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BlackWall (ASX:BWF) – A High-Growth Property Play

Article written by Pitt Street Research. For the full report click here

Attractive yields in property management

BlackWall Limited (ASX:BWF) is a Sydney-based property company with a long track record in development and funds management. The group is also growing a flexible office brand; WOTSO Workspace. BWF typically works with urban renewal or distressed property generating recurring fees from development and funds management. These assets are held in SPV investment structures or the group’s total return A-REIT (the BlackWall Property Trust ASX:BWR).

Capturing the growth in Coworking office space

BWF operates distinct but complementary businesses. All its operating subsidiaries are mainly fee-earning businesses and are highly scalable. Through WOTSO, BWF is one of the leading operators of shared workspace networks across Australia. Considering the economic strength across Australia and the increasing number of businesses opting for shared office spaces, we believe BWF has substantial growth opportunities. Further, BWF’s property management business attracts retail investors through its unique PIPES structures in a business that is traditionally inclined towards institutional capital.

Valuation range of A$2.00–2.41 per share

We value BWF at A$2.00 per share in our base case and A$2.41 per share in an optimistic scenario. Our valuation is based on a blend of DCF and SOTP-based relative valuation, with conservative assumptions regarding the commercial expansion of the business. Our valuation is highly sensitive to volume growth in terms of number of available desks across shared office spaces and BWF’s real estate portfolio expansion.

Introducing BlackWall Limited (ASX:BWF)

BlackWall Limited (BWF), is a Sydney-based and ASX-listed, vertically integrated property fund manager. The firm manages, develops and finances income-generating commercial real estate on behalf of retail, High Net Worth, and institutional investors. It operates three separate, but complementary, segments. BlackWall Asset Management is a development and management business that acquires commercial real estate for incremental rentals. Under WOTSO WorkSpace, the company offers office space on short-term leases, shared workspaces and event venues. It provides space for projects, functions, and meetings on hire. The Investment segment (roughly A$30m) holds a strategic stake (A$15m) in BlackWall Property Trust (ASX:BWR) the group’s total return REIT. The balance of the segment is actively invested in special positions to secure opportunities for either BlackWall Asset Management or WOTSO.

Current business operations provide flexibility in Australia’s sophisticated real estate market

In Australia, investment in real estate has been dominated by institutional investment across high-value REITS. BWF brings in distinct investment opportunities for retail investors. With its 20+ years of experience in the market, BWF buys distressed assets for the long term, and allows retail investors to own part of the portfolio. All its segments generate recurring revenue and are ‘asset light’, hence the model is scalable.

PIPES: Complicated but high-yielding investment structure

Property Income Participating Equity Security (PIPES) is one of BWF’s distinctive propositions. It is a unique funding structure effectively bringing in retail participation in real estate investment. Through this arrangement, BWF introduces capital in the property market, without selling it and also simultaneously keeping the institutional gearing minimal. This mezzanine or preferred equity structure is a method to use funds from passive (retail) investors in the real estate market and mitigate risk by mixing it with funds through more aggressive investors, thereby keeping the cost low and liquidity adequate. This allows retail capital to invest in and cash out of unlisted real estate structures without necessitating the sale of the underlying property.

Coworking space — a growing investment opportunity

Through WOTSO, BWF provides coworking spaces to growing numbers of start-ups and small and medium-sized enterprises (SMEs). The flexible useragnostic option allows the tenant to simply pay rent in a short term lease. BWF follows a hub-and-spoke model and has increased its network presence significantly over the past 3–4 years. With the Australian economy booming with start-ups, we believe shared office space provides an ideal investment opportunity for both retail and institutional investors. WOTSO’s business proposition is to provide a commercial leasing transaction that is more suited to the needs of small business than conventional long term leases.

Business still highly undervalued

BWF is currently valued at A$50.4m, compared to our base valuation of A$123m. We think that the main reasons for this apparent undervaluation are incomplete understanding on the part of investors of the significant potential of coworking spaces in the Australian market, fear of rental yields stagnating, unfamiliarity with BWF’s expansion outside the Australian market, concerns of a crash in the commercial property market, and not fully acknowledging the potential of rental investor participation through the PIPES investment funding structure. We look for a re-rating of BWF based on the company’s increased coworking market share with more coworking desks, higher yields from maturing properties under WOTSO, declining vacancy rates and attractive opportunities to buy distressed prime assets that have attractive leasing and revenue profiles.

Top reasons to look at BlackWall Limited

1) BWF is one of the first companies that has been able to attract retail investors to real estate investment. Through large REITS funded by institutional capital, the management challenged the traditional unidirectional process of property investment.

2) BWF has an experienced team that has been at the forefront of property operational management services for the past 10–15 years. Together, management has restructured some distressed assets into highly rewarding real estate, consistently generating superior yields for investors.

3) PIPES is a unique structure in real estate funding, and has been able to introduce a significant number of retail investors into an otherwise niche investment option. PIPES fund provides investors with priority distribution, capital protection, and superior yields.

4) WOTSO is a revolutionary way of providing shared working spaces to small enterprises. It offers a plug-and-play process where tenants have to simply pay the rent by desk, thus removing the burden of long-term commitments required by traditional office leasing. This distinct feature is supported by the flexibility of short-term contracts, which attracts many start-ups, freelancers, and small organizations.

5) Considering WOTSO charges ~50% premium for its flexible system, the average EBITDA margin for a mature WOTSO property is 20–35%. Further, both WOTSO and the asset management business deploy multiple revenue and fees earning structures, providing revenue diversity.

6) Counter cyclical considerations: Management expect WOTSO’s ’commitment light‘ model to be more attractive to potential users in times of economic distress, that is, periods in which office users are less inclined to enter into long term commitments. Further, historically BlackWall Asset Management’s activity has increased in times of flat or distress property markets—AuM doubled in 2009 through the acquisition of a number of distressed subscale funds management businesses.

7) All of BWF’s operating businesses generate recurring revenues and are scalable. As they are also asset-light, its subsidiaries do not need extensive capital infusions for expansion. Having been in the business for >20 years, the company has developed well-defined philosophies of property investment. It is not looking for deeper penetration in the real estate market but rather aims to build an optimal portfolio that is rewarding over the long term. These well-formulated working principles grant BWF a unique position in an otherwise undifferentiated market.

8) We believe BWF has gained the trust and respect of retail investors. The PIPES funding structure has provided retail investors with the opportunity to invest in quality real estate and earn higher yields compared to other property investments. Similarly, WOTSO’s relationship with small enterprises ensures that tenants stay with it long term.

9) The company manages a portfolio of quality, highly rewarding assets, such as 55 Pyrmont Road, Silver at the Exchange and Canberra North. These once distressed assets have all been turned around as a result of better operational management and establishing WOTSO in parts of the building and have now become valuable real estate assets.

10) WOTSO has expanded beyond Australia by partnering with local retail players in Singapore and Malaysia. This is expected to extend their coworking space network and utilize reach to hedge current operations.

11) We believe BWF is currently undervalued. We value the company at A$2.00 per share in our base case scenario, using a blended valuation approach of DCF and relative valuation. We have applied conservative estimates on the increase in coworking desks offered by WOTSO, average price on WOTSO desks, fees earned from asset management, and contribution from the overseas market.

Valuation

To derive BWF’s long-term value, we have used a weighted average valuation methodology, assigning equal weight to a peer-group-based sum-of-the-parts (SOTP) valuation and discounted cash flow (DCF) calculation.

Currently, we have considered ASX-listed and HK-listed peers for business valuation (Figure 31). BWF has been benchmarked against bigger ASX-listed competitors – APN Group (ASX: APD), and Pendal Group Ltd (ASX: PDL) and HK-listed ZACD Group Ltd (8313.HK) and Shanghai Realway Capital Assets Management Co Ltd (1835.HK).

The company’s peer group is valued at an average EV/EBITDA multiple of 7.9x for FY2020E. We have applied the same methodology to evaluate the WOTSO and Asset Management businesses, while Investments has been valued at 1.0x book value, resulting in an implied EV of A$101.2m for BWF or an equity value of A$1.65 per share (Figure 32).

Considering that BWF is still a growing business, looking to further expand its WOTSO franchise network, entering new geographies, and leveraging portfolio realignment for future investment, we think a discount to the sector average multiples should be applied. Additionally, as most competitors are larger, more mature, and well-established, we believe a discount is justified from that perspective as well. We have applied a discount of 20% to the peer group average. The effective EV/EBITDA multiple applied to WOTSO and Asset Management business is 6.3x.

DCF calculation suggests substantial long-term upside

Our DCF model yields a 10.8% WACC for BWF (risk-free rate of 2.7%, a beta of 1.1, and an equity risk premium of 7.7%). Applying this discount rate to our free cash flow projections through FY2028 and using a terminal growth rate of 2%, BWF yields a value of A$2.36 per share (Figure 33).

Execution risk is associated with BWF’s expansion into the Singaporean and Malaysian markets, and WOTSO’s underlying industry is reaching excess supply. We believe that there will be room for higher growth in NOPAT in case WOTSO’s market share expands further, the average rent rate per desk improves and the new properties start yielding higher returns, even as the commercial activity continues to boom in Australia. This would translate into higher values over time.

Fair value of A$2.00 per share

Our fair value of A$2.00 per share has been derived from a weighted average valuation methodology, which assigns equal weight to our SOTP-based relative valuation and our DCF calculation (Figure 34). This implies a substantial upside from the current share price.

Re-rating BlackWall Limited

BWF’s stock is currently trading below our base case valuation. We have outlined a number of factors that may result in a rerating of BWF going forward:

– Asset-light model, scalable operating structure of all business subsidiaries, a unique funding structure attracting retail investors; growth opportunity offered by expansion in the commercial real estate market.
– Aggressive evolution into the niche but exponentially growing shared working office space through flexible but highly profitable leasing arrangements.
– Successful entry into Singaporean and Malaysian coworking office space.

Further, we believe BWF has an experienced management team , capable of taking the company through to the next growth stage. Stuart Brown, BWF’s CEO, has been managing property structures and funding vehicles for over 15 years. Tim Brown, CFO, has been instrumental in the financial management of the group for the past 10 years. COO Jessie Glew has substantial operational experience in handling property management matters.

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Pitt Street Research work is commissioned by the listed companies it covers, and Pitt Street Research has received or will receive payment for the preparation of such work. Please refer to the bottom of the research notes as published on Pitt Street Research’s web site for risks related to the companies being covered, as well our General Advice Warning, disclaimer and full disclosures. Also, please be aware that the investment opinion in this report is current as at the date of publication but that the circumstances of the company may change over time, which may in turn affect our investment opinion.



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