The core business of FCR Immobilien is the acquisition and development of retail parks, typically in the magnitude of 1,500 square meters. Regional focuses is on communities with more than 5,000 inhabitants and peripheral locations of medium-sized cities with less than 500,000 inhabitants.
The company's business model rests on two pillars:
Portfolio maintenance (primary): leasing of core portfolio real estate, (FFO1)
Development and Trading (complementary): Sale of core portfolio of Real estate, new developments, project developments, opportunistic Sales (FFO2)
By skilfully linking purchasing, active asset management and property sales a high added value can be achieved. The FCR Real Estate AG has an excellent network, which is an essential prerequisite for the early gain access to profitable investment opportunities.
FCR Immobilien AG follows a special purchase profile for real estates. The company searches specifically for and is specialized insolvency real estate. Up to now, these properties have mostly been held over a period of 2 years wherein they are maintained, optimized, and subsequently sold profitably. These properties are usually in the asset class Retail, such as inner-city commercial buildings, retail parks and shopping centers.
Among the anchor tenants are large retail chains such as EDEKA, Netto, Rossmann, OBI, REWE and NORMA. Typically, a large part of the usable space falls to the food retail trade including discounters. Successively However, FCR Immobilien is developing into a portfolio holder. This development is already reflected in the income statement in the strongly growing rental income (H1 2020: +43.9% year-on-year).
Office, logistics, hotel and residential properties are also acquired. While the property size is generally between EUR 1 million and EUR 25 million, in individual cases it can also go up to EUR 100 million. The focus here is on real estate in small to medium-sized cities, with good growth prospects and high demand. The FCR is sure, that these secondary locations have an above-average return potential and long-term stable rent and value development.
Most properties were typically built 10-15 years ago, mostly as capital investment for investors from outside the industry, for example fund investors. At the time of acquisition, an investment backlog has become apparent in many of these properties, which is often reflected in high vacancy rates. The cause often lies in the lack of real estate know-how of the owners. Through targeted Space management, among other things by integrating first-class main or anchor tenants from the existing portfolio, they regularly succeeded in gradually increasing the rental income. Among the offered objects there are also often inheritance cases or sales by owners who are looking for investments that are less rigid in their liquidity.
With volumes of EUR 2 million to EUR 15 million, this segment is too small for institutional Investors, yet also rarely attractive for many private investors. To calculate appropriate purchase prices, FCR sets rental yields of 9% to 10% as the basis. A loan-to-value (LTV) value of just under 80% already results in a standard bank interest rates for secured loans of around 1.6% from the offset and annual repayments of 3% to 6% cash flow surpluses. At the same time the LTV for these properties decreases as a result of scheduled repayments (e.g. 4% p.a.) and the expected value increase of 3.5% p.a. within three years to less than 66%.
Strategy Asset Management & Project Development
While objects are in the inventory, FCR evaluates its structure and economic and optimizes the tenant structure, rental contracts and rental periods. The core of the strategy is to retain or gain anchor tenants with strong credit ratings to minimize the risk of loss of rent.
After repositioning, these locations will again become interesting for investors, which usually accept only low vacancy rates in their investment guidelines. The returns from the sale of developed properties form the second, complementary pillar of the business model. Therefore, FCR covers a value chain holistically and competently from purchasing to asset management to sales of the objects.
Clear profile shows difference to other listed real estate values
Among the listed real estate stocks, two German companies are listed as competitors that are partly comparable. In relation to both, FCR Immobilien shows some advantages from the investor's point of view.
Defama AG (DEF; ISIN DE000A13SUL5) focuses on small properties (EUR 1 million to EUR 5 million), corresponding to the specialty store segment at FCR. The vacancy rate was 9.6% as of June 30 (FCR: 11.8%), the WAULT (Weighted Average Unexpired Lease Term) at 4.6 years (FCR: 5.4 in core portfolio). While the stronger concentration on a single type of distribution at Defama is at first glance compelling for investors, the offering of a broader portfolio like FCR has is on closer inspection advantageous. Thus, FCR can draw attention early on to existing or emerging vacancies or to alternatives in the portfolio and can show them to their existing pool of possible tenants.
Deutsche Konsum REIT-AG (DKG; ISIN DE000A14KRD3) is significantly larger, the market capitalization is calculated at EUR 575 million. The vacancy was reported in the middle of the year with about 11.3% close to the value of FCR (11.8%). The WAULT was stated at 5.6 years, benefiting from the long lease term (WAULT 11.7) with a single DIY store operator (Hellweg). DKG is as REIT (Real Estate Investment Trust) subjected to, however, strict restrictions on the credit financing. The mortgage lending value may not exceed 55%.
In contrast, FCR can negotiate values of up to 80% with banks. In the current low interest rate environment, this difference of 25 percentage points offers a significant competitive advantage. Furthermore, the equity ratio must be above 45%, and at least 90% of the annual result generated in accordance with commercial law must be distributed to shareholders. The internal growth potential is therefore limited. DKG has a portfolio volume of around EUR 786 million and soon more than 160 objects. It has thus already grown to a size where the capacities of top management cannot be used optimally.
The market value of the real estate portfolio exceeded EUR 300 million for the first time in 2020
The FCR real estate portfolio, which at the end of 2014 consisted of 11 properties valued at EUR 11 million, increased significantly as of 30.6.2020 where there were 83 properties with a value of EUR 309 million. The focus is on the retail sector. Of the company’s total market value around 19.3% accounts for 26 specialty stores, around 14.3% for 17 retail parks, 26.8% for 7 shopping centers. The median monthly rent per square meter generated in 2019 ranged from EUR 5.40 (specialist stores) to EUR 8.66 (supermarkets). Approx. 96% of the revenues are generated in German market, the rest in Italy, Austria and Spain. The FCR is represented in all federal states, including Hesse, Rhineland-Palatinate, Baden-Wuerttemberg and Saarland with a single location. In these regions we see potential for the acquisition of further properties.
Measured by portfolio value, approximately 78% of the properties are Asset class retail, which is by far the largest sector. Opportunistically, the company has in recent years also developed a small portfolio of three hotels and six residential properties. In addition, it builds a student residence with 141 apartments in Bamberg. With a share of just under 10% of net rental income or 15.9% of the value of the property these commitments are altogether peripheral activities. By the end of 2021, FCR intends to increase the value of its real estate portfolio by acquisitions and value increases to more than EUR 500 million.
Digitization and artificial intelligence as strong value drivers for the future
With its software, FCR is implementing a comprehensive future program with focus on digitization and artificial intelligence for ERP and CRM. The aim of this program is to make property management and marketing faster and more effective and thus be able to operate more profitably in the market. The company wants to be recognized as the most innovative real estate company in Germany.
FCR works with the largest data providers of Germany, in order to receive a variety of data, that are location and property-related. With the help of AI-analyses and scoring models, object-related data such as the purchase prices or year of construction of real estate combined with demographic and location-related data such as age, marital status income or the sociostructure of the households in the vicinity of the property can be used to determine appropriate valuations and to identify or liftfurther earnings potential.
The previous performance spectrum of the software covers the following areas:
Purchase & sale: among other things analysis and scoring of object-related data and demographic factors
Asset Management: among other things, automation of leasing, communication with property management, cash flow calculation
Finance & Controlling: including liquidity planning and invoice processing
HR/Organization: including employee administration and employee self-services
Marketing: including online marketing, newsletter management and social media
Management dashboard: Daily updated reporting and approval functions for contracts and leases, buying and selling activities and overviews of the existing properties
FCR plans to market a new business field with this software at its core. The "FCR Intranet" is to be implemented as a white Label solution also made available to third parties and, if requested by the customer can be individually adapted.
In support of this business development, FCR placed a strategic equity investment in Immoware24 GmbH for around EUR 2.0 million in January 2020 to acquire a 10% stake and an option for a further 10%.
Immoware24 GmbH is also a company based in Germany, which offers professional and innovative property management systems. These can be used completely as Software as a Service (SaaS) via the internet. Immoware24 is a rentable software, which can be used over a monthly fixed basis price. The variable part of the fee is calculated as it follows the number of administrative units. The included elements of the software overlap in areas with the software of FCR. While the latter also deals with the purchase and sale, the former has holistic support of property management in focus. There, it offers besides rental objects also WEG and SEV administration including the day-accurate retrieval of reading data for external service providers. Currently, around 1,800 small and medium-sized real estate brokers, administrators and managers throughout Germany use this software.
FCR Immobilien AG and Immoware24 AG intend to introduce further tools in the future. They develop and link the technological basis of FCR with the competence of Immoware24 as well as its industry-specific expertise. In the course of the 2nd half of the year, FCR plans to launch further solutions on the market.