Quicky #10 on Aareal Bank

This is part five of my mini series on banks and part #10 within my series of Quickies on new companies.

This is not investment advice. Please read the disclaimer.
I might currently or at a later point in time own shares (economic interest) in mentioned or related companies.

Aareal Bank AG (Aareal or the (parent) company) with its € 880m market cap is included in the mid-cap MDAX index. ‘Aareal Bank Group is a leading international provider of smart financing, software products, digital solutions and payment transaction applications in the property sector and related industries.’ (profile) You may also watch thier company video (with a positive spin)

Its stock lost more than 50% due to the pandemic. It traded at €30 in February, crashed to €12.70 in March and recently lost some of its price recovery due to second and third waves. It currently trades at ~ €15. Aareal’s stock is listed on the Frankfurt stock exchange (ARL GY, ISIN/WKN DE0005408116). Based on its FY 2019 pre-pandemic results, it trades at a depressed P/E of 6x. Currently, its dividends are canceled (link). Aareal used to pay annual dividends of about € 2, what would make for a high dividend yield if reinstate.

This is another part of my series of Quickies on new companies.

The companies groups its services into three segments: structured property financing; consulting/services; and Aareon, catches special attention for its IT consultancy and software services. Its flyer provides a good overview. The company has a long corporate history shaped by market trends and crisis.

Property financing

Aareal is financing large commercial property projects, mostly being office buildings, hotels, shopping centres, logistics and residential property, as well as student apartments. The first three catagories could be severly adversely affected during the pandemic and or the new normal if employees make more use of work-from-home or wfh options, use even more Airbnb and online-shopping just everything. Aareal was de-risiking its operations for some time now, so that non-performing loan or NPL portfolio is dramatically smaller than a year ago.

Its hotel portfolio, as of Q2 2020, is mostly (90%) is with large international hotel brands, reducing credit risk. I think their assessment from August is not valid anymore with covid cases spiking everywhere, especially in Europe

The leisure segment will recover first, which has already been witnessed by strong bookings in drive-to holiday and city locations

Q2 2020, presentation

Its retail portfolio of € 5.9bn is problematic in the sense of a potential risk source as well. More than € 1bn is located in the UK which is also hard hit by the pandemic and could be again negatively affected if the economy dives after Brexit (additional risk factor). Other high retail portfolio shares are the US, De, ES, and IT, most states have strong support programs for tenants in place, mitigating some credit risk.

Consulting and service

Corporate banking and deposit-taking services are part of the second segment, specifically catering to German institutional companies within the housing industry. The company acts as a digitalisation partner providing advisory services and product solutions for housing, property management and energy industries.

Aareon

Aareon offers innovative consulting, software and service solutions for the property industry. Its offerings include administration, management and digitalisation products for properties. ‘The digital ecosystem Aareon Smart World links property companies with their customers, staff and business partners, as well as with technical devices in apartments and buildings.’ Aareon shall provide further growth within the banking group, possibly including M&A transactions and taking in extternal capital. It can be seen as the gem asset within Aareal group.

Aareal sold a 30% stake of Aareon to Advent International for an implied valuation of € 1bn, as reported in August. The transaction strengthened the banks capital position through a capital gain of € 180m. The plan is to accelerate growth (internal and external), imporve operational efficiency and make Aareon to a rule-of-40 software company (weird to read about the rule of forty in banks’ statements). Here it becomes clear that Aareon makes up a good chunk of Aareal’s valuation (remember its m cap of 880m) and could realistically become the most important value-creation-driver when executed perfectly. The possibility should be there , since Aareal’s ecosystem provides the perfect connections within the property sesctor.


The group hopes for a small profit in 2020. Mid term, I believe profits could well be depressed by pandemic affected results of its first segment (property financing) with its hotels and retail properties portfolio potentially hard hit. The questions is if Aareon with all its potential is enough to make up for this and turn Aareals stock into a bet worth taking? The stock abviously trades at very depressed levels and could be a bargain if major defaults do not happen! – But I don’t know that. So I pass for now.

I hope you enjoyed my post. What is your take on Aareal?

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