Accentro - leaping faith
All,
Please find our initiation on Accentro Real Estate (Accentro) here.
Accentro’s SUNs are yielding 18% for a maturity of only 16-months, and German residential real estate remains a highly sought-after investment for institutions and individual investors, however, we are not yet persuaded to take a position. We have concerns about the book value of assets, in particular a portfolio of stressed rental assets acquired in late 2020. These rental assets do represent a potentially significant opportunity, however to date management has not communicated anything about its plans to reduce the level of vacancies from 41%. Accentro has limited liquidity and, we have not been able to persuade ourselves that Accentro has the resources needed to afford the time to exploit this opportunity.
Transformational investment in eastern Germany:
- Part of the German privatisation model involves selling individual condominiums instead of selling refurbished blocks as rental investments. This is being hampered by legislative changes, especially in Berlin where Accentro has traditionally focused. The response is a pivot in strategy by Accentro with the company acquiring residential units to hold for rental income after they have been refurbished.
- In 2020 Accentro purchased 2,500 residential units in two cities in the vicinity of Leipzig. The vacancy rate is a staggering 41%. Vacancy rates at this level indicate that either the units are in a poor state of repair, or are in poor locations (or likely both). Thus far we have seen no detail on the cost of refurbishing these buildings or how quickly Accentro expects to start making inroads into reducing the vacancy levels.
- As distressed investors, we appreciate the potential advantages of acquiring an asset at below its true value, but, we need to have some detail as to how, when, or if the assets can be returned to a non-distressed condition. The worst vacancy rates among competitors in Germany lie at around 11%. On one hand, this indicates the potential for significant recovery, but on the other hand, it reveals how poor the starting point is. Taking a plan just on trust is not feasible. Nevertheless, despite the big step up in project scale and financial resources required, the concept of releasing value from refurbishment is at the heart of Accentro's strategy.
How liquid is inventory?
- Accentro has €385m of property inventory with over 50% in Berlin. The German residential market is currently very strong, however, refurbishing buildings requires displacement of tenants which takes time. Successful execution either requires new tenants (or old tenants paying higher rents) or individual apartment purchasers. Institutional buyers want the new tenants already in place making large block sales a challenge.
- Much of the announced asset sales have been the movement of assets from the inventory to the rental portfolio (along with fair value uplifts). We accept that Covid may have slowed completion rates, although, we expect more dynamism from management.
- Turning these assets to cash quickly would be more of a challenge than selling rental units (as Adler has demonstrated in its recently announced asset sales)
Shareholder flux:
- Accentro is majority-owned by Natig Ganiyev, who still owes €60m to Adler Real Estate for his stake three years after the original due date. Ganiyev is apparently struggling to pay for the Accentro shares he acquired from Adler. So assuming further liquidity help from this source may prove fanciful.
- We believe that there are up to €40m of shareholder loans at Accentro, these are automatically subordinate to external debt under German law. However, if Adler took back control, then loans from Ganiyev would no longer necessarily be subordinate as he would no longer be the shareholder. These loans are likely to be at the asset level and would be structurally senior to the bonds.
- Alternatively, the €100m loan Brookline has taken out to finance the Accentro share acquisition is likely secured on the Accentro stake (60% LTV at present). This could complicate the ability of Adler to exercise control over the stake.
Investment Considerations:
- The 3/2023 SUNs have 16-months to maturity and currently trade at 85.5c/€ (a YTM of 18%). Investors are sceptical of Accentro’s ability to refinance the bonds. Headline LTV is 57%, however, we have concerns over the market value of the eastern German rental portfolio vs book valuation. We have tried to unpick the various valuation drivers, but the Eastern Germany portfolio is still largely a black box, and placing a valuation on these assets with the current data is a leap of faith. If shareholder loans did become senior to bonds this would increase the LTV in the portfolio, hurting potential recoveries in the SUNs
- Liquidity is likely to have to come from a sale of part of the rental portfolio, Accentro may well be forced to give up some of the potential upside in order to access the liquidity to complete the project. A partial sale could help generate a pull to par with investors having more confidence in Accentro having the cash to execute on such a large refurbishment project.
- The 2023 SUNs will be in short-term liabilities at the Q1 accounts. SoAccentro management needs to inform investors of their plan soon.
Looking forward to exchanging ideas with you all on this,
Aengus
E: amcmahon@sarria.co.uk
T: +44 203 744 7055