• Dimitri Konstantinidis

Greek REITs

Athens Stock Exchange lists 5 Real Estate Investment Companies (REICs or ΑΕΕΑΠ in Greek). While, REICs have been in existence for a long-time in the US and in the UK, they are relatively new in Greece. Greek law requires REICs to pay at least 50% of their net profits in dividends, which is a lower requirement than in the US, where REICs must distribute as dividends to their shareholders at least 90 percent of their taxable income. In Greece, similar to the US and the UK, REICs have various tax benefits and are exempt from a number of taxes, such as property transaction tax (3%), capital gains tax, dividends tax etc. Nevertheless, they are still liable to pay ENFIA (property holding tax) that everybody that owns property has to pay as well as they are taxed on their total investable assets (REIC tax). The ENFIA tax depends on the value of each property based on an "objective value", while the REIC tax was increased in 2016 from 0.105% to 0.75% by SYRIZA government. This had a dramatic effect at the bottom line of all REICs, since they are taxed at the highest level on record. 

The first big bet today for investing in REICs in Greece is with the change of Government and the New Democracy party coming to power. Mr. Kyriakos Mitsotakis, the leader of New Democracy has a long track record of pro-business and free market policies while he was a minister with the government of Antonis Samaras, before SYRIZA came to power. Mr. Mitsotakis has promised to cut ENFIA tax by 30%, as well as to reduce taxes across the full spectrum. All REICs in Greece will see an instant benefit from a reduction of their taxation back to normal levels. 

The second big bet is with the rise of house prices in Greece. At the moment house prices have hit the bottom of the barrel and for the first time since the financial crisis begun, there has been the first, albeit small, increase of house prices during the last quarter of 2017. Considering that properties in Greece have lost 40-50% of their value, while properties abroad (and other assets) have even surpassed their 2008 peak, Greece has a lot of room to catch-up. 

Which of the 5 REICs would be good to invest in? My personal view is that if a company has not only managed to survive but also generate profits during the financial crisis and the overtaxed period of SYRIZA, it will thrive when the government changes and the economy recovers. 

Market Cap (in millions)

NBG Pangea 1,230.00

Grivalia           886.03

Trastor            67.78

Interco            57.50

Briq                22.41

At first let's have a look at the p/Bv ratio at the graph below. Considering that for the US the average p/Bv ratio across all REICs was 1.08, all Greek REICs look undervalued. 

However, looking at the price / funds from operations (FFO), then only Interco looks undervalued, while the rest look overvalued. However, Grivalia also had an excellent year in net profits, which is reflected in the low p/e. Trastor was the only one that made losses and thus p/e is negative.

Price-to-funds from operations (P/FFO) is the REIT equivalent of the price-to-earnings (P/E) ratio—essentially measuring a REIT’s valuation in terms of its recurring income and any appreciation in property values. The P/FFO ratio roughly indicates the market’s expectations for REIT cash flow growth.

FFO = GAAP net income + property sales gains/losses + GAAP property depreciation and amortisation. 

Values for NBG Pangea and Interco are estimates for 2017 based on mid-year results, while Trastor, Briq and Grivalia are from reported figures. 

Interco has the highest FFO/share out of all, however this didn't translate to the highest net earnings for 2017, because of the big exposure to the US dollar that the company has. The majority of its cash reserves are in USD. The loss from foreign exchange effects was approximately 2 million Euros. However, this is a one-off event and the company is slowly investing its cash to property. Looking back to 2013 the company has generally benefited from the decision to hold its reserves in USD and now the dollar has again started to rise.

In terms of dividend payments, only 3 out of 5 REITs paid dividends for 2016 or 2017. (NBG Pangea and Interco are for 2016 and Grivalia for 2017). (*Since this article was written Briq has also paid a dividend of 0.035 euros, 1.9% yield)

While, high returns are important for investors, the question is how sustainable they are. One good metric to establish sustainability for shareholder returns is the gearing ratio. 

Briq, the newest of the REICs has no debt, while Interco has the highest level of debt, however NBG Pangea is not very far off. Having said that, with similar debt ratios Interco is outperforming NBG Pangea. 

To put things in a better perspective, if we were to remove all capital based on debt, then p/FFO would would like this for all the REICs:

Now, BriQ without any debt is outperforming all other REICs with Interco coming close second. Briq however is a newer company (listed in the Athens stock exchange in 2017) and their portfolio is of higher risk due to the exposure to a single major occupant.

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