Grand City Properties - Back to boring
All,
Please find our updated analysis of Grand City Properties here.
As the title suggests, this update is mere housekeeping as Grand City Properties returns to normality. Credit risks for the name have pivoted away from liquidity concerns and are returning to normal real estate concerns, including regulatory and the push for modernisation. We see limited Idiosyncratic risk in the name and expect over the coming quarters a continued improvement in valuations.
Investment Rationale:
- Although current prices are 12% lower than our purchase price, we are maintaining our 2% long equity position taken in September. In September, we exited our 4% long hybrid position at 94.5%. We felt that the hybrids had limited opportunity to rally further, therefore switching our exposure to equity while taking some cash off the table.
The recent set of numbers in themselves is not overly interesting, but liquidity is no longer a concern. We have removed it as a risk, focusing our attention on modernisation/regulatory risk and overall CAPEX spending.
-,In conjunction with confirming its FY24 guidance, Grand City Properties indicated a dividend for FY24, subject to market conditions and shareholder approval.
- Grand City Properties has demonstrated that the unsecured market is open to quality issuers and coupled with further buybacks at discounts, the upside for GCP is more focused on equity. We do expect the overall sector to benefit from the rates environment and overall confidence in the residential market across Europe.
- Name-specific downsides are linked to its controlling shareholder, AroundTown. There is always the possibility that AroundTown may try to increase its 62% shareholding, but we see this as low probability in the short term.
Discount to Book Value:
- Grand City Properties continue to trade at a c.30% discount to Book Value. This is in contrast to other listed real estate operators, who have seen there discount contract over the last couple of months. For example, Vonovia currently trade at a 20% discount to NAV.
- We would expect GCP to trade tighter over the coming quarters, which will be aided by a recommencement of dividends. A similar discount to Vonovia would see a 20% increase in the current share price.
- However, we are conscious that we are down 10% since taking the position, and will exit the position if the share price falls below €10. This would equate to a 30% discount to NAV. We are also putting a timelimit on the position, where we would exit the position by the end of H1 25.
Regulatory Environment:
- Liquidity concerns are abating at Grand City Properties following several exchange offers earlier this year. We have limited credit concerns with the name but we wanted to highlight one segment which will become a bigger issue for all real estate names over the coming quarters.
- The German government are seeking further modernisation of the housing stock. Due to the ownership structure of the German rental market, which comprises overwhelmingly small private landlords, the question of funding the modernisation of the housing stock remains a significant issue, as many private landlords do not have the financial means to modernise their properties or scale to do so cost-effectively.
- GCP and other real estate operators expect additional government subsidies to support the transition to a more energy-efficient housing stock. However, with an election looming, there is a hiatus on this topic.
Next Steps:
- Grand City Properties will release its FY24 numbers on the 12th of March, where further uplift in the asset valuation is expected.
- More telling for our equity position, GCP are likely to announce a recommencement of dividends.
Happy to discuss
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk