AroundTown | Grand City Properties - Much ado about nothing.
All,
Please find our research on AroundTown and Grand City Properties (GCP) here.
Although the market was surprised by the non-calling of both AroundTown and GCP’s Hybrids, times have changed. Both sets of management have taken the simple economic view that the cost of unsecured capital is greater than the reset on the Hybrids. With the precedent set now, we fully expect that none of the upcoming Hybrids will be called soon. One of the frustrating issues in looking at the AroundTown/GCP structure is the lack of triggers and unless we see a significant change in underlying rates, both Companies will have sufficient headroom for their covenants in the next couple of years.
Investment Considerations:
- We are not taking a position in either cap stack as we don’t envisage any near-term trigger to change the trading levels. We see both names as a yield play.
- AroundTown Unsecured bonds trade on a curve between 7-11%, with the Hybrids trading on a c.15% running Yield. GCP unsecured trade tighter, in 6-8% range, with the Hybrids trading at 10% running yield. GCP is less leveraged and deserves to trade tighter on a relative basis to AroundTown.
- We don't see any short or medium-term event that would result in a re-rating of either of the capital stacks. Management at both entities has shown a willingness to not call the Hybrids and instead accept the reset rates, leaving the bonds outstanding.
- With both entities having the capacity to issue secured bank debt to refinance upcoming maturities, the non-call of the Hybrids removes any trigger from a potential refinancing.
- There is potential for a cross structure long/short, but we will wait for upcoming results to get a better understanding of the relative underlying assets
Underlying Operations:
- We favour the 100% residentially exposed GCP over AroundTown, but neither entity is likely to suffer from a liquidity crunch in the short term.
- Our model is conservative, with no upside built into our projections. Even then, AroundTown is near cash break-even (c.€20m outflow per quarter), assuming no uplift in rents and/or dividends from GCP.
- GCP’s cash flow is stronger, on a relative basis, and can generate c. €80m p.q before payment of dividends. We fully expect dividends to resume in FY24, which would help cash flow at AroundTown.
- At both entities, management are restricting their CAPEX levels. We have reduced them modestly from historic levels, and we will explore this further at the next reporting.
Valuations:
- Ultimately, this is the biggest threat. We use Vonovia’s recent Q3 results and valuations as a sense-check on GCP’s valuations. Berlin, which is the biggest region (23%) for GCP is valued at a 15% premium to Vonovia’s valuation. On the flip side, the remainder of the portfolio appears to be valued at a lower €/m2 basis than the Vonovia non-Berlin portfolio.
- GCP also has listed equity, which trades at a 34% discount to Book Value. Using this as the correct valuation metric would mean GCP would be close to breaching its covenants, specifically the 60% total debt to Assets. (Using the current share price gives 56% LTV). However, there is a world of difference between the equity trading levels and where the Company values its long-term assets.
- At AroundTown, a sense check on their valuation is more difficult as non-residential real estate is less homogenous. AroundTown portfolio consists of 55% Office, 25% Hotels, 10% Development and the balance ion Logistics and Retail. However, using the equity value as a metric for valuations, total debt to assets would rise to 53%. Again, this does not imply that the Company will value its assets at these levels.
Next Reporting:
- AroundTown are due to report its Q3 results on the 29th of November. Before then, Grand City Properties report on the 15th of November.
- We will update our model after the Q3 results.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk