Location, location, location. Location is the most decisive factor when it comes to aluing real estate. We all know this – but if anyone understands the full significance, it is Jeudan. Jeudan is Denmark’s largest listed real estate company with properties in central Copenhagen worth more than 24 billion Danish kroner. There are hidden values amounting to billions of kroner in the company due to the applied management estimates.

In 2018, Jeudan had a highly limited choice of attractively valued properties, and the property portfolio was only expanded by just under 100 million Danish kroner. Management has three billion kroner waiting for new real estate purchases. We appreciate management’s ice-cold discipline.

However, we do expect that Jeudan will be able to strike at a moment’s notice to create value when the property market in central Copenhagen is once again in a more attractive price range than it is at present. The reason behind this expectation is the company’s extensive knowledge and effective processes. The company’s CEO, Per Hallgren, has been at the helm at Jeudan for more than 25 years, and he is supported by a highly competent management and, not least, a highly competent board. In previous issues of Our Companies, we have talked about William Demant’s former CEO, Niels Jacobsen, as a skilled strategist and number cruncher. We are therefore pleased to see that Niels Jacobsen assumed the role of Chairman of the Board at Jeudan at the annual general meeting in 2018, after a number of years as deputy chairman. At the 2018 annual general meeting, Claus Gregersen, the CEO of majority shareholder Chr. Augustinus Fabrikker, was elected as deputy chairman.

Claus Gregersen brings with him several years of experience from the investment banks Alfred Berg and Carnegie. When real estate is purchased by the billions, you definitely need to be a numbers guy.

Niels Jacobsen’s many years on the board has resulted in him and Per Hallgren having a strong relationship, and both understand how to identify growth-driving initiatives. We see this as a clear competitive advantage once the real estate market turns and properties are no longer sold based on as low an internal rate of return as today. Jeudan has a disciplined ‘wait and see’ approach when market prices do not reflect their strict investment requirements – and they act in a quick and agile manner, while still maintaining discipline when there are good buying opportunities. This ability to react is a result of Per Hallgren’s many years of experience and his extremely impressive level of detailed knowledge of potential properties.

The combination of these factors has resulted in Jeudan currently owning real estate worth more than 24 billion kroner, with a focus on the so-called prime properties in central Copenhagen. As mentioned, location is key when it comes to the value of a property – and this applies both to residential and commercial properties. The locations include Amaliegade, Bredgade, Store Kongensgade and Sankt Annæ Plads – and Jeudan is a strong partner when clients are looking for new surroundings, whether out of a desire for more or less space.

Conservative and with a long-term perspective

Jeudan has been listed on the stock exchange since 1991, but its history goes all the way back to 1898. Even though Jeudan is continually on the lookout for new investment opportunities as properties hit the market in the focus area of central Copenhagen, the objective is not to create value by reselling them, as Jeudan is a real estate operator. The objective is to keep the properties and gain recurring revenue from inflation-adjusted rent payments and cash flows.

The strategy and approach are conservative to its core, and over the years this has been appreciated by the stock markets during hard times – while considered undesirable and unnecessary when the real estate market is roaring ahead. As long-term co-owners, we value exactly this combination of a long-term and conservative management, with the will and ability to act quickly in response to the right opportunities.

As mentioned, management is supported by a strong board of directors that includes representatives from the major shareholders, William Demant Invest and Chr. Augustinus Fabrikker, who together own 83 percent of the capital. The owners have previously demonstrated an interest in adding capital if Jeudan finds attractive opportunities that cannot be financed by its current balance sheet. The last time this happened was in 2013. Currently, Jeudan have plenty of “ammunition” to purchase real estate, with dry powder of up to four billion kroner.

Management’s conservative approach is not merely seen in how it looks for real estate to buy. It is also evident in the company’s financing, where more than 75 percent of debt is financed by fixed rate loans with 10-year maturities. Due to the falling interest rates in recent years, this has resulted in significant negative value adjustments amounting to more than two billion kroner from 2011 to 2018 – however, these are balance sheet adjustments that will not impact cash flows in the short term. It did have a negative impact on the book value of the equity in 2015 and 2016. In 2017 and 2018, Jeudan again paid dividends of 12 kroner per share, equivalent to a direct dividend of 1.5 percent, after the equity was rebuild in 2015 and 2016 following the negative rate adjustments.

Jeudan’s policy is to have an equity-to-asset ratio of 25 percent. The board of directors thus considers to pay dividends if this proportion is higher and if there are no current options for the capital to be used to expand the business.

Full occupancy and conservative calculations

The valuation of the real estate is currently being determined based on a very conservative internal rate of return of 4.5 percent. By comparison, in 2017 and 2018 several real estate properties in Copenhagen were sold with rates of return as low as less than three percent. If Jeudan’s real estate portfolio was valued based on a return of 3.5 to 4 percent – and thus closer to the market’s current property valuations – this would lead to valuations increasing by between 3.5 and 7 billion kroner. This is a significant potential for write-ups, considering that Jeudan’s book-value-of-equity currently amounts to 6.5 billion kroner, and the market value of the company is slightly less than 10 billion kroner.

During the last few years, Jeudan has made significant investments in strengthening its sales organisation. This is not, however, due to it being difficult finding tenants – after all, the occupancy rate is at 97 percent which for all practical purposes is full occupancy as there will be brief vacancy periods as people move in and out of the offices. Rather, the basic challenge that Jeudan faces is to manage the ongoing dialogue about future needs and requirements, as the tenants’ needs naturally evolve. This could be either a need for more space or, in some cases, less space. Occupancy is high even for Copenhagen standards, where the average is around 95 percent.

In 2018, operating income grew by almost eight percent. This is the same pace as seen over the last five years. The rental contracts have the advantage that the price is adjusted by the consumer-price index when they are renewed. As a result, the company’s cash flows are inflation protected. This may not be appropriately appreciated during periods of benign inflation, but it is extremely valuable if inflation should reach higher levels. Jeudan’s revenue growth is not just from increased rents, but also from the ongoing acquisitions of new properties and expansions. We thus believe that Jeudan will be able to maintain these growth rates over long periods of time.

Disciplined approach with strict requirements

The requirements for new investments are clear. Real estate acquisitions must increase earnings per share and the valuation must be at an internal rate of return of at least four percent. These are strict requirements, and it may result in some otherwise attractive real estate properties being sold to other parties, as Jeudan is not willing to invest in anything that cannot deliver the required internal rate of return.

Management aims to create long-term shareholder value. Among other things, this is done by setting a target for operating profit to result in a return on equity of more than eight percent not including value adjustments – something which the company has managed to exceed in the past seven years, where the return has been over ten percent. Per Hallgren runs Jeudan as an asset manager – he is looking for the right investments with the right risk profiles, and he will pursue these as long as the price and the potential returns are suitable. Investments need to be nurtured in just the right way. As co-owners, we see the wisdom of that, and for this reason we remain happy co-owners.