond 43% Syndicated credit line 36% Bilateral credit line 21% Debt maturities ( m) Average maturity (y) - rhs Source: Immobel Source: Immobel, KBC Securities Balance sheet conservatism reflected in low LTV and debt ratio LTV AND DEBT RATIO SUFFICIENTLY BELOW COVENANT The company s Loan to Value ratio (Net financial debt/inventories) has remained at or below 40% over the years, confirming the company s conservative balance sheet management. For the coming years, we bank on a ratio between 30% and 40%. The debt ratio, which compares the value of the financial debt to total assets, has been fluctuating slightly above this ratio and is expected to remain at a level of 40%. 21

22 Further increase of conservative debt level could optimize profitability As a result of the recent bond issue, we expect the discrepancy between LTV and the debt ratio to widen in FY13 (as the impact on financial debt will be bigger than on the amount of total assets, thus increasing the debt ratio). We believe both ratios could be upped in order to increase leverage on the company s portfolio and hence increase the ROE. DEBT RATIO EVOLUTION NAV EVOLUTION 80% 80% 60 70% 70% 50 60% 60% 50% 50% 40 40% 40% 30 30% 30% 20 20% 20% 10% 10% 10 0% E 2014E 2015E 2016E 0% E Loan-to-value ratio Bank cov. Debt ratio REITs legal cov. NAV (IFRS) Share price Source: Immobel, KBC Securities Source: Immobel, KBC Securities NAV EVOLUTION An average annualized growth of 5% expected Average disagio of 37% over the past six years In the coming years, we expect Immobel to be able to confirm its track record in value creation and thus to record yearly growth in Net Asset Value (NAV). We forecast an average annualized growth of 5% for the coming years, which compares to an average 4% growth rate over the past 4 years. In FY13, we bank on an exceptional 10% growth in NAV per share from 45.6 to The current re-strengthening of the company s development pipeline has narrowed the disagio between the share price and the company s NAV to 38%. This is more in-line with the company s 37% average over the past six years. Going forward, we however believe this discount could decline towards 28%. 22

23 FINANCIAL OUTLOOK FY12 was characterized by an increase in turnover, but the rise in the Cost of sales more than offset this, leading to a drop in operating result 67% increase in turnover driven by office segment Turnover fluctuating around 100m Despite the gloomy economic situation and the challenges in the Brussels office market, Immobel s reported FY12 earnings were in-line with expectations. Turnover increased a strong 67% y/y from 76m to 127m, but the cost of sales rose even more, from 56% in FY11 to 75% of turnover in FY12. This led to a drop in operating result from 22.6m in FY11 to 19.4m in FY12. However, it remains difficult to forecast the exact turnover in the years to come, as guidance is limited and the timing of the unique project sales is highly uncertain. However, we do know that the company s Buy&Sell strategy results in only a marginal recurring rental income. Management therefore strives to create a recurring income stream (related to the residential and land banking projects), that would be sufficient to cover the operating and financial charges. What we do know is that this increase in turnover in FY12 is predominantly driven by the offices segment, where sales increased from 11.2m in FY11 to 78.1m in FY12, with the sale of phase 2 of the Forum and Château-Rempart projects, and 80% of the 50% stake in the company holding a plot of land in Warsaw. The revenues from the residential segment remained in-line, while the land-banking activities recorded a 50% drop in earnings. Going forward, we expect turnover to fluctuate around 120m based on our assumptions of a more cyclical office business, while we forecast more stability in the residential and land banking segments. On the other hand, we expect the cost of sales to fall to 65% of turnover in the coming years, which is more in-line with the company s 5-year average. In FY13, we exceptionally bank on a turnover neighbouring 150m as we believe Immobel will be able to sell its Part 1 of the BelAir project at its delivery. The table below provides a more in-depth view of our turnover estimates. TURNOVER th E 2014E 2015E 2016E OFFICES 58,671 14,300 78,130 91,014 58,683 61,587 64,080 Change y/y -76% 446% 16% -36% 5% 4% RESIDENTIAL 12,032 39,219 37,220 37,848 38,525 37,027 39,164 Change y/y 226% -5% 2% 2% -4% 6% LANDBANK 11,147 25,704 11,420 14,275 14,275 14,561 14,852 Change y/y 131% -56% 25% 0% 2% 2% TOTAL 81,850 79, , , , , ,096 Change y/y -3% 60% 13% -22% 2% 4% Source: KBC Securities 23

24 Expansion to Poland resulted in 16% personnel costs increase The yearly coupon linked to bond will increase funding costs Certainly remarkable is also the significant increase in personnel costs due to the market entry in Poland. The company expanded in FY12 its staff with 10 and in FY13 this will even be increased to 15. This led to a 16% cost increase in FY12 and we bank even on a further 7% increase in the year to come before reconverting again to a normal 2% yearly indexation. Therefore, it will be highly important to see clear evidence that this market entry does pay off. The financial charges for the year increased from -5.4m to -6.8m, mainly due to the 40m bond issue in December FY11 and February FY12 at a yield of 7%. In the coming years, we however expect an even higher debt charge due to the recently-issued 60m bond and this despite the fact that the interest charges for on-going projects can be capitalized. P&L ANALYSIS m E 2014E 2015E 2016E Turnover Other operating income Sales COGS Other operating expenses EBITDA EBITDA margin 19% 16% 27% 15% 25% 22% 22% 22% Depreciation & Amortization EBIT Financial costs Associates Taxes Discontinued operations Net result - group Number of shares EPS - direct chg y/y -32% 53% -28% 110% -33% 2% 3% CFPS chg y/y -51% 74% -37% 163% -33% 2% 3% DPS chg y/y -38% 40% -20% 107% -34% 5% 5% Pay out ratio 53% 49% 45% 49% 49% 48% 49% 50% Source: KBC Securities 24

25 FY13 EPS: 5.96 FY14 EPS: 3.98 FY15 EPS: 4.07 Dividend pay out of 50% Taking into account an increasing cost of debt as a result of a longer development pipeline and an expected steady growth in i-rates in the coming years, we attain a pre-tax result on which we apply a 10% effective tax rate (extrapolated from the last 5 years). We therefore bank on an EPS of 5.96 in FY13, 3.98 in FY14 and 4.07 in FY15. The drop in FY14 mainly results from our expectations of lower office sales in that year, in comparison to the exceptional turn-over expected in FY13. Our forecasts also assume a payout ratio close to 50% (management targets a 40 to 50% range). SALES EVOLUTION EPS DPS EVOLUTION % % % % % 60 15% % % E 2014E 2015E 2016E 0% E 2014E 2015E 2016E Sales ( m) EBITDA margin (%) - rhs EPS DPS Source: Immobel, KBC Securities Source: Immobel, KBC Securities 25

26 VALUATION 36 target price, Accumulate rating We value Immobel using a discounted cash flow model over a 5-year forecasting period with a 1.5% long-term growth rate. Using a WACC of 8.9%, we attain a theoretical fair value of 36.1 p.s. and this is where we set our target price. This target implies 12% upside potential and corresponds to a dividend yield FY13E of 8%, EV/EBITDA13E of 6.7x and P/NAV13E of 0.72x (Atenor 1.77x and Banimmo 1.01x). Hence, we initiate our coverage with an Accumulate rating. DCF VALUATION m E 2014E 2015E 2016E 2017E EBIT operating tax NOPLAT D&A Δ in WCR OCF Capex FOCF Discounted value Total discounted value 120 Terminal value 184 Total DCF Value Net financial debt Minorities 0 - Provisions Financial Assets own equity 0.0 Equity value 143 N of shares 4.1 Forward value per share 36.1 Upside/Downside 12.1% Source: KBC Securities SENSITIVITY TABLE WACC 8.00% 8.20% 8.40% 8.60% 8.80% 8.90% 9.00% 9.20% 9.40% 9.60% 9.80% 1.10% LT Growth rate 1.20% % % % % % % Source: KBC Securities 26

27 COMPARISON OF BELGIAN LISTED DEVELOPERS Three Belgian developers with a comparable market cap Next to Immobel, the Belgian universe holds two other listed developers: Atenor and Banimmo. Atenor applies the same Buy & Sell strategy, while Banimmo prefers a Buy & Hold approach. The advantage of the latter is that the risk profile of the company is lower, as the recurring income enables the company to reap the fruits from the recent (re)developments while also covering its operating and financing costs. We classify Immobel in the category of Buy & Sell, as we perceive the recurring income component within the company as negligible. OVERVIEW OF BELGIAN LISTED DEVELOPERS Developers Atenor Banimmo Immobel Strategy Buy & Sell Buy & Hold Buy & Sell Country Core markets: Belgium & Luxemburg Belgium & France Belgium & Luxemburg Other: Hungary & Romany Poland Segment Offices / Residential / Retail Offices / Retail / Other Offices / Residential / Land Banking Development pipeline (m²) 626, , ,400 (+416 ha LB) Price to NAV 1.69x 0.88x 0.71x Implied dividend yield (%) 6.1% 3.9% 9.0% ROE (%) 9.6% 2.0% 6.2% Net Debt to Equity (%) 215% 176% 85% Market capitalization ( m) Bulls Promising development Combination of development Diversification in country and pipeline. EPS FY14 of 4.20 and FY15 of 9.96 Good relationship with local & regional authorities Strong track record in completing projects, while maintain solid BS Stable shareholder base supports growth margins & recurring income Diversification in country and segment (offices, retail, conf centres, logistics, ) Strategic shift towards less capital intensive land banks with certain built-to-suit projects Extensive development pipeline ensuring cap gains segment (offices, residential, land banking) Proven track record in delivering qualitative longterm leased asserts Conservative balance sheet management Relationships with local and federal government Good pipeline rotation in near term Bears - Expensive investments in CEE at pre-office crisis levels - Projects in challenging Bxl office market - Uncertainty re profitability Polish market - Max. level of projects attained - Limited free float of 24% - Lower transparency than its under current equity base - Volatility in rental income could jeopardize interest buffer Peers Source: KBC Securities 27