The shortfall in H1 results (revenue and adjusted EBIT down by a third) should not detract from Noratis’s ambition to benefit from favourable macro factors and clear opportunity in real estate with development potential in non-core German cities. The outturn was, as expected, a matter of timing (likely high-margin asset sales will be H2 oriented), so guidance of a rise in full-year profit is maintained, albeit on lower revenue. For the longer term, the asset base (stock book value up 15% in H1 at €114m) continues to be actively grown with c 900 units acquired since May (under 1,200 units in total at the start of 2018). Solid finances should allow a further generous dividend (6.7% yield 2018e).
With lower financial returns in the period regarded by management as an accident of timing and to be remedied in H2, Noratis’s focus remained firmly on growth. Consequently, even excluding a major 161-unit purchase in May but not completed until H2, the company was again clearly a net buyer in the first half, laying a strong base with +210 units and a stock book value of €114m vs €99m at December 2017. Rental income was duly up by a quarter following similarly aggressive expansion last year. However, sales of value-enhanced properties, Noratis’s main profit centre, were, as budgeted, well down (notably only one block disposal), hence a sharp fall in overall profit.
With the majority of planned 2018 disposals in H2 and sustained strong demand for residential real estate, management has affirmed guidance of higher profit. However, given its revised expectation of lower revenue, it does assume much higher asset sales margin, as in H1 which saw gross profit 34% vs 28%. Assuming a two- to three-year lead time for investment projects, recent step-up in expansion, topped by a mid-double-digit €m block purchase in Frankfurt promises longer-term growth.
Sitting between asset holder and developer makes for a difficult comparison with listed peers but Noratis is at a notable discount to RCM Beteiligungs, which has a similar model (trailing P/E ratio of c 30x). At 8x prospective P/E and P/BV (June 2018) of 1.9x, the company offers an attractive yield, backed by a positive outlook and dividend commitment (c 50% payout of annual net income).