Aggregate - By popular demand
All,
Please refer to our unchanged analysis here.
In the last 24 hours several of you have been asking how to estimate a potential funding shortfall at the Fürst from the €250m committed facility. We are not real estate investors per see, but we’ve been looking at it this way:
Considerations:
- We have Consus data by project - both for projects that are at a very early stage (5-10% completion) and for projects that are a little more advanced (30-35% completion). First observation is that on average the more advanced projects are expected to require €4k/m2 of CapEx, projects that are at an earlier stage require only €3.5k/m2. The Fürst is deemed to lie in the middle between those two groups with approx. 20% completion (although we are wondering if that is confused with the pre-lease figure - the tower is merely a refurb and the hole is dug - no WW2 bombs or historical artefacts delaying construction from here).
- Overall the Consus cost per m2 resembles what we understand from other companies in the market.
- The progression from 3.5% to 4% is concerning. Q1: should we extrapolate the increase all the way to completion? We don’t think so. Certainty of costs grows exponentially with % of completion, so once a certain stage has been reached, cost increases should certainly flatten. Q2: Is there room for cost increases from the Fürst's current stage of development? Absolutely, although we do not see a huge amount in the scheme of things (see below).
Calculation:
108k Fürst m2
405m Fürst Implied CapEx at Consus average of €3.75k/m2
20% Fürst %age of completion
325m Fürst Implied CapEx remaining
250m Fürst Pre-funding
75m Fürst Shortfall
Note:
- The largest part of the Fürst project is the refurbishment of the tower. This tower already stands. So the construction of it is not part of the project. It is possible therefore that the Fürst will have slightly lower CapEx per m2, because more of it will have been in the acquisition price of the tower in the first place.
- Also, we do not know to what extent contractors have been tied in for the duration of the project. Inflation is on the move and if it's 6% p.a. for two years on half the costs, then another €15m might be due - tops.
- By contrast, that costs will be overestimated is a very remote thought as well. So for the reasons above, we will earmark some €50m of “predictable overruns”, which may not have to bother us in the short term, but should feature in our backup thinking, in case we have to take ownership. On a €1.6bn project (based on €38pcm/m2) with expected €1.25bn financing (before adding these €50m), this is significant but digestible.
- Assuming an overrun would raise the Fürst CapEx / m2 to €3.5k / m2, which would still only be in line with the lower estimates of Consus early-stage developments (which however are mostly brownfield - not already substantially standing).
- We do not think of the billing of €250m as “fully funded” as deceptive. Rather, we think developers have the same problem as investors - reigning in overruns. If Aggregate had negotiated a €300m facility, that too would likely overrun, and so forth.
Positioning:
- We remain long the SSNs for 5% of NAV. This is primarily a “bet” on two short-term catalysts going the right way: The refi of the VIC and the sale of the €350m Fürst SSN so as to pay out or otherwise satisfy Vivion. Short-term risk comes primarily from the failure of either of the two deliverables, but also from negative developments surrounding recently commenced enquiries into the affairs at Adler and the verdict to come from KPMG. While Adler is not a significant component in Aggregate’s valuation anymore, it is historically closely tied to Aggregate through Consus and via Corestate.
- Note, we are also long Adler for 2% of NAV in the equity and 2.5% of NAV in the Consus convertibles, which mature in November.
Please reach out to discuss,
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003