Montea Offers A 4.8% Yield With Logistics Real Estate Assets (OTCMKTS:MONSF)

Introduction

After discussing Warehouses De Pauw (OTCPK:WDPSF) here on Seeking Alpha, I wanted to have a closer look at other European REITs that are flying under the radar. Montea Comm. VA (OTCPK:MONSF) also is a Belgian REIT focusing on warehouse and logistics properties, which are predominantly located in Belgium and The Netherlands, which account for a combined 87% of the portfolio.

The REIT also owns a few properties in France and two in Germany, which represent respectively 12% and 1% of the portfolio. The REIT operates a relatively new set of buildings, as approximately 2/3^rd of the assets are younger than 10 years.

As European REITs have had a difficult time adapting to a rapidly increasing interest rate on the financial markets, this article will focus on Montea’s longer-term plans, the impact of higher interest rates on its financial performance as well checking up on how sensitive the LTV ratio is to changes in the capitalization rate used to value the properties.

Montea’s primary listing is on Euronext Brussels where it’s trading with MONT as its ticker symbol. The average daily volume in Brussels is approximately 22,500 shares, which represents a monetary value of in excess of 1.7M EUR per day. The current market capitalization is approximately 1.6B EUR.

2023 was a transition year as the company has to get used to higher interest rates

Looking at the company’s financial performance in 2023, Montea reported a net rental result of approximately 106.6M EUR and this increased to approximately 116.1M EUR after taking the net property expenses and “other income” into account. The total property result of 113M EUR likely is the best metric to use to determine whether or not Montea is sufficiently cheap to consider a long position.

The total property operating result of approximately 113M EUR was obtained by deducting the property management costs and the technical and commercial costs from the equation. Those are the expenses that are directly related to the management of the property portfolio. I’m excluding the corporate expenses as that’s not a property-specific expense.

The income statement above also shows an “other income” of approximately 11.1M EUR. The majority of that amount is related to the revenue from solar energy as plenty of Montea’s assets have solar panels on their roofs.

The “other” portion of “other rental-related income and expenses” is related to the additional work on properties that has been re-invoiced to the tenants. Technically, the pure real estate net property result is approximately 107M EUR after isolating the revenue from the sale of electricity generated via the solar panels.

Looking at the EPRA results – which are somewhat related to the FFO and AFFO results in North America, the REIT reported EPRA earnings of 90.01M EUR which, divided over the average share count of 18.39M shares, resulted in an EPRA EPS result of 4.90 EUR.

While that sounds like a great result, there are some non-recurring items included in the 2023 results. That non-recurring item was related to the Dutch division of Montea being recognized as a fiscal investment institution for the years 2021 and 2022 while the REIT also benefited from the release of a provision it recorded in 2022 due to the uncertainty of the “green power certificates” related to solar power generation capacity. So rather than focusing too much on the 4.90 EUR per share, 4.45 EUR is a more reliable and normalized starting point. This means the REIT is currently trading at approximately 18 times its EPRA earnings.

While that isn’t cheap, Montea’s balance sheet is quite robust.

As the balance sheet below shows, Montea had about 88M EUR in cash on the balance sheet while it had 815M EUR in long-term debt and 36M EUR in current debt. This means the total net debt was just 763M EUR, which represents an LTV ratio of just 33.5%.

As Montea runs a clean balance sheet, it’s understandable the market is rewarding the stock with a slightly higher multiple.

At the end of 2023, the REIT’s net tangible assets were estimated at just under 1.5B EUR which represents an NTA of 74.38 EUR per share based on the current share count of 20.1M shares.

This is based on a net initial yield of approximately 5.06%, as you can see below.

I like to be a bit more conservative and want to err on the side of being cautious. Although I understand a cap rate of just over 5% is perfectly acceptable by the independent appraisers, I’m also curious to see how the NTA/share (and the LTV ratio) evolves when I’m using a higher required rental yield.

As explained earlier in this article, the net property result after deducting the contribution from solar panels was approximately 107M EUR. However, some assets only started contributing to the result during the year, so the “exit rate” was likely a bit higher than the aforementioned 107M EUR. Additionally, we can expect the REIT to push through an inflation-related rent hike. If I would use a net property result of 110M EUR (based on the 2023 situation so excluding the development projects that will be completed this year), I think I’m still pretty conservative.

Applying a required rental yield of 6.25% (which represents a mark-up of 310 bp on average 10-year government bonds of Belgium and The Netherlands in a 50/50 weighing) on that result would result in a fair value of 1.76B EUR for the existing investment properties. We know the book value of the solar assets is approximately 80M EUR while the REIT also owns 2.2 million square meters of land of which just over 1.4 million square meters is suitable for future development. Valuing that at 200 EUR per square meter on average (the company used 196 EUR per square meter for the acquired land bank), the fair value of the real estate assets including the land would be 280M, excluding the developments at this point. This would result in a pro forma fair value of the assets of 2.12B EUR. After deducting the 763M EUR in net debt would then result in just under 1.36B EUR in fair value and divided over the 20.1M shares outstanding, the fair value per share would decrease to just 67.5M EUR while the LTV ratio would remain comfortably below 40%.

The expectations for 2024 and 2025

Montea also provides pretty straightforward targets for the next two years. The REIT anticipates an average inflation rate of 4.1% this year, which will boost its rental income. Additionally, it plans to invest 260M EUR in new assets and this should help to push the EPRA earnings to 4.55 EUR per share. This represents an increase of approximately 2% based on the 2023 normalized EPRA earnings.

And the REIT plans to continue to grow as it expects to add an additional 10 cents per share in earnings in 2025 based on a 2.1% inflation rate and a 200M EUR investment program.

This should result in an anticipated dividend of 3.60 EUR per share in 2024 (which is an increase compared to the 3.38 EUR per share in normal dividends declared over FY 2023). Although there has been no formal dividend projection for 2025, I expect a 0.10 EUR earnings increase to result in a 0.05 EUR dividend increase as well.

The earnings guidance includes the impact of increasing interest rates, although Montea will only gradually see its cost of debt increase. It’s inevitable, but manageable. In 2023, the average cost of debt was approximately 2.3% which already was a substantial increase from the 1.9% it paid in 2022. The vast majority of the debt (in excess of 80%) is fixed rate debt, and almost the entire amount of variable rate debt has been hedged. This means the cost of debt will increase when existing loans have to be refinanced.

And the cost of debt will only increase pretty slowly. As you can see below, Montea has played the interest rate game very well, and the majority of its financial debt consists of fixed rate bonds. And rather than issuing short-term bonds, Montea chose to issue long-term bonds. As you can see below, only two bonds (for a total of 50M EUR) are maturing before the end of this decade.

The pipeline (shown below) will cost an additional 379M EUR to be completed, but as Montea has been developing these properties at an anticipated yield on cost of 7%, these investments will add about 36M EUR in rental income on an annual basis.

Depending on Montea’s plans, the company may not require any additional equity to complete the 379M EUR in investments during the next two years as the combination of retained earnings, existing cash and access to additional debt should be sufficient. That being said, Montea has a history of being cautious and conservative, so we can’t rule out another equity raise.

Investment thesis

I haven’t had a closer look at Montea before, but my conclusion is pretty similar to my parting thoughts after analyzing WDP: The stock is definitely more attractive than I thought. Thanks to its excellent decision to issue long-term fixed rate debt, Montea will be pretty shielded from interest rate increases as the interest expenses on an annual basis will likely increase slower than the rental income will increase, and that’s a good combination.

It also explains why Montea expects its earnings to continue to increase in 2024 and 2025. And as the majority of the projects that are currently being developed will only be ready in 2025, I expect the REIT’s earnings to continue to increase into 2026. Using the dividend guidance of 3.60 EUR per share for this year (subject to the 30% Belgian dividend withholding tax), the dividend yield of 4.6% is not spectacular but should be safe given the payout ratio of just 80% of the EPRA earnings. I currently have no position in Montea, but would for sure be interested in a long position on weakness.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.