Grand City Properties - Changing Tack - Positioning

All,

Please find our updated analysis of Grand City Properties here.

Real estate investing is supposed to be boring, and the recent results from Grand City Properties fit that bill. Operationally, the business continues to perform marginally better than expectations. Praise should be given to management over the last couple of quarters and their decisive actions in accessing the credit markets, executing the exchange of the hybrids and extending the maturity profile.  

Investment Considerations:

- We are rotating our position exiting our 4% long perpetual position and taking a 2% long equity position at €12.70. The Hybrids have rallied a further 13pts since we took the position in mid-June. We acknowledge there is additional upside in the perpetuals, but we are taking the opportunity to take some cash off the table. The long equity position gives us the same exposure to the underlying assets but is less call constraint than the hybrids. 

- This rotation should also be seen in the context of our investment decision in AroundTown, the 61% shareholder of Grand City Properties.  

- The recent set of numbers in themselves are not overly interesting, but add further weight to our view that Grand City Properties have sufficient liquidity and the operational performance will continue its positive trajectory.  

- 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, accessing the market during the summer. Coupled with further buybacks at discounts, the upside for GCP will be more evident in the equity. We 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 60% shareholding, but we see this as a low probability in the short term.  


Recent Results:

- GCP reported higher revenue, driven mainly by in-place rental growth. Market rent continues to increase strongly, due to the imbalances in the supply in key city areas. Vacancy rates remain at c.4% reflecting supply deficiencies.

- More reassuringly, property revaluations appear to be bottoming out. GCP recorded a -2% in H1 2024, and with yields c.5%, investors have started to return to the space.  

- In H1, GCP completed €160m of disposals at 2% discount to NAV. We expect less asset sales in the coming quarters as the business returns to normal status.  


Relative Value:

- When we took the position in the perpetual in June, the biggest debate was between the perpetuals and an equity outright position. Although there was better risk-reward in the equity versus the perpetuals, we settled on the perpetual long, arguing that there was still positive convexity in the perpetuals due to their 80% trading level. 

- Since June, the perpertuals have rallied c.13pts, or 18% including the coupon, with the equity rallying 20%. With the perpetuals now trading at 93.5%, we don’t see them rallying in line with the equity. Therefore, we are switching the position to a long equity position. 

Happy to discuss.  

Tomás

E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk