(Debtwire) Vivion loan-to-value remains low as cash balance set to climb on bond tap, latest disposals and financial asset conversion

17 September 2021 | 14:58 BST

Vivion had a modest 39% loan-to-value (LTV) at 1H21 while its liquidity will be boosted following a recent EUR 340m tap issuance in July. But the Germany-based real estate investment company’s liquidity buffer still includes large financial assets not yet converted to cash. This leaves its BB+ rated bonds looking tight at two-handle yields, according to three analysts, while two sources familiar with the deal remain constructive.

The company reports semi-annual results and released 1H21 numbers on Monday (13 September). It will host a pre-recorded webcast on Monday (20 September) though it does usually not take direct investor questions and answers.

The 1H21 numbers at first glance looked good with a 39% net LTV ratio versus 41.5% back at FY20.

However, the ratio was still relatively high when one considers the company disposed of EUR 976m of assets in its German portfolio in 1H21 including its Furst Berlin asset complex, which was sold to Aggregate Holdings with a capital gain of EUR 250m and a strong 40% premium on the investment. Aggregate Holdings is owned by Gunter Walcher who also has stakes in high yield real estate companies Adler Group and Corestate Capital.

There was speculation Vivion Investments could have made a loan to Aggregate Holdings to get the Furst project done, one analyst suggested. Vivion’s financials feature a EUR 705.6m value of financial assets including EUR 220m quoted prices in an active market and EUR 485.6m of fair value significant unobservable inputs for which there is no market data in its financial statements.

“There is EUR 220m of tradeable securities and a EUR 485m financial assets,” the analyst said. “Taking capital out the business does not make sense and ratings agencies could scrutinize it.”

The EUR 220m of tradeable securities and EUR 485m financial assets relate to company bond holdings, which provided a greater return than holding cash in the negative interest rate environment, one of the sources familiar with the situation countered.

“The financial assets comprise with as of today cEUR 240 million of various traded bonds (level one) and around EUR 485mn of bonds. As of today, already material amount of the bonds was cashed-in and the remaining is planned to be settled until June 2022,” the source familiar said.

“The bonds provide an average coupon of 3.5%, which reduces the group’s net cash interest [and] the negative interest rate that would have been paid on the cash position in euros, [bringing down] the cost of liquidity, before the group can execute its acquisition pipeline,” the source continued.

Despite EUR 976m of disposals announced, net debt only decreased marginally to EUR 1.674bn at 1H21 versus EUR 1.805bn at FY20 (see chart from investor presentation below).

To the company’s credit, it prepaid EUR 76m of secured financing in 1H21. But the reason net debt didn’t reduce by more was primarily due to an increase of EUR 709m in financial assets.

The liquidity position still looks healthy with EUR 1.132bn of cash and other current financial assets. However, the cash portion only amounted to EUR 423m with the remaining being other financial assets.

This meant the company required extra liquidity in the form of a EUR 340m tap of its EUR 300m 2025 senior notes in July after the reporting period.

Vivion also completed the disposal of two hotel operations in July 2021 for two London hotels acquired in January 2020, which could mean greater cash inflows.

They sold the assets in Germany, but the LTV remained at 39% because they received only a small proportion of the asset disposal in cash and the remaining amounts were received in bonds, a second analyst noted. “Out of EUR 709m financial assets a big portion will be converted into cash in the coming months.”

There is a massive capital gain [on the disposal] so it was a good transaction, the second analyst continued. “But we don’t know how much is reinvested in new assets and there is no visibility on the strategy,” he said. “They could reinvest in new assets and the LTV increases.”

Back to office blues

Whilst the company’s loan-to-value is low currently, it could increase in the coming quarters.

Vivion noted that its tap proceeds and recent disposals allow the company to pursue its active pipeline of investing in acquiring income producing office class assets in Germany. The company expects to acquire EUR 200m-EUR 300m of assets that fit with the strategy (income producing office class Germany) until the end of the year, and the remaining amount the first half of 2022, according to the source familiar.

The company has the potential to generate free cashflow. With a last-twelve-months (LTM) 1H21 adjusted EBITDA of EUR 150m, it in FY20 faced EUR 57.4m capex, EUR 57.3m interest and EUR 19.7m cash taxes, which could mean EUR 15.6m of annual free cashflow with upside given future annual capex will likely reduce now given the disposal of its Furst Berlin property.

Collection rates across the portfolio are also strong with 89% collection rates in 1H21. Rent collection was 90% and 88% on the on the German and UK portfolio, respectively, though UK portfolio collection rates in 3Q21 rose to 100%.

“Collection rates are above 90% and there is huge liquidity now while they will reinvest money into new assets in Germany,” the second analyst said. “Investors for now are focused on governance risk as performance is good and the 4Q outlook should be good for hotels and offices.”

Net rental income yields were up at 6.2% at 1H21 versus 5.9% at 1H20. This was despite collection rates falling in 1H21 falling versus over 100% collection rates in the UK at 1Q-3Q20 and over 90% in Germany in 2Q20.

“Rent collections were only 88% but rent yields are much higher despite collections being lower YoY,” the first analyst said. “The fundamentals do not warrant the price action but holders are comfortable.”

The first source familiar with the situation noted that hotels are doing better as there is a bottleneck of people wanting to go out as everything is almost back to normal. “Leasing accounts have done an amazing job with leases made at market level,” he said. “There is an increased rent per square meter, properties have been sold at higher valuations and there are 90% collection rates.”

Over 18,000 sqm of new leases or prolongations were signed in first half of 2021 (in addition to 65,000 sqm of leases that were signed in 2020) with anchor tenants in several properties which assures stable future cashflows, the source noted. Two pre-permits are obtained for additional building rights for a total of approx. 19,500 sqm, he added.

Shareholder Dayanamics

The legal situation around its founder and 74% shareholder Amir Dayan, who has been under investigation for alleged tax evasion, is manageable with the maximum exposure relatively low and in the high single-digit million euro territory, as reported. The remaining 26% shares are held by Dayan co-investors.

“The tax investigation is now a civil claim and it will be a single digit euro maximum exposure to settle,” the second source familiar with the situation said.

One concern is that Amir Dayan in 1H21 took EUR 109.7m out of the company through the repayment of a related party shareholder loan, according to the company cashflow statement.

Loans from related parties however reduced by EUR 48m to EUR 780m in 1H21 from EUR 828m at FY20. The payment related to a bridge loan given by the shareholder loan at the beginning of 2020 used for supporting acquisitions, the first source familiar with the situation noted.

Vivion’s BB+ rated EUR 640m 3.5% senior unsecured 2025s moved two points higher following the results to 104-mid yielding 2.5% while its EUR 700m 3% senior unsecured 2024s moved one point up to 101.5-mid yielding 2.4%, according to Markit.

The name is tricky as there is not enough visibility on strategy and the trajectory of the loan to value, according to the second analyst. “We remain cautious. At 2.5% it is a good level to take profit and stay outside the name,” he said. “Catalysts on the upside are limited and downside risks are real given the strategy.”

The market expected more cash coming in at once but it didn’t, independent special situations firm Sarria noted. “We see LTV well above the 39%, but what will they buy with the cash when it comes? Amir Dayan may have cash stashed elsewhere, but we’d really like to see the OpCos.”

“When I ride a rollercoaster, I have to have my eyes wide open,“ Sarria commented. “But some people like to go with their eyes closed. Vivion is for them.”

Vivion declined to comment.

by Adam Samoon