(Debtwire) Adler Group disposals salvage liquidity but greater Consus concentration points to rising interest burden

Adler Group disposals salvage liquidity but greater Consus concentration points to rising interest burden

01 December 2021 | 18:45 GMT

Adler Group’s announced disposals will help salvage liquidity and enable it to tackle near-term debt maturities. But the German real estate investment company's 3Q21 earnings release was a disappointment, given a rising loan-to-value, delayed collection on receivables, and liquidity dwindling. Completing disposals will provide respite but also make the group more construction-focused, meaning its medium-term interest costs will likely rise, according to three buysiders and an analyst.

The company released 3Q21 results on Tuesday (30 November) and held an earnings call to discuss the results though it did not allow any time for investor questions after its 20-minute management presentation, as reported.

The company will host another investor call to discuss its two recently completed disposals at 2pm UKT tomorrow (2 December).

The investor call tomorrow will include a question-and-answer session with a previous question-and-answer session not possible on the 3Q21 earnings call due to the closing of the two disposals yesterday (30 November), a company spokesperson noted.

The 3Q21 results included some operational weaknesses. The company's loan-to-value increased to 57% in 3Q21 from 54.7% in 2Q21. This was a large miss given the company had guided at its 2Q21 earnings that it had expected to reduce the ratio to below 50% going forward, as reported.

Adler Group was also again slow on converting its collection of receivables into cash, a trait that has caused frustration for investors previously. Adler Group’s loan-to-value of 57% included a deduction of EUR 563m of selected financial assets that meant its net financial liabilities were EUR 7.443bn. Selected financial assets included netted financial liabilities of EUR 28m which were reduced to a reversal of its Gerresheim transaction, EUR 267m trade receivables yet to be collected from the sale of real estate investments, and EUR 268m of other financial assets.

Liquidity was thin with the company reporting EUR 396m of cash on balance sheet, though this was boosted by a EUR 300m draw of its revolving credit facility.

“I’m sceptical as they burnt a lot of cash and didn’t collect on receivables as they had guided on the 1H21 call. In 3Q21 they collected virtually nothing which is negative,” one buysider said. “It was negative for me and they drew down the RCF to have liquidity to address upcoming maturities.”

The 3Q21 operations were good but the communication was a disaster with no ability to ask questions, one analyst noted. “We have questions on receivables, construction projects and the Viceroy allegations,” he said. “There are still uncertainties.”

The group has taken steps to address its thin liquidity position by announcing the completion of two disposals since the results release, with a third to potentially follow.

One is a disposal of around 15,500 units to German property company LEG Immobilien SE on a real estate value of EUR 1.4bn generating EUR 800m in net cash proceeds. Completion was announced today (1 December).

Adler Group also this morning (1 December) announced it had secured an upfront payment of EUR 82.5m for the sale of a 6.8% stake in Brack Capital Properties to LEG.

A third transaction is a further disposal of EUR 1bn for around 14,300 units signed with an alternative asset management firm that will lead to a liquidity inflow of around EUR 600m after repayment of EUR 355m of secured loans. A deal for this transaction is expected in 1Q22, according to the company's 3Q21 investor presentation.

Disposals should be executed though LEG Immobilien had a 38% loan-to-value at 3Q21 versus its FY21 loan-to-value guidance of a maximum of 43%, suggesting the company does not have huge headroom for acquisitions and could be incentivized to delay any transaction with its call option on the 15,500 units able to be exercized as late as 30 September 2022.

“We are surprised at the severity of the fall in prices yesterday, but today the market no longer cares, because Adler are raising another net EUR 850m, which for better or worse affords them silence,” independent special situations firm Sarria said.

The stake sale announced after the call was not good news, according to an analyst. "They will only receive a small amount of initial cash and then collect the full cash proceeds later, so we still have to wait and it is hypothetical."

The company on its earnings call yesterday (30 November) had targeted reaching a 45%-50% loan-to-value by FY22 with support from its disposals (see chart below from investor presentation).

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The disposals should buy time and allow Adler Group to tackle upcoming debt maturities in 2021 and 2022. Upcoming bond maturities include a EUR 170m Adler Real Estate 1.5% senior unsecured 2021 bond maturing on 6 December that is indicated at 99.625-mid on Markit.

Management noted in the investor presentation that upcoming maturities are well covered with cash on hand, disposal proceeds and liquidity facilities.

The disposals also mean that Adler Group will have a greater focus on risky construction projects given its Consus operations will be a larger proportion of the group following the disposal of its other units.

“Adler are marrying the pretty daughter first to generate liquidity for the treatment of the sickly daughter,” Sarria said. “They are selling good, fungible assets, which concentrates stakeholders on the riskier development book.”

With increased construction exposure and trading levels on Adler Group longer-dated bonds in secondary yielding towards 5%, Adler Group will likely have to refinance existing debt at higher coupons, which could erode its free cashflow generation potential. Adler Group’s cost of debt at 3Q21 was just 2.1%.

Adler Group already burnt cash in 3Q21. For 3Q21, it had a EUR 71.3m quarterly adjusted EBITDA but faced EUR 82.8m capex, EUR 46.5m net cash interest, EUR 13.1m net taxes paid, a EUR 54m dividend and EUR 18m acquisition of non-controlling interest, according to data from Debtwire's sister service CreditRubric, which meant it had quarterly negative EUR 71.1m free cashflow ahead of working capital swings, dividends and non-controlling interest payments.

“The company will reinforce liquidity for 2022 and 2023 with disposals but they need to follow up with cash generation for the group,” the analyst said. “It is insufficient to fund the extension of debt and they still have to prove they can generate EBITDA. It is difficult.”

Without a strategic buyer or “big brother” that can help them, they are in trouble, according to a second buysider. “I’d not buy the December 2021s at 99.625-mid even if it looks a gift. What happens if LEG steps away as the assets are not in expected shape or the book values are wrong,” he said.

Steady-Estate outcome

Adler Group’s BB- rated EUR 800m 2.25% senior unsecured 2029s are around a point down following the results at 84-mid yielding 4.9% on Markit, after falling a few points after the earnings call before paring losses on the latest disposal announcements today.

Adler Group shares were down around 20% yesterday at EUR 8.8 per share following the earnings call, before recovering losses on the latest disposals news to be slightly up versus Monday (29 November) and indicated today at EUR 11.54 per share leaving a market capitalisation of EUR 1.35bn.

“They announced so many transactions but the longer-dated bonds are still in the 80s. [Peer] Vonovia could buy them on the cheap,” the second buysider said. “There is the closing of the transaction with LEG and the 1Q22 potential disposal will help liquidity but they have short-dated maturities.”

“Consus previously paid a coupon of 9.625% while Adler average interest costs are now around 2%. With a near even split of Consus and Adler exposure this suggests a new interest cost of around 6% given business risk,” the first buysider said. “They will then not generate enough cash to pay interest.”

The company’s EUR 800m 2.25% senior unsecured 2029s hit lows of 76-mid on 7 October after short-seller Viceroy Research released its report the prior day, exacerbating ongoing corporate governance concerns.

Adler Group has since taken steps to mitigate the concerns, by planning an independent audit and announcing some disposals that had been well received. However, red flags still surround the name, as reported.

The company appointed Bernd Schade as chief development officer as of 1 November, while KPMG’s specialised forensic accounting division has been appointed to review historical transactions. KPMG will notify Adler Group of any material findings and will provide a full report to Adler Group on completion of its review.

Corporate governance and German tax legislation changes could potentially expose Adler Group to downside risks, as Debtwire reported in August. It boasts one of the European high yield markets’ largest capital structures following the amalgamation of Consus, Adler Real Estate and ADO Properties into a single entity.

Please click HERE for a Debtwire 3Q21 analyst report.

by Adam Samoon