Bavarian logistics property company VIB Vermoegen is using an admirable combination of trusted partnering and smart geographical thinking

I want to talk here about a blue banana, but so as not to confuse you, let me explain first that this is really all about geographical expansion strategies, in particular that of Bavarian property company VIB Vermoegen. Many of you will not have come across the company before, so let’s start with some salient facts before we get onto the banana. 

VIB was founded in 1993 by Ludwig Schlosser, an ex-banker who now sits on the supervisory board. It has been listed in Germany since 2005. The flotation price was €6.00 and shares now stand at €26.00. The market capitalisation is currently €720m and gross assets stand at €1.2bn. The last reported EPRA NAV per share was €20.74 on 31 March 2019. The dividend has been maintained or increased (usually the latter) every year since flotation, and it has just paid out 65c for 2018. It is not a REIT – a conscious decision taken by the management.

So far, so boring. But what has made this company so exceptional, and why can we feel so confident about its prospects? There are several points here of which we should all take note, and not necessarily just in relation to the real estate sector.

First, this is a tortoise, not a hare. Well, quite a speedy tortoise, but one determined not to be put off its long-term objectives by short-term temptations or panics. The first explosion of overseas interest in German property took place in the six years leading up to the financial crisis of 2008-09. Many new arrivals were clearly in it for their own profit rather than for their shareholders. They knew nothing of the market and relied too much on local managers, and they geared up too much – in fact, all of the usual hare-like behaviour. Very few of them are still around today.

The second notable aspect is strategic consistency. The structure of the company has remained constant. Long-term local institutional shareholders, such as the Sparkassen Biberach, have been gradually introduced. Through the efforts of my erstwhile colleague Emmanuel Valavanis, a fair but tough shareholder base has been built up and enjoys an excellent relationship with the management – to their mutual benefit.

The investment style has not wavered, although it has evolved. What investors want to know is that the next announcement is going to be as boring as the previous one – another purchase, another development, another tenant, but not a quixotic change of direction. VIB has always stuck to its knitting, which largely means buying or building big boxes in business parks for top-quality tenants. An element of speculation, in the correct sense of the word, can occur, but usually when asked to construct further space for an existing tenant, or when a new building is not 100% let but there are very strong assurances that it will be in the short term. So, a bit of developer mark-up that adds spice but no additional risk to speak of.

Staff turnover is very low, while the evolution of senior management has been calm and done with the approval of core shareholders.

 Financial consistency is another important aspect. (Slip up once, and you won’t be trusted again.) The LTV ratio at VIB is at the forefront of management’s thinking. Historically this has been in the range of 51% to 59%.

The borrowing structure has always been of a mortgage nature: each development has its own financing. There is no central treasury function. This means that the cost and duration of debt can evolve steadily over time, with each contract having its own lifetime and its own balance sheet. The management are remarkably adept at chipping away at interest rates and rolling over contracts. Free cash generation is the key and is the source of all other developments, whether of NAV or dividend policy.

This is getting rather dry and far too much like a broker note, so let’s get to that blue banana at last. You can see it in the map provided.

So, what does the blue banana signify? I will explain. From an early stage VIB identified that to be successful one should not overreach. So almost all early developments were within an hour or so’s drive of its head office in Neuburg an der Donau, a town near Ingolstadt in the heart of Bavaria. As an aside, Ingolstadt is one of the fastest-developing cities in the whole of Germany – among other things, it houses the headquarters of Audi. The Transalpine Pipeline, the longest crude oil pipeline in Europe, comes out here too, having started in Trieste in the south of Italy, before branching out to other cities. With growth comes opportunity, and VIB management reckoned that the motorway network through western Europe was the way to go. One of the contracts that obeyed this principle was to build a network of service centres for the truck giant MAN, so that lorries would not have to return to base to be serviced. 

What the blue banana shows is the areas of operation and/or future intent for VIB. It is interesting to note that Ingolstadt is right on the eastern edge of the coloured area. The powerhouse of the EU resides in safe and steady economies such as Germany, Austria, Belgium and Holland, and that’s where VIB is now aiming.

Now let me explain about Warehouses de Pauw (WDP). This much larger company, and paragon of the logistics sector, is also seeking to expand outside its native Belgium in the direction of Germany. The company is listed but family-managed and shares many of VIB’s beliefs and styles. If you move too far from home, especially in the notoriously parochial business of property, you need partners you can trust. So WDP came knocking at VIB’s door at much the same time as the latter was contemplating easing along its blue banana away from Bavaria. We are not talking merger or takeover here, but an alignment of interests that would see joint venture projects managed in Germany by VIB (coloured blue on the chart), and in the Lowlands by WDP (orange), with probably an emphasis on mutually adjacent areas such as North Rhine Westphalia (teal), as the chart shows. A letter of intent has been signed, and it will be fascinating to see what happens next. 

The company has learned from its infrequent mistakes. A few years ago it inherited a contract with a mismatch of debt (Swiss franc) and assets (euros). With the sudden revaluation of the Swissie this was causing an increasing headache, so VIB bit the bullet and extracted itself from the situation. Like an underperforming share in a portfolio, it didn’t put the whole at existential risk but absorbed too much management time and caused too much angst.

There is still an element of parochialism: much of Germany is still full of Mittelstand companies that prefer to stay out of the listed limelight and are suspicious of flashy investment techniques. But VIB’s chief executive Martin Pfandzelter and chief financial officer Holger Pilgenroether are remarkably sophisticated in their outlook. They have always made impatient overseas investors aware that they have a strong and loyal local investor base and some great relations with clients – including the administration of Ingolstadt – which are paramount. If this means that free cash flow isn’t splurged out as an eye-catching dividend, for example, that’s tough. They have better uses for their money.

The next regret is that, having come to the market a few times for fresh money, they haven’t had to do so for the last four years or so. This is bad news for stockbrokers, of course. And the liquidity of the stock isn’t that great, though with a bit of patience – and some canny dealers – no one has had a problem in building a desired position.

So, to valuation. Resisting the temptation to use the ratio that suits you while ignoring the rest (dot-com boom, anyone?) and shunning the ridiculous price target system forced on us by ignorant financial administrators, we would just point out a few salient features.

VIB may stand at a small premium to NAV, but WDP’s premium on that measure is a whopping 80%. The free cash flow (much the same as funds from operations) multiple makes VIB look remarkably cheap and is arguably a better measure in that it relies on actual money.

Cost of money hovering around 1% versus gross rental yields of over 7% results in the sort of margin that big UK propcos can only dream of.

The dividend policy may seem a touch on the stingy side, but VIB is about to enter its golden era of free cash flow generation – and if you are not patient enough an investor to hang around for that to come through in dividends, well, you’re not showing enough tortoise-like characteristics.