Description

Hypoport operates EUROPACE, Germany’s leading online B2B2C mortgage marketplace, and its subsidiary Dr Klein, which is Germany’s second-largest independent mortgage broker. It also operates a real estate appraisal/valuation platform and is building a B2B2C insurance marketplace.

The main business consists of a marketplace that lets mortgage brokers aggregate quotes across multiple bank offerings to give their end customers the most competitive price. From the banks’ perspective the marketplace adds additional distribution. From the brokers’ perspective the marketplace gives brokers more product, while the end customer benefits by getting a better offer. Aside from aggregating mortgages, Hypoport also helps with the credit check, the approval, covering money laundering regulations, securing the land register and the payment. Hypoport charges a roughly 22bp all-in take rate for this.

As the above figure shows, there is significant further growth runway for Hypoport as they further expand into the cooperative banks and savings banks channels where the platform currently only has 20% and 15% market share but is expanding steadily. As a digital marketplace, Hypoport only has one direct competitor, ING. ING’s marketplace has fallen behind a bit in marketshare and as a bank controlled marketplace, is perceived as less neutral.

This is a good, almost toll-road like business that continues to grow at mid teens annualized growth rates taking market share from offline. Yet the stock is down about -85% from its peak in September 2022. What happened?

1. Due to geopolitical ‘uncertainty’, higher energy prices and mortgage rates rising from 1.3% to 3.3% within a year, German mortgage volumes have started to collapse. It is unclear when they will recover. For Q4, they are running about -40-45% below 2021 levels. 3.3% mortgage rates are still affordable for most households, but due to the sudden jump in financing cost there is an element of sticker shock for now. Once sellers have readjusted their expectations, we should see mortgage market activity resume. On their latest conference call Hypoport indicated that previous declines in mortgage prices have lasted about 4 to 6 quarters. The current slump will have lasted around 2 quarters by year end.

2. Q3 saw a large miss off the back of increased losses in the real estate valuation platform. Hypoports plan was to build nationwide virtual property valuation & appraisal capabilities and then cross sell them to banks when closing on a mortgage. The German regulator BaFin prohibited virtual valuations in Q3 which resulted in a return to traditional on-site visits and led to additional costs of EUR 3m within the Real Estate Platform. By 2023, virtual valuations were said to be allowed again but with a valuation discount of 5% (on each virtual appraisal) for the banks. Therefore, it remains to be seen whether banks will opt for the more expensive on-site visits or a virtual valuation that can be offered at lower prices. The company has guided that the additional spend of 3MM EUR in Q3 will be lower in Q4 and will have normalized by 2023.

The entirety of the rest of the thesis can be expressed in one simple thesis: mean reversion. 

Simple Valuation

There are several ways to look at Hypoport. The simplest one is to assume that this is a similar quality asset to Black Knight that deserves a similar multiple. For most of the past 5 years, Hypoport has traded north of 18x trailing EV/EBITDA and at an average multiple of 23x EV/EBITDA. Similarly, Black Knight has traded between 18-29x EV/EBITDA and at an average of around 22x. Currently, with an EV of 820MM EUR Hypoport trades at around 10-11x 2019, 2020, 2021 and TTM EBITDA (in round numbers). If housing market activity returns back to pre-war levels in 2024, Hypoport EBITDA returns to at least 75MM EUR. A range of 15-23x EBITDA would suggest stock price upside to 160 - 250 EUR/share.

SOTP Valuation 

I. The lending platform: This is Hypoports trophy asset, capable of producing 55MM in EBIT in a more normal environment. Growing ~15% p.a. due to ongoing digital penetration of the mortgage space, a 20x EBIT multiple seems justified, valuing the lending platform between 1.1bn EUR.

II. Private customers: This is the second largest mortgage broker (with physical branches) in Germany and the reason why Hypoport was originally able to get its flywheel as a platform going (it was easier to jump start the platform with captive brokers). This segment produces about 25MM EUR but is more or less ex-growth. At 10x EBIT it would be worth about 250MM EUR. 

III. Real estate platform: The real estate platform is a segment that is just being set up and bundles all activities relating to the marketing, valuation, financing and management of real estate - with the aim of digitizing the associated activities. Growth areas are in particular marketing via the FIO platform and the valuation of real estate via Value AG. 

FIO is the leading software for the marketing of real estate, which in Germany runs to a large extent through the banks (bank-affiliated brokers). FIO has a market share of over 90% in the savings banks but is not being used outside of this sector. It is also heavily undermonetized. 

Value AG is the valuation and appraisal segment. Hypoport has just begun to roll out a OneClick option through which a potential buyer can obtain the bank’s financing commitment with just “one click”. This is possible because Value AG can automatically appraise the property. Based on data provided from the bank Hypoport also has insight into the customers’ bank account, payment behavior etc. By connecting all of these steps Hypoport is able to produce a binding financing commitment automatically. The real estate platform segment is not yet profitable. At 3x sales it is worth 200MM EUR. In this market that doesn’t value unprofitable business highly this seems like a conservative valuation.

IV. The insurance platform: The insurance platform takes a B2B approach and bundles the technology offered for advice, rate comparison and the administration of insurance policies. JDC (its closest, but slightly different) competitor is currently valued at 1.5x sales. They seem to be executing slightly better than Hypoport so we will value this segment at a discount of only 1x sales or around 50MM EUR. As a sidenote, the company has guided for this segment to be breakeven in 2023.

Adding the four platforms we get:

I. The lending platform: 1.1bn EUR

+II. Private customers: 250MM EUR

+III. Real estate platform: 200MM EUR

+ IV. The insurance platform: 50MM EUR

- V. Net Debt: -75MM EUR

= 1,525bn EUR or 235 EUR/share

There is additional upside if the real estate and insurance platforms execute well and begin to show operating leverage in 2023/2024. Overall, the most important thing to get comfortable with here is the toll road like nature of the lending platform / where most of the value resides.

Ronald Slabke, the founder and owner operator of Hypoport still owns about 34.5% of the company. 

They just guided for a 40-60MM cost reduction. I assume some of these will come back on as volumes renormalize but it’s pretty drastic. I don’t want to put a multiple on it given the uncertainty but there is some value in this.

Finally they just raised 50mm EUR to “pursue further growth opportunities” while the market is weak and take share. The timing was awful (raise money at the top not at the bottom) but the execution was rock solid with the stock only down -3%. Final note, this idea could take a year or two to play out as homebuyers get used to a higher for longer environment and higher mortgage rates.

Risks

An extended period of lower mortgage volumes could keep marketplace volumes lower for a historically unprecedented period of time

Even higher interest rates could lead to a second dip in mortgage volumes

Hypoport may get distracted by its other bets and continuously dilute shareholders through further raises. I find this unlikely though as the CEO has proven to be a good steward of capital and run the company for both profitability and growth for decades

Do your own due diligence, not investment advice

Catalyst

Rebound in German mortgage volume

End of rate hikes