WCM Beteiligungs und Grundbesitz AG. Real Estate. Growing in German commercial real estate. 6 August 2015 BUY

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1 6 August 2015 WCM Beteiligungs und Grundbesitz AG BUY Real Estate Growing in German commercial real estate Kai Klose, CIIA Analyst Tina Kladnik Analyst ATLAS ALPHA THOUGHT LEADERSHIP ACCESS SERVICE

2 THE TEAM Kai Klose has 15 years experience in real estate, working both in the industry and on the equity side. He joined Berenberg from Macquarie, and prior to that worked for Dresdner and Sal. Oppenheim. Tina Kladnik joined Berenberg from BlueCrest in 2014 where she worked in product control for the credit fund. Before that, she worked in business control at Lloyds Banking Group, specifically looking after structured credit investments. Tina started her professional career at Mazars, in assurance services. She is qualified accountant (ACA) and holds a Masters degree in Finance and Investments from the University of Nottingham. For our disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz WpHG) and our disclaimer please see the end of this document. Please note that the use of this research report is subject to the conditions and restrictions set forth in the disclosures and the disclaimer at the end of this document.

3 Table of contents Growing in German commercial real estate 4 Investment thesis 5 Portfolio and earnings forecasts 20 Snapshot on German commercial property markets 36 Financials 43 Disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz WpHG) 46 3

4 Growing in German commercial real estate Re-start: WCM is aiming to become an important player in the German commercial real estate markets with a renewed focus on office and retail properties. With office space letting volumes currently stable, and indeed moderately improving, the timing of its re-focus is good; we also welcome the company s underlying assumptions for financial leverage and its dividend policy. WCM has already built up a strong track record in acquisitions, and its current investment pipeline suggests it will be able to reach its medium-term portfolio target size of ~ 1bn. Attractive portfolio terms: At the beginning of July, WCM successfully completed a cash capital increase with the issuance of 76.0m new shares at a price of 2.05 and generated gross proceeds of 155.8m. The proceeds were earmarked to finance the acquisition of several portfolios and single properties leading to an increase of the company s overall portfolio size of about 0.5bn. WCM is now owns a good-quality portfolio of office and retail properties/supermarkets. The average lease term is high at almost 10 years, annual lease expiries are low and current vacancy rates of about 7% are at low levels. The combined net initial yield of about 6.7% could lead to some valuation uplift at some point in the future, in our view. Clear strategy: WCM is internally managed and headed by an experienced management team. While targeting to increase the portfolio size to ~ 1bn in the mid-term, the company follows an active portfolio management strategy, including property sales, to utilise existing tax loss carry forwards of 522m. We think that WCM can show a good track record in deal sourcing, and we would expect the company to grow continuously. Solid earnings growth: For FY 2016, we foresee rental income of 30.3m, adjusted EBITDA of 26.3m and funds from operations (FFO) of 20.4m. We expect an initial payout ratio of 50% on FFO for FY 2016, and the dividend will be distributed tax-free. We have only incorporated very modest assumptions for yield compression, leading to an increase in EPRA net asset value per share from 2.19 for the current fiscal year to 2.66 by year-end 2018 on an lfl basis based on the current portfolio structure. We have not included additional acquisitions or the sale of properties at this stage in our model. Valuation: For the standalone valuation, we derive an average fair value of 2.80 for WCM translating into a FY 2016 implied FFO yield of 6.6%, an implied dividend yield of 3.3% and an implied 22% premium to EPRA NAV. Peers are trading for FY 2016 on a median basis at an FFO yield of 6.6%, at a dividend yield of 3.3% and a discount to net asset value of 22%, while the range of valuation multiples is very wide. This leads to a fair value for WCM of 2.50 on peer group-based multiples. We set our price target at 2.65 as the average of both methodologies, leading to a Buy rating with an upside potential to the current share price level of about 25%. Y/E , EUR m E 2016E 2017E 2018E Total revenues Net rents EBIT (inc revaluation net) EBIT (excl revaluation) Net profit (reported) Funds From Operations (FFO) EPS reported FFO per share DPS NAV per share NNAV per share EV/EBITDA FFO yield - 5.1% 8.9% 9.4% 9.6% P/FFO Dividend yield - 0.0% 4.5% 5.2% 5.3% P/NAV per share n.m. 5% -2% -9% -15% P/NNAV per share n.m. -5% -10% -17% -22% Net gearing n.m. 96% 87% 79% 71% Loan-to-value (LTV) n.m. 57% 56% 55% 53% Implied yield - 2.3% 6.3% 6.5% 6.7% Source: Company data, Berenberg 6 August 2015 BUY Current price (Initiation) Price target EUR 2.09 EUR /08/2015 XETRA Close Market cap (EUR m) 229 Reuters WCMKk.DE Bloomberg WCMK GY Share data Shares outstanding (m) 110 Enterprise value (EUR m) 439 Daily trading volume 250,000 Kai Klose, CIIA Analyst kai.klose@berenberg.com Tina Kladnik Analyst tina.kladnik@berenberg.com

5 BUY Investment thesis 6 August 2015 Office markets in Germany have improved reflected in a higher demand for space and also a stabilisation in rental levels. Current price Price target EUR 2.09 EUR 2.65 Market cap (EUR m) /08/2015 XETRA Close EV (EUR m) 439 Non-institutional shareholders Karl-Philipp Ehlerdings: 5.5% Johen Frederik Eherdings: 5.5% Stavros Efremidis: 1.5% Business description WCM is in the build-up phase of a commercial real estate portfolio with focus on offices. Trading volume 250,000 Free float 87.5% Share performance High 52 weeks EUR 3.69 Low 52 weeks EUR 0.17 Performance relative to SXXP MDAX 1mth -14.9% -14.3% 3mth -26.1% -27.8% 12mth - - New supply of office space remains limited overall. The management team of WCM has long experience of, and a strong track record in, real estate. WCM has a high amount of tax loss carryforwards and dividends can be distributed on a tax-free basis. Our valuation is based on return on net asset value and a dividend discount model. Profit and loss summary EURm E 2016E 2017E Net rental income Total revenues Revaluation result Total operating expense EBITDA Adjusted EBITDA Financial result EBT Net profit Funds from operations FFO/share Year-end shares DPS Cash flow summary EURm E 2016E 2017E FFO CF operating activities Payments (acquisitions) Income (asset disposals) Change in debt position Dividend paid Capital measures Growth and margins E 2016E 2017E Rental growth % 1.9% Adj. EBITDA growth - - n.m % 2.7% FFO growth - - n.m % 4.9% Adj. EBITDA margin % 93.8% 94.3% Adj. EBIT margin % 94.1% 94.6% FFO margin % 75.0% 77.0% Key ratios E 2016E 2017E Net debt Net debt/equity LTV % 56% 55% Net gearing % 87% 79% Interest cover Dividend cover Payout ratio % 55% Return on NAV % 8.8% 8.5% Valuation metrics E 2016E 2017E P / FFO P / NAV - - 5% -2% -9% P / NNAV % -10% -17% FFO yield % 8.9% 9.4% Dividend yield % 4.5% 5.2% EV / adj. EBITDA Key risks to our investment thesis The investment markets for German commercial properties in the seven most relevant cities are very competitive. WCM also intends to sell some newly acquired properties, which are located in small cities with only a limited demand from potential buyers. Kai Klose, CIIA Analyst kai.klose@berenberg.com Tina Kladnik Analyst tina.kladnik@berenberg.com

6 Attractive portfolio structure already in place Founded in 1766, WCM has pursued a very broad range of activities in its long history, including as an investment company. Due to collateral debt obligations, the company ran into bankruptcy on 21 November The insolvency proceedings were lifted in 2010 and the 12 March 2013 AGM set the basis for the re-birth of WCM with the declaration that its business operations were a going concern again. The re-listing on the Frankfurt stock exchange followed last year, with the first cash capital increase of 18.8m and a capitalincrease-in-kind of 13.2m taking place in December 2014 (4.9m new shares issued) for the acquisition of three office properties and one logistics property in Bremerhaven. The company s operational re-organisation accelerated following the appointment of Stavros Efremidis as the company s new CEO at the end of Since then, the company has increased its capacity further, internalised all key corporate functions and hired senior managers with a strong experience in real estate. WCM s key historical events Source: Company reports The strategy of WCM is very clear and straightforward: its focus is on commercial real estate in Germany with a targeted portfolio size of about 1.0bn in the medium term. The company sees itself as an active principal investor, including the sale of properties but excluding project development. Offices are targeted to be mainly of core/core+-types located predominantly in Germany s seven largest cities. For retail properties WCM is preferably looking in to Metropolitan areas for core+/valued-added properties with longterm lease contracts and a stable tenant base. 6

7 WCM s strategy Locations Yield Property quality Tenant structure Vacancy Focused strategy Office Retail Top 7 German cities Metropolitan areas Focus on Core / Core+ Core+ / value-added Strong initial yield of properties Strong initial yield of properties Target yield between 5.5% - 7.0% Target yield between 6.5%-8.0% Low/no need for renovation and easy to convert property structure High solvency tenants High solvency tenants Minimum amount of tenants for office Anchor tenant structure for retail Long term lease contracts Low vacancy rate: 5-15% Minimum investment volume of 5.0m Multi-use properties to minimise single tenant category Clear and fast decision process Minimum investment volume 5.0m Clear and fast decision process Source: Company reports; the top seven German cities in terms of office space are Munich, Stuttgart, Frankfurt, Cologne, Düsseldorf, Hamburg and Berlin Operationally, WCM s re-birth was initiated by Stavros Efremidis, who was appointed as CEO at the end of Previously, he was CEO of KWG Immobilien, which was subsequently bought by the Austrian property company conwert. Mr Efremidis has more than 20 years experience in real estate and will be responsible for the operating business, portfolio management, M&A and investor relations. WCM has also appointed a new CFO and CIO as of September 2015, and we expect the respective names to be announced shortly. With Max Bensel as Head of Finance, Joachim Mokross as Head of Asset Management and Christian Kaiser as Head of Acquisitions and Sales, the second level of management has now been completed, with a further three to eight other senior managers to join. We strongly welcome the fact that all WCM s key functions will be managed inhouse, including asset and property management. WCM s organisational structure Source: Company reports From the very beginning, WCM has returned to the equity markets with a well-structured portfolio offering high earnings stability as well as upside potential from vacancy reduction and additional capex spend. We regard the pace of portfolio growth as nothing short of remarkable, and have also been impressed by the attractive terms of the portfolio and single property acquisitions. 7

8 WCM s recent acquisition timeline (1) Net acquisition prices Source: Company reports The location and quality of the assets are fairly reasonable, in our view, which is a good platform on which to add additional properties as well as also diversified portfolios. 8

9 WCM s portfolio map Source: Company reports The tenant structure of the portfolio is well-diversified with a broad range of sectors represented, such as retail, public institutions, IT and logistics. The creditworthiness of the tenants is very strong. WCM s top five tenants Tenant 1 (Retail), 23.9% Tenant 2 (Public sector), 11.6% Tenant 3 (Conglomerate), 5.2% Other, 50.5% Tenant 4 (IT), 5.2% Tenant 5 (Chemicals), 3.6% Source: Company reports At almost 10 years, WCM has among the highest weighted-average lease duration among its peers. Following the lease extension for an office property in Berlin and the acquisition of an OBI DIY-market with a an lease maturity of 14.3 years (closing expected for the end of the third quarter), we would assume that the average lease maturity of WCM s portfolio overall will exceed 10 years. 9

10 (1), (2) WCM s WALT by type of use (in years) in years Retail Office Other Total (1) Calculated by weighting the individual WALTs with annualised rental income; (2) Annualised net rental income excluding other and parking Source: Company reports We welcome the defensive lease maturity schedule overall, with about 10% of expiries annually. WCM s lease expiry schedule 70% 60% 61% 50% 40% 30% 20% 10% 0% 13% 9% 2% 5% 3% 5% 2% > 2021 Source: Company reports; including rental guarantees and a signed lease contract for an office property; excluding the recently sourced DIY-market in Olpe / Westphalia WCM now has a diversified portfolio structure and can no longer be classified as a pure play on one sector only. As such, the company benefits from long leases particularly in the EDEKA portfolio and can create value by reducing vacancy rates and extending lease contracts for office properties. Regional breakdown of WCM s portfolio Sector breakdown of WCM s portfolio Saxony Anhalt, 14% Bremen, 7% Retail, 33% Saxony, 15% NRW, 6% Lower-Saxony, 8% Other, 13% Hesse, 44% Berlin, 6% Brandenburg, 1% Office, 54% Source: Company reports; excluding the recently sourced DIY-store in Olpe / Westphalia Source: Company reports; excluding the recently sourced DIY-store in Olpe / Westphalia 10

11 As already announced, WCM is targeting a capital increase for its already secured portfolio acquisitions. We expect the company to continue its growth momentum, with a target portfolio size of about 1.0bn in the medium term. In view of its recent transactions, it is clear that management has a strong network and track record in deal sourcing. We would therefore expect WCM to successfully execute additional acquisitions; the investment pipeline is promising, with the company highlighting high occupancy levels and weightedaverage lease terms (WALT) as key criteria for new portfolios. At the end of July, WCM purchased an OBI DIY store for 10m (9,000sqm) with a rental yield of 7.4% and a weighted average lease term of 14.3 years. WCM s acquisition pipeline Project Type of use Source: Company reports WALT (in years) Occupancy Investment volume ( m) Project A Office % 25 Project B Office % 27 Project C Office % 28 Project D DIY % 10 Project E Office % 17 Project F Office % 55 Project G Mixed % 35 Project H Office % 11 Project I DIY % 9 Project J Office % 28 Total Assets % 245 Portfolio I. Retail % 140 Portfolio II. Office % 49 Portfolio III. Retail % 43 Total Portfolio % 232 Total Pipeline % 477 WCM will be able to significantly lower its tax burden from utilising the remaining tax loss carryforwards of 522m overall, split into 272m corporate tax and 250m trade tax. The cash tax rate is relatively low also for some of WCM s peers that have also built up tax loss carryforwards, such as Deutsche Office ( 240.0m, split into corporate tax 186.1m and trade tax 53.9m) or DIC Asset ( 107m, split into corporate tax 48m and trade tax 59m). Obviously, WCM can benefit from the highest amount of tax loss carryforwards, as it offers significant portfolio value and income generation, for example tax-free dividend payments of up to 1bn. The tax loss carryforwards have to be capitalised over the coming five years according to IFRS on the basis of expected net income from the subsequent recognition of deferred tax assets. As of March, the capitalised tax loss carryforwards amounted to 2m, with the portfolio s gross asset value standing at 86m. Generating value by utilising tax loss carry forwards March 2015 GAV 86m Balance sheet value of capitalised TLCF 2m Pro forma GAV 438m Economic value of TLCF Source: Company reports; (1) discount rate at 10% Example value creation: Utilisation of 50m TLCF pa over 10 tax rate 30% NPV of > 90m (1) 11

12 The illustrative NAV-bridge gives an indication on the NAV-accretion coming from WCM s tax loss carryforwards being generated from the recent acquisitions. Illustrative NAV-bridge on a 100% basis ( m) as of 31 Mar m tax loss carry forwards Recent acquisitions 209 Pro forma debt for recent acquisitions (2) TLCF (3) Portfolio as of 31 Mar Pro forma GAV Cash & cash equivalents (1) Debt Pro forma NAV (1) Excess cash post capital increase assuming 150m gross proceeds and c. 5m transaction costs (2) Based on indicative term sheets (3) Illustrative value Source: Company reports The shareholder structure shows that WCM benefits from a high free float; however, this is of only limited relevance as the company is in the throes of creating a new business model. We welcome that the CEO owns a substantial stake in the company. WCM s shareholder structure Stavros Efremidis, 1.5% Free float, 87.5% Karl P. Ehlerding, 5.5% John F. Ehlerding, 5.5% Source: Company reports In our view, the timing of WCM s expansion into the German commercial property market is good, as letting volumes have picked up over the last year and there has been no further rise in tenant incentives. Based on the solid demand for space within the market, we see potential for value generation when lease contracts for office properties are being extended and occupancy levels increased. Therefore, it will be important for the company to remain disciplined in the investment markets. We would regard WCM s underlying assumptions for acquisitions as reasonable, a view that is based on the company s successful new letting and re-letting activities but not on cap rate compression. The company is domiciled in Germany and is acting as an ordinary corporation but could almost be categorised as a REIT given tax loss carryforwards of 522m in total. 12

13 German office take-up in the top seven cities (000sqm) in 1,000 sqm 4,000 3,407 3,500 2,910 3,026 2,914 3,004 3,000 3,100 2,500 2,000 1,500 1, ,346 1, E H H Office space take up in the top 7 cities in Germany Forecast Source: Colliers, JLL for half-year comparisons While most of the stock-listed German commercial property companies have been relatively quiet in the investment markets recently, transaction volumes in German real estate have continuously increased yoy. This increase has not only been due to a general rise in demand for real estate as an asset class, but also due to international investors significantly increasing their activities in the German market over the last year in terms of transaction volumes. Please see a more detailed section on German commercial property markets later in the report. Commercial transaction volume in Germany ( bn) in bn E H H Commercial transaction volume in Germany Forecast Source: JLL 13

14 Existing portfolio structure in detail With this competitive environment in mind, we consider WCM s deal-sourcing capabilities to be remarkable. Prior to the capital increase WCM s initial portfolio consisted of four properties with a gross asset value of 86.4m on a 100% basis or 81.6m attributable to WCM, representing a net initial yield of 7.0%. Total vacancy rates are at ~9%, in line with the market average, which is also the case for the average remaining lease term of about five years. The acquisition of a portfolio with three office properties in Frankfurt, Bonn and Düsseldorf closed in March this year; an industrial property in Bremerhaven was added to the portfolio in December Key portfolio measures for the initial portfolio Asset Property type Built Area (sqm) Vacancy rate (%) WALT (years) GRI ( m) GRI ( /sqm/ month) Market value on a 100%- basis ( m) FV ( /sqm) Net rental yield Gross rental multiple Market value attributable to WCM ( m) Frankfurt Office , % , % Bonn Office , % , % Dusseldorf Office 1954/1994 2, % , % Bremerhaven Industrial 1911/ , % n.m % Total 90, % % Source: Company reports; WALT as of 31 March 2015 The split of the current portfolio does not bear much relevance, due to the small size of the portfolio overall. Regional split of the initial portfolio (sqm) Bremerhaven, 35% Bonn, 19% Frankfurt, 40% Dusseldorf, 6% Source: Company reports Pictures of properties in WCM s initial portfolio Frankfurt, Bleichstrasse High-rise office building located in inner-city close to the main high street Zeil - Major tenant GE occupies c80% of the building s office space with long-term WALT - Good public transportation via bus and underground lines, good access to major roads - No major capex required - Lease-up of vacant office space underway Bonn, Graurheindorfer Str. 149a - Multi-let office building located in B location north of the city centre - Graurheindorfer Strasse is close to the highway exit Bonn Auerberg and one of the major routes to the city centre - No major capex required - Renegotiations with existing tenants to increase WALT 14

15 Düsseldorf, Kavalleriestrasse An office property well located in the government district in the city centre very close to the CBD - Good public transportation via tram and bus lines - 75% rented to government of NRW; 25% of vacant space committed to kindergarden with government guarantee for 15 years - No major capex required Source: Company reports Bremerhaven, Riedemannstrasse 1 - Industrial property located in the trade port of Bremerhaven - The property includes production halls, office and storage space as well as areas of water - Good access to the Autobahn in 3.5 km and access to the North Sea via the river Weser - No major capex required - Renegotiating lease extensions with existing tenants to increase WALT About 50% of lease income is generated by the five largest tenants. WCM s top five tenants in WCM s initial portfolio Tenants Rents ( m pa) Rents in % Area (sqm) Source: Company reports. The data (1) does not include income from a rental guarantee for a industrial property in Bremerhaven; (2) includes income from a rental guarantee for a logistics property in Bremerhaven; (3) does not include a special termination right as of 14 January 2018 (65% of rental income in Frankfurt as of 31 March 2015; penalty clause: 3.6m) and the special termination right in Bonn as of 31 December 2017 (23% of rental income in Frankfurt as of 31 March 2015; no penalty clause) Acquisition of the office portfolio in Dresden/Rhine-Main Average remaining lease term (years) Tenant 1 / Conglomerate % 5, Tenant 2 / Wind energy % 13, Tenant 3 / Asset manager % 1, Tenant 4 / IT % 2, Tenant 5 / Consulting % 1, Top 5 tenants (1) % 24, Others (2) % 65, Total (3) % 90, On 24 April, WCM announced the signing of a pre-contractual arrangement for a commercial portfolio consisting of 16 assets for a purchase price of 116m. Based on 9.9m annualised contracted rents, the purchase price represents a gross initial yield of 8.5%. Vacancy rates of about 10% and an average remaining lease term of five years is close to the market average. The regional exposure based on market value is primarily on Dresden (46%) and on the Rhein-Main region (54%). We understand that the fair value derived from an external appraisal comes out at about 124m on a 100% basis. 15

16 Regional split of WCM s acquired portfolio Dresden/Rhine-Main (sqm) Neu - Isenburg, 35% Dresden, 40% Frankfurt / Main, 12% Mainz, 7% Wiesbaden, 3% Radebeul, 4% Source: Company reports The portfolio has a diversified tenant structure with the largest tenant accounting for about 11% of total rents. Tenant mix for WCM s acquired portfolio Dresden / Rhine- Main (sqm) Tenant 1, 11% Tenant 2, 10% Other, 59% Tenant 3, 10% Tenant 4, 7% Tenant 5, 4% Source: Company reports We welcome the fact that the average lease term of the top five tenants, which together generate about 40% of total rents, is, at 7.0 years, well above the portfolio s average lease term of 5.1 years. The portfolio s total lease expiry schedule looks manageable. Lease expiry schedule of WCM s acquired portfolio Dresden/Rhine-Main 60.0% 55.0% 50.0% 40.0% 30.0% 20.0% 10.0% 5.0% 15.0% 17.0% 8.0% 0.0% > 4 years Source: Company reports 16

17 Examples of office properties from WCM s acquired portfolio in Dresden/Rhine-Main Neu-Isenburg/Greater Frankfurt; Frankfurter Strasse /Hugenottenallee Three refurbished office properties including parking located in Neu-Isenburg/Greater Frankfurt. Lettable space: 18,203sqm - Multi-tenant property with 11 tenants - Reversionary potential from vacancy reduction of ~20%, WALT of 5.7 years Dresden; Provianthofstr./Elisabeth-Boer-Str - Multi-tenant office property located in Dresden-Altenstadt close to public transport. Lettable space: 15,115sqm - 15 tenants, of which the largest generates about 60% of total leases - Lower vacancy rate of 7.3%, lease contract with public institution to be extended Dresden; Prohliszentrum - Mixed-commercial property with retail and office use located in the Dresden-Prohlis district - Very good public transport with several train and tram lines. Lettable space: 12,449sqm - Vacancy rates below 2%; 46 tenants, the two largest of which generate more than 35% of total rents; WALT of 4.7 years Mainz; Peter-Sander-Str Two connected office properties of modern style located in Mainz-Amoneburg. Lettable space: 2,767sqm - Fully occupied with WALT of 3.2 years - For sale due to limited upside potential Source: Company reports WCM intends to hold with seven properties, representing about ¾ of the portfolio s market value (mainly the larger office properties), with the rest considered for sale to optimise the portfolio structure. However, the company is flexible about the timings of any sales, depending on market opportunities. We regard WCM s underlying asset management assumptions as reasonable, with capex of 8.00/sqm and 100/sqm for tenant improvements and renewals with a rent-free period of three months. Also, we consider our 60% tenancy extension probability estimate for existing tenants to be conservative. Acquisition of a portfolio of EDEKA supermarkets The company s third portfolio acquisition a portfolio of 29 properties belonging to leading German supermarket EDEKA was announced on 28 April Total rental space amounts to around 77,000sqm, the total net purchase price is 95.3m. It will be structured as both an asset and share deal. Annual rents of 7m translate into an initial yield of 7.4%, which we regard as attractive given the full occupancy levels and a remaining lease term of 15 years for each single property. The regional exposure is mainly to the middle/eastern part of Germany. 17

18 Regional split of EDEKA supermarket portfolio (in sqm) Lower Saxony, 32% Saxony - Anhalt, 57% Brandenburg, 5% NRW, 4% Berlin, 2% Source: Company reports The properties are rented to different companies within the EDEKA Group, which has itself sub-let some space in a number of these assets. Under the terms of the deal WCM will be permitted to change the sub-lease contracts into direct leases to generate an annual rental uplift of up to 0.9m over time. Also, some facilities can be extended and refitted, generating additional annual rents of up to 0.8m. WCM will buy the properties out of an investment funds structure and the seller will maintain a minority position and act as property manager. WCM intends to sell with up to 13 properties about 18% of the portfolio s market value in order to optimise the portfolio and exploit the company s substantial tax loss carryforwards. Examples of EDEKA supermarkets acquired by WCM Wolfen-Bobbau; Sibenhauser Strasse (a Hold asset) - Larger retail park with a diversified tenant structure of 12 tenants. Lettable space: 16,886sqm. - The property can be extended by 1,500sqm and sub-letting contracts changed into direct lease contracts at higher rents Isenbuttel, Moorstrasse/Altes Muhlenfeld (a Hold asset) - Mid-sizes E-Market with a lettable space of 1,669sqm - Recently completely refurbished and extended and located close to a newly created residential district Lemfoerde; Burgstrasse (a Hold asset) - Mid-sized E-Market with a lettable space of 1,726sqm. - Located in a retail park including Deichmann, KIK and Aldi Hoym; Nachterstedter Strasse (a Disposal asset) - Smaller retail park of four tenants including also Aldi, lettable space 3,074sqm - Located outside of the city in a rural area Source: Company reports About 35m of the gross purchase price for the portfolio will be paid in cash from the equity issuance and the debt financing will be structured on mortgages loans with a longterm maturity. 18

19 Acquisition of an office property in Berlin While WCM s previous portfolio acquisitions included primarily core/core+-properties, the purchase of its single office property in Berlin (announced on 20 April) was more of a value-add transaction. The property is located in a prime location in the eastern part of Berlin between Hackescher Markt and Alexanderplatz, and is currently rented to a single tenant with a remaining lease term of two years. The tenant, PSI AG, has recently exercised an option to extend its lease until 31 March 2022, which increases the office building s weighted average lease term to about seven years. also has an extension option for another five years. The current in-place rent/sqm is 13/sqm/month, whereas the current market rent is at around 17/sqm/month. However, the property requires refurbishment/capex spend of 1.5m, which will be conducted in the coming years. Acquired office property in Berlin Berlin, Dircksenstrasse 42 - Singe-tenant office building between Alexanderplatz (a seven-minute walk away) and Hackescher Markt (four minutes) - Very good public transportation - Fully occupied with seven years as WALT, built in 1997 and refurbished in 2006 Source: Company reports Acquisition of an office property in Frankfurt ( Triangel ) On 2 June 2015, WCM announced the acquisition of an office property in Frankfurt/Main (called Triangel ) located in the up-and-coming eastern part of the city within close vicinity of the new headquarters of the European Central Bank (ECB) on the other side of the river Main. The property was built in 2008, and with a lettable space of about 28,400sqm, currently has a vacancy rate of 13%, which the company intends to improve quickly. The average remaining lease term of 19.7 years is particularly high and the tenant structure is of high quality. 72% of the space is rented out to the government of Hesse for 24 years. The current annual rental income is 4.8m, which translates into a net initial yield of 4.6%. The gross acquisition price is 92.1m on a 100% basis of which 87m is attributable to WCM. Acquisition of office property in Frankfurt (Main Triangel) Source: Company reports Frankfurt - High-quality office property located in Frankfurt Sachsenhausen close to the new headquarters of the ECB - The main tenants are the federal state of Hesse, a subsidiary of Deutsche Bahn and Euromicron - Current vacancy rates of ~13%, long remaining lease term of 19.7 years - Very good public transport connections and 366 parking spaces Acquisition of an OBI DIY store in Olpe / Westphalia On 29 July 2015, WCM signed a purchase agreement to purchase an OBI DIY store in Olpe/Westphalia for 10m, which was constructed in 2014 as a GreenBuilding. The property has a rental area of ~9,000sqm and the average rental contract runs for 14.3 years, after which three rental options of five years each are in place. The rental yield amounts to 7.4% and closing is expected for the end of the third quarter. 19

20 Portfolio and earnings forecasts In our forecasts for WCM s portfolio on a lfl basis, we have not included selective disposals of properties. In general, we would regard it advisable for WCM to optimise the portfolio structure and utilise the tax loss carryforwards, but any decision to sell will only be taken opportunistically. Our forecasts are based on each of the acquired portfolios/property on an annualised basis and we have pencilled-in a moderate improvement in rents and occupancy levels as well as a marginal yield compression. 20

21 Our forecasts for WCM s portfolio on an lfl basis 2015E Portfolio Assets Total sqm Vacancy WALT Rent / sqm / month Annual rent m in % Market Value in % Current gross yield Current gross multiple Bremerhaven industrial 1 68, % % % 11.7% 8.5. Office portfolio I 3 21, % % % 6.0% 16.7 Office portfolio II 16 88, % % % 8.0% 12.5 Supermarkets' portfolio 29 76, % % % 7.3% 13.8 Office property Berlin 1 9, % % % 5.4% 18.4 Office property Frankfurt 1 28, % % % 4.6% 21.9 OBI DIY-market Olpe 1 9, % % % 7.4% 13.5 Total , % % % 7.1% 14.0 Source: Berenberg estimates 2016E Portfolio Assets Total sqm Vacancy old Change in vacancy Vacancy new WALT Rent / sqm Annual / month rent m old Change in-place rent Annual in-place rent m new in % Annualised rent from vacancy reduction m New total rent annualised m in % Current gross yield Current gross multiple Change in yield New current gross yield New current gross multiple Market value m Bremerhaven industrial 1 68, % 0.00% 9.2% % 2.1 7% % 11.7% % 11.7% Office portfolio I 3 21, % -2.00% 4.9% % % % 6.0% % 6.0% Office portfolio II 16 88, % -1.50% 8.1% % % % 8.0% % 7.9% Supermarkets' portfolio 29 76, % 0.00% 0.0% % % % 7.3% % 7.2% Office property Berlin 1 9, % 0.00% 0.0% % 1.5 5% % 5.4% % 5.4% Office property Frankfurt 1 28, % -2.00% 11.3% % % % 4.6% % 4.5% OBI DIY-market Olpe 1 9, % 0.00% 0.0% % 0.7 2% % 7.4% % 7.4% Total , % -1.1% 5.8% % % % 7.13% % 7.07% Source: Berenberg estimates 21

22 2017E Portfolio Assets Total sqm Vacancy old Change in vacancy Vacancy new WALT Rent / sqm Annual / month rent m old Change in-place rent Annual in-place rent m new in % Annualised rent from vacancy reduction m New total rent annualised m in % Current gross yield Current gross multiple Change in yield New current gross yield New current gross multiple Market value m Bremerhaven industrial 1 68, % 0.00% 9.2% % 2.1 7% % 11.7% % 11.7% Seed portfolio 3 21, % -1.50% 3.4% % % % 6.0% % 6.0% Office portfolio II 16 88, % -1.50% 6.6% % % % 7.9% % 7.9% Supermarkets' portfolio 29 76, % 0.00% 0.0% % % % 7.2% % 7.1% Office property Berlin 1 9, % 0.00% 0.0% % 1.5 5% % 5.4% % 5.4% Office property Frankfurt 1 28, % -3.00% 8.3% % % % 4.5% % 4.4% OBI DIY-market Olpe 1 9, % 0.00% 0.0% % 0.7 2% % 7.4% % 7.4% Total , % -1.2% 4.6% % % % 7.07% % 7.02% Source: Berenberg estimates 2018E Portfolio Assets Total sqm Vacancy old Change in vacancy Vacancy new WALT Rent / sqm Annual / month rent m old Change in-place rent Annual in-place rent m new in % Annualised rent from vacancy reduction m New total rent annualised m in % Current gross yield Current gross multiple Change in yield New current gross yield New current gross multiple Market value m Bremerhaven industrial 1 68, % 0.00% 9.2% % 2.1 7% % 11.7% % 11.7% Seed portfolio 3 21, % 1.00% 4.4% % % % 6.0% % 6.0% Office portfolio II 16 88, % -1.00% 5.6% % % % 7.9% % 7.8% Supermarkets' portfolio 29 76, % 0.00% 0.0% % % % 7.1% % 7.1% Office property Berlin 1 9, % 0.00% 100.0% % 1.5 5% % 5.4% % 5.4% Office property Frankfurt 1 28, % -2.00% 6.3% % % % 4.4% % 4.4% OBI DIY-market Olpe 1 9, % 0.00% 0.0% % 0.7 2% % 7.4% % 7.4% Total , % -0.5% 9.0% % % % 7.01% % 6.98% Source: Berenberg estimates 22

23 In terms of WCM s earnings forecasts, the closure of any portfolio transactions will mainly take place in the third or fourth quarter of this year, which makes the results for FY 2015 less relevant. For this year s results, we foresee a higher contribution from valuation gains as one-offs given that the purchase price for the Dresden/Rhine-Main office portfolio was below the externally appraised portfolio value. The current properties will contribute to results for the first time on an annualised basis in FY 2016, which explains the strong rise in rents and net operating income (NOI). Our forecasts for WCM s income statement m 2014 Q1 2015E 2016E 2017E 2018E Gross rental income / Revenues Property-related expenses Net operating income / NOI Portfolio valuation Other operating income Other operating expenses Personnel expenses Depreciation Net result from property sales EBITDA / operating profit Adjusted EBITDA I excluding valuation results EBIT / operating profit Adjusted EBIT I excluding valuation results Financial income Financial expenses Other financial result Total financial results EBT Total taxes Net profit Source: Company reports, Berenberg estimates FFO has become the key earnings figure for property stocks. It not only excludes non-cash valuation results from the portfolio valuation as described above, it also excludes disposal gains. We expect stable and positive development of WCM s FFO. 23

24 Our forecasts for WCM s FFO FFO-calculation ( m) 2014 Q1 2015E 2016E 2017E 2018E Net operating income Administrative and personnel expenses and depreciation added -0.2back Other income Other expenses Gains from property disposals Cash financial results Other items / cash taxes Funds From Operations I FFO I / share Source: Berenberg estimates WCM targets a payout ratio of 50% on FFO I for FY 2016, to be paid in the following year. In our model, we have assumed that the payout ratio will initially be low but will rise continuously. Strong rise in FFO per share and dividends per share ( ) E 2016E 2017E 2018E FFO per share DPS Source: Berenberg estimates; dividends being paid in the year after The company s balance sheet will look very similar to other property companies, and our numbers incorporate the recently completed cash capital increase. 24

25 Our forecasts for WCM s balance sheet m 2014 Q1 2015E 2016E 2017E 2018E Cash and liquid funds Receivables Financial assets Associated companies Prepayments Other short-term assets Total current assets Investment properties Property, plant and equipments Deferred tax assets Other non-current assets Total non-current assets Total assets Subscribed equity Capital reserve Other reservers Retained earnings / losses Total shareholders's equity Minorities Total equity Trade payables Other short-term liabilities Short-term bank loans Short-term provisions Other short-term financial liabilities Total short-term liabilities Long-term financial liabilities Deferred tax liabilities Other long-term liabilities Total long-term liabilities Total equity and liabilities Source: Company reports, Berenberg estimates We welcome that WCM considers stable financial ratios as a high priority. Solid financial ratios of WCM Financial ratios 2014 Q1 2015E 2016E 2017E 2018E Net debt Investment properties including assets held for sale Net loan-to-value -65% 63% 47% 45% 43% 41% ICR Net gearing -35% 146% 90% 82% 74% 67% Source: Berenberg estimates In addition to FFO, net asset value (NAV) remains a relevant figure for property companies. As it has become a standard measure in the industry, we refer to the so-called EPRA NAV. Here the calculation method has been specified by EPRA (European Public Real Estate Association), the standard setter, which has provided several best-practice guidelines for the industry. While NAV is similar to shareholders equity, EPRA NAV is adjusted by adding the deferred tax liabilities on the assumption that the investment properties are held on a going-concern basis, and the non-cash valuation losses for financial derivatives. We expect WCM S EPRA NAV to rise steadily. 25

26 Continuous rise in EPRA NAV per share ( ) E 2016E 2017E 2018E Source: Berenberg estimates 26

27 Valuation standalone and peers 1) Standalone valuation leads to an average fair value of 2.80 For the valuation of property stocks, we typically follow a standardised approach, which is based on return on NAV and on a three-stage Gordon growth/dividend discount model. Through this method, we try to determine which companies generate or destroy value and should therefore trade at a premium or discount to NAV. The total return is split into the economic return, which is the sustainable operating profit defined as funds from operations excluding disposal gains, and the indirect profit, which is the result of the valuation changes of the investment property portfolio. The total return is typically forecast for three years. The return on NAV is then compared with the cost of equity. By adding company-specific risk premiums such as those reflecting financial leverage, portfolio quality, transparency or potential share overhangs, we derive the cost of equity. By incorporating financial and non-financial items, we attempt the calculation of a correctly priced, company-specific cost of equity. Finally, the spread between total return and cost of equity in relation to the company s economic profit leads us to the economic value that is generated or destroyed by the company. By adding the NPVs of the economic value to the NAV, we reach the fair value of the company. In general, we believe that a standalone valuation is more reasonable than a peer-group-based approach. For the base cost of equity calculated via the CAPM we start with a risk-free rate of 2.5%, a risk premium of 3.5% and a beta of 0.9. For WCM, we derive company-specific risk spreads of 50bp according to the following criteria, which leads to a total cost of equity of 6.15%. Calculation for cost of equity of WCM Portfolio Asset type 0.00% Focussed / Multi-focussed 0.00% Location (national/pan-european) 0.10% Quality of assets / tenant structure 0.10% Development exposure 0.00% Management In-/external management 0.00% Experience/track record 0.00% Financing structure LTV 0.00% Structure of debt 0.00% Shareholder structure 0.10% Liquidity / Indices 0.20% Transparency 0.00% Corporate Governance 0.00% Total risk premiums 0.50% Normalised risk free rate 2.50% Risk spread 3.50% Beta 0.90 Adjusted cost of Equity 6.15% Source: Berenberg estimates Based on return on NAV, we derive a fair value of 2.63 for WCM based on FY 2016 estimates. 27

28 Equity value for WCM based on return on net asset value ( ) 2016E 2017E 2018E Funds From Operations Revaluation results New equity Adjustments Total return Net Asset Value Adjustments Adjusted NAV Return on NAV 9.9% 11.7% 10.5% Cost of equity 6.2% 6.2% 6.2% Spread 3.8% 5.6% 4.4% Value creation Year NPV Total value creation 33 NAV 255 Adjustments 0 Fair Value 288 Dividend 0 Equity value 288 Number of shares Fair value 2.63 Source: Berenberg estimates WCM is a normal German corporation and not a real estate investment trust (REIT), of which there are only three currently listed in Germany. From a business model and also from a financial profile perspective, however, the company would qualify as a German REIT; further, given its high tax loss carryforwards, dividends can be paid out on a tax-free basis. Our DDM valuation, with 55% as the normalised payout ratio, derives a fair value for WCM of Equity value of WCM based on dividend discount model m / Mid-term growth 2.50% Terminal growth 1.00% Payout 55% Normalised CoE 6.25% Dividends FFO Payout NAV RoE CoE Growth Year 2015E % % 6.15% 0% E % % 6.15% E % % 6.15% 15% E % % 6.15% 2% 4 NPV NPV of forecasted dividend 41.3 payments 2018E E E E E NPV NPV of dividends FY6-FY NPV of Terminal Value Fair value NOSH Fair value 3.05 Source: Berenberg estimates 28

29 The range for WCM s fair values based on return on net asset value and on a dividend discount model is very wide. This is mainly because we have assumed only very marginal valuation gains for the portfolio. The net asset value does not include any accretion from the net present value of WCM s tax loss carryforwards. On an equal-weight basis, the fair value for WCM comes out at 2.84, and we set the target price at 2.80 as a rounded basis. This implies for FY 2016 an FFO yield of 6.6%, a dividend yield of 3.3% and a premium to net asset value of 22%. Range of fair value for WCM on a standalone basis ( ) Fair value based on return on NAV Fair value based on DDM Average Source: Berenberg 29

30 2) Peer group valuation leads to an average fair value of 2.50 From our current coverage universe, we have included five German commercial property companies in the peer group for WCM: alstria office REIT AG, DO Deutsche Office AG (DO), DIC Asset AG, Hamborner REIT AG and TLG Immobilien AG. alstria and DO are pure sector plays on offices in Germany, while the others follow a more diversified commercial property portfolio strategy. Alstria has published its intention to takeover DO and the transaction is to be closed by year-end For the time being, we have included both companies still on a standalone basis. DIC also manages commercial properties for thirdparties. Hamborner might be considered as the closest peer. Sector focus of WCM and peers WCM alstria Retail, 35% Industrial, 7% Warehouse, 5% Office, 53% Office, 100% Deutsche Office DIC Office, 84% Nursing homes, 7% Retail, 4% Logistics, 3% Hotel, 2% Office, 71% Retail, 18% Other commercial, 10% Residential, 1% Hamborner TLG Highstreet retail, 32% Retail, 48% Large-scale retail, 33% Hotel, 14% Offices, 35% Offices, 38% Source: Company reports 30

31 alstria has a higher regional focus in its case Hamburg whereas the portfolios of DIC Asset, DO and Hamborner are more regionally diversified. In recent years, more of Hamborner s acquisitions have been located in the southern part of Germany. TLG is a pure play on eastern Germany. Regional focus of WCM ) and peers WCM alstria Saxony, 15% Hesse, 44% Saxony Anhalt, 14% Lower- Saxony, 8% NRW, 6% Bremen, 7% Stuttgart region, 21% Rhine / Ruhr, 18% Rhine / Main, 7% Munich, 4% Berlin, 2% Others, 5% Berlin, 6% Brandenburg, 1% Hamburg, 43% Frankfurt, 14% Darmstadt, 12% Dusseldorf, 20% Deutsche Office Berlin, 9% Other, 21% Stuttgart, 6% Essen, 6% Cologne, 6% Munich, 4% Hamburg, 2% Central Germany, 32% Western Germany, 24% DIC Eastern Germany, 11% Southern Germany, 20% Notherrn Germany, 13% Baden- Wuerttemb erg, 10% Lower Saxony, 11% North- Rhine West, 43% Hamborner Bavaria, 9% Hessen, 8% Bremen, 7% Hamburg, 4% Frankfurt / Rhine-Main, 3% Saxony, 3% Thueringia, 2% Berlin, 1% Leipzig, 5% Dresden, 15% Berlin, 44% TLG Rostock, 9% Other, 27% Source: Company reports 31

32 The tenant structure of the portfolios differs, which is partly because of the varying exposure to single- or multi-tenant properties. alstria has, with the City of Hamburg and Daimler, high exposure to two large tenants that generate 45% of its total rents. Hamborner also has two large single tenants that contribute 25% of annual rents. DO s five largest tenants generate around half of its total rents. Details on most relevant tenant structure of WCM and peers Other, 50.5% Tenant 1 (Retail), 23.9% WCM Tenant 2 (Public sector), 11.6% Tenant 3 (Conglomer ate), 5.2% Tenant 4 (IT), 5.2% Tenant 5 (Chemicals ), 3.6% Daimler, 16% City of Hamburg, 29% alstria Bilfinger Berger AG, 6% Barmer, 3% Wurttembe rgische, 3% L'Oreal, 2% Rheinmetall, 2% Siemens, 2% State of Baden- Wurttembe rg, 2% HUK - Conurg, 1% Allianz, 13% Deutsche Office Zurich Insurance, 8% Deutsche Telekom, 17% Hochtief, 8% Daimler, 3% Nursing Home Cologne, 3% Nursing Home Recklingha usen, 2% Nursing Home Trier, 1% LG Electronics, 1% Medtronic, 1% City of Hambur g, 4% State of Hesse, 4% Metro AG, 6% DIC Siemens AG, 3% REWE Zentral, 3% Deutsche Bahn AG, 6% ebay Internation al AG, 2% Deutsche Telekom, 2% State-run Property and Building Departmen t, 2% State of Baden - Württembe rg, 2% Kaufland Gruppe, 10.6% Hamborner OBI, 8.4% C&A, 2.4% EDEKA, 14.4% H&M, 2.2% AREVA, 2.0% SFC Energy, 2.0% Estee Lauder, 1.9% Schneider Electric, 1.7% Telefonica O2, 1.7% TLG Top tenants - office Bundesanstalt fur Immobilienaufgaben Daimler Real Estate Freistaat Thuringen OstseeSparkasse SAP Top tenants - retail EDEKA Group Daimler Real Estate Freistaat Thuringen OstseeSparkasse SAP Source: Company reports WCM is, in terms of portfolio size, the smallest player among the peer group understandably so, as the company has just started to relaunch its operations. Portfolio details of WCM and peers WCM alstria Deutsche Office DIC asset Hamborner TLG Investment properties 437.8m 1.6bn 1.8bn 2.4bn 0.7bn 1.5bn Vacancy rate 6.8% 11.0% 16.4% 10.9% 2.3% 6.7% WALT 9.9 years 6.8 years 4.7 years 5 years 6.6 years 5.7 years Rental yield 6.7% 6.0% 6.1% 6.6% 6.4% 7.8% Source: Company reports as of year-end 2014; latest data for WCM excluding the recently acquired DIYmarket in Olpe and rent extension for an office property in Berlin. 32

33 The lease expiry schedules of all six companies are relatively similar. In general, we would regard an annual expiry of about 10% of the entire lease contracts as standard for commercial real estate. Lease expiry profile of WCM and peers 80% 70% 60% 50% 40% 30% 20% 10% 0% WCM 71% 13% 9% 2% 5% >4 years 35% 30% 25% 20% 15% 10% 5% 0% alstria 32% 23% 17% 17% 4% 6% years 5-10 years >10 years 70% 60% Deutsche Office 62% 70% 60% DIC 60% 50% 50% 40% 40% 30% 30% 20% 10% 0% 14% 9% 6% 9% >4 years 20% 10% 0% 14% 16% 10% 0% >4 years 80% 70% 60% 50% 40% 30% 20% 10% Hamborner 7% 6% 5% 12% 70% 70% 60% 50% 40% 30% 20% 10% 5% TLG (Offices) 11% 8% 11% 65% 0% >4 years 0% >4 years Source: Company reports; latest data for WCM excluding the recently acquired DIY-market in Olpe and rent extension for an office property in Berlin. In addition to the companies portfolio details, investors have been closely following the development of balance sheet ratios. The loan-to-value levels have been relatively low among the sector. The vast majority of the debt among the peers has been asset-backed, only DIC has issued non-rated corporate bonds. Details on debt structure of WCM and peers WCM alstria Deutsche Office DIC asset Hamborner TLG LTV 58.2% 50.4% 53.5% 65.9% 43.3% 40.3% Average cost of debt 2.1% 3.4% 3.5% 3.9% 3.7% 3.0% Average debt maturity 7.2 years 5.3 years 4.2 years 4 years 6.2 years 5.7 years Source: Company reports 33

34 In terms of the debt expiry schedule, we see that all the peers have a relatively low amount of debt coming due in the short term and a fairly defensive maturity schedule. Debt maturity profile of WCM and peers WCM alstria in m in m >5 years >5 years in m Deutsche Office >5 years in m DIC asset >5 years Hamborner TLG 459 in m >5 years in m >5 years Source: Company reports Again, as WCM is just about to embark on a new business model, the company is not yet either a member of the German SDAX or of the EPRA indices. Stock market details of WCM and peers WCM alstria Deutsche Office DIC asset Hamborner TLG Share price Market cap ( m) 229 1, ,011 Free float 88% 95% 35% 67% 78% 53% Largest holder 10% 5% 60% 33% 9% 18% 52W low ( ) W high ( ) Average daily turnover (shares, 1Y) 113, , , ,000 95, ,488 Weighting in EPRA Global % 0.02% 0.03% 0.04% 0.06% Weighting in EPRA Europe % 0.14% 0.17% 0.25% 0.38% Weighting in SDAX % 1.18% 1.59% 1.90% 2.10% Source: Company reports, DAX, Datastream as of 5 August 2015 The performance of the sector has been fairly positive. Interestingly, WCM has been significantly outperforming its peers; this, however, is not very meaningful and was presumably only based on speculation as it is only now that the new real estate business model is coming into being. 34

35 WCM and peers performance 3 months performance YTD performance 1 year performance Deutsche Office 12% WCM 76% WCM 91% TLG 9% Deutsche Office 68% Deutsche Office 56% alstria 4% TLG 32% alstria 36% DIC asset -4% alstria 29% Hamborner 23% WCM -6% Hamborner 19% DIC asset 22% Hamborner -7% DIC asset 15% Source: Datastream as of 5 August 2015 For FY 2016, the peers are trading at a median FFO yield of 6.5%, or an FFO multiple of 15.4x, at a median dividend yield of 4.3% The median premium to NAV is 4%, while the range within the peer group is very wide. Valuation levels of peer group German commercial stocks Price Market cap LTV Net gearing Float % Dividend Yield FFO yield Premium/(discount) NAV 14a 15e 16e 17e 14a 15e 16e 17e 14a 15e 16e 17e WCM % 96% % 4.5% 5.2% 5.1% 8.9% 9.4% -5% -10% -17% alstria office ,985 50% 109% % 3.9% 3.9% 4.3% 5.9% 4.6% 5.1% 5.7% -6% 13% 9% 8% Deutsche Office % 106% % 3.6% 3.9% 4.3% 9.3% 5.9% 6.5% 7.2% -34% -6% -9% -13% DIC Asset % 194% % 4.3% 4.3% 4.3% 9.4% 8.8% 8.3% 8.3% -38% -33% -34% -34% HAMBORNER REIT % 63% % 4.4% 4.4% 4.6% 6.3% 4.2% 5.4% 6.1% -1% 12% 7% 4% TLG ,011 40% 111% % 4.5% 5.0% 5.5% 7.8% 6.0% 6.6% 7.2% -16% 11% 4% -4% average peers 49% 117% 4.3% 4.2% 4.3% 4.6% 7.7% 5.9% 6.4% 6.9% -19% -1% -4% -8% median peers 50% 109% 4.7% 4.3% 4.3% 4.3% 7.8% 5.9% 6.5% 7.2% -16% 11% 4% -4% Source: Berenberg, Bloomberg as of 5 August 2015 A peer-group-based valuation has to take into account that alstria and Hamborner are both REITS and therefore have to distribute higher dividends. Obviously, WCM is just a newcomer and is currently still managing a significantly smaller portfolio. However, given the rapid growth of the portfolio, we expect markets to compare WCM to current sector multiples. Applying the peers multiples, the rounded mid-point of the valuation range for the fair value is Range of fair value for WCM based on peer multiples ( ) Valuation based on peers P/NAV2016E Valuation based on peers P/FFO2016E Valuation based on peers DY2016E Peer group-based fair value for WCM (average) Source: Berenberg The valuation for WCM on a standalone basis ( 2.80) and on a peer-group basis ( 2.50) comes out relatively close. We therefore set the price target for the coverage initiation at 2.65 as the average of both valuation methods. This leads to a Buy rating with an upside of about 25%. 35

36 Snapshot on German commercial property markets The German investment market for commercial real estate was worth 24.2bn in H1 2015, a 42% increase on the same period last year. This was double the five-year average of 12bn (based on half-year results). Commercial transaction volume in Germany ( bn) in bn E H H Commercial transaction volume in Germany Forecast Source: JLL Cities where transactions exceeded 2bn during H include Berlin, Frankfurt, and Munich. However, Düsseldorf was the one prime location that suffered an unusually steep yoy decline in investment volume (-39%) due to an extraordinarily strong Q Commercial transaction volume in Germany in the top seven cities ( m) in m 3,000 2,700 2,751 2,779 2,500 2,000 1,950 2,054 1,500 1,210 1,150 1,364 1,450 1, Berlin Dusseldorf Frankfurt Hamburg Cologne Munich Stuttgart H H Source: Colliers, JLL 36

37 Due to a few large retail deals (43 Kaufhof department stores and 4 shopping centres by Corio to Klepierre), retail increased it s share substantially to 39% (Q1 2015: 31%) and is therefore slightly ahead of office properties. Transaction volume of German commercial property by asset class Retail, 39% Mixed-use, 7% Office, 38% Other, 9% Logistics / Industrial, 7% Source: JLL Individual transactions accounted for 64% of transaction volume and have increased yoy by 44% to 15.6bn. In contrast, portfolio transaction volume increased by 39% to 8.6bn as big-ticket deals in the 250m-500m range remain in short supply, even though these are exactly what equity-rich investors are looking for. Transaction volume of German commercial properties by size ( bn) Q Portfolios, 8.6, 36% Single assets, 15.6, 64% Single assets Portfolios Source: JLL Foreign investors continue to show interest; their share is now approaching 60% (approximately 14bn) of transaction volume. In first half of 2015, the five largest transactions were carried out by international investors. In the last few years, take-up in the office leasing markets has remained stagnant after a peak in This year started out strong with a H1 take-up of 1,521,000sqm, 13% higher than a year ago, representing the best first-half take-up result in the past four years. 37

38 German office take-up in the top seven cities (in 1,000sqm) in 1,000 sqm 4,000 3,407 3,500 2,910 3,026 2,914 3,004 3,000 3,100 2,500 2,000 1,500 1, ,346 1, E H H Office space take up in the top 7 cities in Germany Forecast Source: Colliers, JLL for half-year comparisons While Stuttgart and Berlin have enjoyed increases in take-up levels of over 20% yoy, Cologne is still the worst performer, but was able to considerably reduce its yoy decreasing take-up from -20.1% in first quarter to -5% in first half of Surprisingly, in Munich, there was only one letting above 5,000sqm in the second quarter, while second half was at a similar level to H The shortage of prime office space in central locations, a key focus of users, remains problematic and is limiting take-up. German office take-up in the top seven cities (in 1,000sqm) in 1,000 sqm Berlin Dusseldorf Frankfurt Hamburg Cologne Munich Stuttgart H H Source: JLL The upwards trend in net absorption continues, leading to steadily falling office vacancy rates, indicating that tenants are looking to expand, moving to new and larger premises or new companies are entering the German office market. In H vacancy rates in six out of seven major German cities hit new lows with an aggregate level of 7.2%, down 0.9ppt yoy and down 3.0ppt over a five-year period. 38

39 German offices vacancy in the top seven cities (%) 14.0% 12.0% 10.0% 9.8% 10.0% 8.0% 6.0% 6.9% 6.7% 6.1% 6.5% 5.0% 4.0% 2.0% 0.0% Berlin Dusseldorf Frankfurt Hamburg Cologne Munich Stuttgart Q Q Q Q Source: JLL Development of German offices vacancy (%) 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 8.4% 7.9% 7.0% 6.0% 4.9% Berlin - vacancy 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 12.0% 11.8% 11.6% 11.4% 11.2% 11.0% 10.8% 10.6% 10.4% 10.2% Source: Colliers 7.9% 7.1% 6.1% 6.1% 5.1% Munich - vacancy 11.5% 10.7% 11.4% 10.8% 10.4% Dusseldorf - vacancy 39

40 The shortage of high-quality office properties available at short notice is particularly felt in the prime locations, forcing companies to stay put until they find suitable alternatives. This is not likely to improve in the short term, as many new construction projects are being postponed, presumably as a consequence of the financial crisis and banks being more selective when it comes to financing construction projects. The volume of scheduled office completions is forecast to remain stable at 984,000sqm for The regional focus of construction during this and next year is on Berlin, Munich and Hamburg. Due to positive market developments, with persistent demand for office space and a decreasing number of completions, rents in major German cities have already risen and are expected to expand further. German office rent index (1990 = base year) = Source: BulwienGesa Real estate rent index - Office All cities have achieved stable to slightly increasing prime rents in H Overall, rents in the top seven cities increased by 1.2% yoy with a further increase of 0.9% expected by the end of German offices rent in the top seven cities ( /sqm/month) 40.0 /sqm/month Berlin Dusseldorf Frankfurt Hamburg Cologne Munich Stuttgart Q Q Q Q Source: JLL 40

41 German prime office rents and yields in the top seven cities ( /sqm/month) in /sqm/month % 4.60% 4.50% % % % 4.30% % % 4.30% 4.20% 4.10% % % 3.90% 3.80% % 0 Source: JLL Berlin Dusseldorf Frankfurt Hamburg Cologne Munich Stuttgart Prime rent Q2 15 ( /sqm/month) Prime yield Q2 15 (%) 3.60% The high level of liquidity in the market has affected the prime yields of traditional investment classes. EMEA office yield index yoy annual change (BPs) 150 (BPs) Source: CBRE Core office prices continue to rise, causing further softening of yields. Due to the short supply of core/high-quality offices, a further decline in yields is expected as the year progresses. 41

42 German prime office yields development over the year in the top seven cities (%) 6.00% 5.00% 4.30% 4.40% 4.35% 4.30% 4.35% 4.55% 4.00% 3.85% 3.00% 2.00% 1.00% 0.00% Berlin Dusseldorf Frankfurt Hamburg Cologne Munich Stuttgart Q Q Q Q Q Q Source: JLL 42

43 Financials Profit and loss account Year-end December(EUR m) E 2016E 2017E 2018E Net rents Direct property expenses Net operating income Earnings from property disposals Earnings from project developments Earnings from other property activities Other operating income Total revenues Revaluation result from investment properties (net) Total income Administrative expenses Personnel expenses Other operating expenses Total operating expenses EBITDA EBITDA excl revaluation result (net) Depreciation EBITA EBITA excl revaluation result (net) Amortisation of goodwill Amortisation of intangible assets Impairment charges EBIT (incl revaluation result net) EBIT excl revaluation result Interest income Interest expenses Depreciation of financial investment Investment income Financial result Earnings before taxes (incl revaluation result) Earnings before taxes (excl revaluation result) Total taxes Net income from continuing operations (incl revaluation result) Net income from continuing operations (excl revaluation result) Income from discontinued operations (net of tax) Extraordinary items (net of tax) Cumulative effect of accounting changes (net of tax) Net income (incl revaluation result net) Net income (excl revaluation result net) Minority interest Net income (net of minority interest, incl revaluation result) Net income (net of minority interest, excl revaluation result) Funds from operations (FFO) Source: Company data, Berenberg estimates 43

44 Balance sheet Year-end December (EUR m) E 2016E 2017E 2018E Intangible assets Investment properties Development assets Property, plant and equipment Financial assets Other non-current assets Deferred tax assets FIXED ASSETS Properties held for sale Inventories Accounts receivable Accounts receivable and other assets Liquid assets CURRENT ASSETS TOTAL ASSETS Subscribed capital Surplus capital Additional paid-in capital Net profit/loss SHAREHOLDERS' EQUITY MINORITY INTEREST PROVISIONS AND ACCRUED LIABILITIES short-term liabilities to banks Bonds (long-term) long-term liabilities to banks other interest-bearing liabilities Interest-bearing liabilities Accounts payable Current liabilities Deferred income Deferred taxes LIABILITIES TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY Source: Company data, Berenberg estimates 44

45 Cash flow statement EUR m E 2016E 2017E 2018E Funds from operations Other recurrent / non-recurrent items Increase/decrease in working capital Cash flow from operating activities Capex Payments for acquisitions Financial investments Income from asset disposals Cash flow from investing activities Increase/decrease in debt position Dividends paid Purchase of own shares Capital measures Others Cash flow from financing activities Cash flow from operating activities Cash flow after maintenance capex Cash flow before financing Increase/decrease in liquid assets Source: Company data, Berenberg estimates Ratios Ratios E 2016E 2017E 2018E Return on equity Net profit / Y/E equity 3.9% 4.9% 10.5% 12.1% 10.9% Recurring net profit / Y/E equity -2.9% 3.2% 8.8% 8.5% 8.2% Net profit / avg. equity 3.9% 4.9% 10.5% 12.1% 10.9% Recurring net profit / avg. equity -2.9% 3.2% 8.8% 8.5% 8.2% Security Net debt Debt / equity 27% 117% 110% 101% 94% Net gearing -36% 96% 87% 79% 71% Interest cover EBITDA / interest paid Dividend payout ratio 0% 0% 42% 39% 41% Dividend cover Loan-to-value (LTV) 47% 57% 56% 55% 53% Return on net asset value -2.9% 3.2% 8.8% 8.5% 8.2% Liquidity Current ratio Acid test ratio Source: Company data, Berenberg estimates 45

46 Please note that the use of this research report is subject to the conditions and restrictions set forth in the General investment stment-related disclosures and the Legal disclaimer at the end of this document. For analyst certification and remarks regarding g foreign investors and country-specific disclosures, please refer to the respective paragraph at the end of this document. Disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz WpHG) Company WCM Beteiligungs und Grundbesitz AG 3, 5 Disclosures (1) Joh. Berenberg, Gossler & Co. KG (hereinafter referred to as the Bank ) and/or its affiliate(s) was Lead Manager or Co- Lead Manager over the previous 12 months of a public offering of this company. (2) The Bank acts as Designated Sponsor for this company. (3) Over the previous 12 months, the Bank and/or its affiliate(s) has effected an agreement with this company for investment banking services or received compensation or a promise to pay from this company for investment banking services. (4) The Bank and/or its affiliate(s) holds 5% or more of the share capital of this company. (5) The Bank holds a trading position in shares of this company. Historical price target and rating changes for WCM Beteiligungs und Grundbesitz AG in the last 12 months (full coverage) Date Price target - EUR Rating Initiation of coverage 06 August Buy 06 August 15 Berenberg Equity Research ratings distribution and in proportion to investment banking services, as of 1 July 2015 Buy % % Sell % 2.70 % Hold % % Valuation basis/rating key The recommendations for companies analysed by Berenberg s Equity Research department are made on an absolute basis for which the following three-step rating key is applicable: Buy: Sustainable upside potential of more than 15% to the current share price within 12 months; Sell: Sustainable downside potential of more than 15% to the current share price within 12 months; Hold: Upside/downside potential regarding the current share price limited; no immediate catalyst visible. NB: During periods of high market, sector, or stock volatility, or in special situations, the recommendation system criteria may be breached temporarily. Competent supervisory authority Bundesanstalt für Finanzdienstleistungsaufsicht -BaFin- (Federal Financial Supervisory Authority), Graurheindorfer Straße 108, Bonn and Marie-Curie-Str , Frankfurt am Main, Germany. General investment- related disclosures Joh. Berenberg, Gossler & Co. KG (hereinafter referred to as the Bank ) has made every effort to carefully research all information contained in this financial analysis. The information on which the financial analysis is based has been obtained from sources which we believe to be reliable such as, for example, Thomson Reuters, Bloomberg and the relevant specialised press as well as the company which is the subject of this financial analysis. Only that part of the research note is made available to the issuer (who is the subject of this analysis) which is necessary to properly reconcile with the facts. Should this result in considerable changes a reference is made in the research note. Opinions expressed in this financial analysis are our current opinions as of the issuing date indicated on this document. The companies analysed by the Bank are divided into two groups: those under full coverage (regular updates provided); and those under screening coverage (updates provided as and when required at irregular intervals). 46

47 The functional job title of the person/s responsible for the recommendations contained in this report is Equity Research Analyst unless otherwise stated on the cover. The following internet link provides further remarks on our financial analyses: Legal disclaimer This document has been prepared by Joh. Berenberg, Gossler & Co. KG (hereinafter referred to as the Bank ). This document does not claim completeness regarding all the information on the stocks, stock markets or developments referred to in it. On no account should the document be regarded as a substitute for the recipient procuring information for himself/herself or exercising his/her own judgements. The document has been produced for information purposes for institutional clients or market professionals. Private customers, into whose possession this document comes, should discuss possible investment decisions with their customer service officer as differing views and opinions may exist with regard to the stocks referred to in this document. This document is not a solicitation or an offer to buy or sell the mentioned stock. The document may include certain descriptions, statements, estimates, and conclusions underlining potential market and company development. These reflect assumptions, which may turn out to be incorrect. The Bank and/or its employees accept no liability whatsoever for any direct or consequential loss or damages of any kind arising out of the use of this document or any part of its content. The Bank and/or its employees may hold, buy or sell positions in any securities mentioned in this document, derivatives thereon or related financial products. The Bank and/or its employees may underwrite issues for any securities mentioned in this document, derivatives thereon or related financial products or seek to perform capital market or underwriting services. Analyst certification I, Kai Klose, hereby certify that all of the views expressed in this report accurately reflect my personal views about any and all of the subject securities or issuers discussed herein. In addition, I hereby certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific recommendations or views expressed in this research report, nor is it tied to any specific investment banking transaction performed by the Bank or its affiliates. I, Tina Kladnik, hereby certify that all of the views expressed in this report accurately reflect my personal views about any and all of the subject securities or issuers discussed herein. In addition, I hereby certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific recommendations or views expressed in this research report, nor is it tied to any specific investment banking transaction performed by the Bank or its affiliates. Remarks regarding foreign investors The preparation of this document is subject to regulation by German law. The distribution of this document in other jurisdictions may be restricted by law, and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions. United Kingdom This document is meant exclusively for institutional investors and market professionals, but not for private customers. It is not for distribution to or the use of private investors or private customers. United States of America This document has been prepared exclusively by the Bank. Although Berenberg Capital Markets LLC, an affiliate of the Bank and registered US broker-dealer, distributes this document to certain customers, Berenberg Capital Markets LLC does not provide input into its contents, nor does this document constitute research of Berenberg Capital Markets LLC. In addition, this document is meant exclusively for institutional investors and market professionals, but not for private customers. It is not for distribution to or the use of private investors or private customers. This document is classified as objective for the purposes of FINRA rules. Please contact Berenberg Capital Markets LLC ( ) if you require additional information. Third-party research disclosures Company WCM Beteiligungs und Grundbesitz AG Disclosures no disclosures 47

48 (1) Berenberg Capital Markets LLC owned 1% or more of the outstanding shares of any class of the subject company by the end of the prior month.* (2) Over the previous 12 months, Berenberg Capital Markets LLC has managed or co-managed any public offering for the subject company.* (3) Berenberg Capital Markets LLC is making a market in the subject securities at the time of the report. (4) Berenberg Capital Markets LLC received compensation for investment banking services in the past 12 months, or expects to receive such compensation in the next 3 months.* (5) There is another potential conflict of interest of the analyst or Berenberg Capital Markets LLC, of which the analyst knows or has reason to know at the time of publication of this research report. * For disclosures regarding affiliates of Berenberg Capital Markets LLC please refer to the Disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz WpHG) section above. Copyright The Bank reserves all the rights in this document. No part of the document or its content may be rewritten, copied, photocopied or duplicated in any form by any means or redistributed without the Bank s prior written consent. May 2013 Joh. Berenberg, Gossler & Co. KG 48