Gagfah Profit Declines as Company Sells Homes to Pay Debt

Gagfah SA (GFJ), the second-biggest owner of German homes, said first-half profit fell 4 percent after rental income declined as the company sold assets to repay debt.

Funds from operations excluding property sales, a measure of a real estate company’s ability to generate cash, slid to 47.7 million euros ($63 million) from 49.8 million euros a year earlier, the Luxembourg-based company said in a statement today. Gagfah repeated its FFO forecast for 2013 and said growth for next year will be higher than it previously expected.

Gagfah has focused on raising money to refinance debt and overhauling its strategy in the past 12 months. In July, Fortress Investment Group LLC (FIG) cut its stake to less than 50 percent as part of a transaction through which Gagfah also sold shares.

The debt refinancing and a plan to improve Gagfah’s properties show the company is “well on track to become a more conventional residential company,” Andre Remke, an analyst at Baader Bank with a buy rating on the stock, said in a research note today.

Gagfah was up 8.6 percent at 9.6 euros at the 5:30 p.m. close of trading in Frankfurt, the biggest gain since March 2012. The shares have risen 8.3 percent this year, giving the company a market value of 2.1 billion euros.

Raised Forecast

FFO per share will increase by 5 percent to 10 percent this year and by at least 25 percent next year, the company said. Gagfah previously forecast an increase of as much as 12.5 percent for 2014.

Chief Executive Officer Thomas Zinnoecker, who joined the company in April, said the following month that he plans to spend more on maintaining and modernizing apartments to increase their value.

“With both the successful recent capital increase and the accomplished refinancing projects, Gagfah has significantly enhanced its financial headroom going forward,” the company said. “A significant amount of the savings from lower interest rates will be invested in the portfolio to drive asset value growth and operating performance.”

Fewer Apartments

Rental income declined to 277.5 million euros from 283.6 million euros a year earlier. Net income dropped to 900,000 euros from 25.3 million euros on higher refinancing costs. Gagfah owns about 144,000 apartments in German cities including Berlin and Dresden, 4,500 fewer than a year ago.

Gagfah has almost finished a review to determine which apartments should be sold and which should be modernized, the company said.

“We have identified great investment opportunities in fast-growing cities like Berlin, Hamburg and Dresden,” Zinnoecker said in the statement. “With our new strategy, which focuses on operational improvements in our portfolio, we believe there is a significant upside.”

Gagfah had more than 3.4 billion euros of debt coming due this year, most of which it refinanced by getting a loan from Bank of America Corp. and by issuing a commercial mortgage-backed security.

Gagfah, which hasn’t paid a dividend since 2011, according to data compiled by Bloomberg, expects to resume payments with a dividend for 2014, Zinnoecker said on a conference call with analysts and reporters.

Over the coming years, Gagfah will target a dividend yield of between 3 percent and 4 percent, although the 2014 dividend will likely be lower as the company focuses on upgrading its portfolio.

“We wouldn’t pay out money that we need for capital expenditure,” he said.

To contact the reporter on this story: Dalia Fahmy in Berlin at dfahmy1@bloomberg.net

To contact the editor responsible for this story: Andrew Blackman at ablackman@bloomberg.net

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