The CEO of the real estate developer on financing, forward deals, stock listing and rent caps.
The real estate developer Consus is aiming to expand forward sales up to 50% of the project volume. This is intended to help reduce debt and financing costs. After the planned change to the Prime Standard, Consus is a candidate for the SDax, says CEO Andreas Steyer.
By Helmut Kipp, Frankfurt
After the strong growth, Consus Real Estate is paying more attention to the reduction of the debt ratio. The newly formed real estate developer aims to reduce leverage by expanding forward sales of residential projects and increasing operating income. In the medium term, net debt is to be reduced to three times adjusted earnings before interest, taxes, depreciation and amortization. Last year they were 8.3 times higher. “First comes the investment, then the return and finally the lower leverage” says CEO Andreas Steyer in an interview with Börsen-Zeitung.
With the acquisition of the SSN Group at the end of 2018, the development volume grew to 9.6 billion euros. It is distributed over 64 projects with a total area of 2.1 million square meters, which according to Steyer include up to 25,000 residential units. Steyer joined Consus in early 2018 as Chief Operating Officer and was promoted to CEO five months later. He turned the company, which, according to him, “had no clear strategic focus”, into a developer, sold its own portfolio and the stake in the commercial real estate company GxP and streamlined the group structures.
“The feedback from the capital market was: You are too complex. We have eliminated this point of criticism,” assures the Consus CEO, who previously served as CEO of Demire, a company specialising in commercial real estate in medium-sized German cities, and was also managing director of Deka Immobilien Investment and partner of Ernst & Young Real Estate. Consus is now focusing its business activities on the development of affordable residential quarters and standardised multi-storey residential construction in economically strong German cities.
More interest in new buildings
The rent cap discussion – in Berlin the red-red-green Senate wants to prohibit rent increases for five years – this does not scare Steyer. His reason: New buildings are excluded. The CEO even believes that investors will be more interested in new residential projects because the old buildings will fall under the moratorium. However, it remains to be seen how the re-letting of new buildings will be handled in Berlin. The Senate Administration for Urban Development and Housing announced on request that this would only be decided during the legislative process.
Early redemption possible
Net debt amounted to EUR 2.2 billion at the end of March. Steyer attributes the high interest expenses not only to the expensive mezzanine capital. In order to place the financing on a broader footing, Consus placed a EUR 400 million bond with a five-year maturity in May. The proceeds will be used, among other things, to finance the individual company projects. Steyer explains that the financing will thus be shifted away from the project level to the parent company.
Compared to other corporate bonds, the bond bears an unusually high interest rate of 9.625 %. This is a very attractive coupon for investors, says Steyer. He sees the issue as a success: “The important message is that our business can be refinanced on the capital market”. Consus is in the ramp-up phase and must continue to build investor confidence. With the bond, the first peg has been set.
As a result of a call option, the company can redeem the bond prematurely after two years. Steyer expects the next bond to be issued at more favourable conditions: “This will also improve the rating”. The rating agencies S&P and Fitch are currently rating the company “B”, i.e. in the junk sector.
Management estimates financing costs at an average of 8.1 %. This rate is expected to fall by 200 basis points in the medium term. One lever for this is the expansion of forward sales. Their volume now stands at EUR 2.7 billion, equivalent to 28% of the development portfolio. The company intends to increase this share up to 50 % and then maintain it at this level on an ongoing basis. Consus sells residential projects primarily to institutional investors such as pension funds and insurance companies.
As a rule, 30 % of the sales price would be due with the building permit, says Steyer. “This rate covers the initial investment and finances the start of construction.” The following rates flow as construction progresses. Consus also takes over the pre-letting of the real estate projects so that the investor receives a return from day one. If a higher occupancy rate or a higher rent is achieved than agreed in the pre-sale contract, the company will, according to its own information, collect additional remuneration.
Candidate for SDax
For the Consus share, which is listed in the comparatively low regulated scale segment of the Frankfurt Stock Exchange, a change to the Prime Standard is planned within twelve months. According to Steyer’s indications, this could be the case in spring 2020, when four quarterly balance sheets of the group expanded by SSN will be available. With a market capitalisation of currently around 950 million euros, Consus is a candidate for the small-cap index SDax.
However, the understanding of a project developer on the German capital market is still underdeveloped. Many investors approached the share with the standards for a portfolio holder. “Loan-to-value and funds from operations are not criteria for us” emphasizes the CEO. Therefore, talks were held with the University of St. Gallen, which is developing a valuation model for developers.