Grand City Properties - playing the waiting game- Positioning
All,
Please find our updated model for Grand City Properties, post Q1 numbers and hybrid exchange, here.
The results continue to be a non-event. But perhaps that is the point. Real estate investing, especially residential, with very little development exposure, should be boring. Operationally, the business continues to perform in line, but the current pricing of unsecured debt means Grand City Properties (and others) are unwilling to access that market. This is not an issue for Grand City Properties, because of its low senior debt leverage, overall LTV of 36% and €1.3bn of liquidity that is sufficient to meet upcoming maturities until end of FY26.
Investment Considerations:
- We are taking a 4% long position in the newly exchanged Perpetual Hybrid bonds, namely the 6.125%, at 80.25%. At 80.25%, the running yield is 7.6%, which is c.250bps wider than the unsecured bonds. There is the potential for some pull-to-par, but given their perpetual nature, we feel it is prudent not to assume this.
- 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 fact, in conjunction confirming its FY24 guidance, Grand City Properties indicated a dividend for FY24, subject to market conditions and shareholder approval.
- But with the unsecured market not yet accessible at “appropriate” rates, there is limited idiosyncratic factors that will drive the perpetual bonds tighter. We do however expect the overall sector to benefit from the rates environment and overall confidence in the residential market across Europe.
- Name-specific downsides is 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 low probability in the short term. Grand City Properties continue to have ample access to the secured market and with large headroom under their covenants, we continue to envisage Grand City Properties maintaining its liquidity by refinancing the upcoming unsecured via the secured market.
Relative Value:
- The biggest debate we have had on the desk is if the hybrids are the appropriate instrument to gain exposure to Grand City Properties. The listed equity, which creates the business at c. 80% of book value. In fact, in line with Vonovia, there is 100% upside in the equity of Grand City Properties if the equity trades in line with NAV.
- Overall, there is better risk-reward in the equity story, with initial dividend yield at c. 7.5%, similar to the running yield on the Perpetual Notes. However, we maintain we get similar upside in the Perpetuals initially, with some positive convexity in the perpetuals due to their 80% trading value.
Perpetual Notes Exchange:
- In April, GCP launched an exchange offer with a 15% tender option to two of its outstanding perpetuals, €550m in total. Overall acceptance was over 80%, with the holders mainly converting into a new 6.125% Perpetual Bond. €35m was repurchased via a tender, at a small premium to the prevailing market prices.
- The new perpetuals are S&P compliant, with the equity content regained. There is a small coupon savings, but the main purpose of the exchange was to regain the 50% equity content. The new perpetuals have a first call date in January 2030. Grand City Properties do have another perpetual bond outstanding, which is callable in mid-2026.
Recent Results:
- As seen with other residential companies, Grand City Properties are seeing an increase in the rental growth and vacancy rates remain low. This is due to demand remaining very strong in key city areas, with limited new supply.
- The Company did not revalue its estate as at March 31st, with next valuation due as part of the H1 results. Grand City Properties continue to execute small divestments at are slightly above book value.
Next Steps:
- We don’t assign a high probability to AroundTown increasing its 60% stake in Grand City Properties. But this has to be the motivation of both major shareholders, Yakit Gabay (15%) and Georg Stumpf (10%). Note the shareholdings underestimate their control, as the Treasury shares, 17%, and shares held by TLG Immobilien, 12%, which AroundTown own 88%. The TLG Immobilien shares have had their voting rights suspended. Historically, AroundTown have increased its stake in Grand City Properties from 38% in 2017.
Grand City Properties appear content with continuous access to the secured market, but with the unsecured debt continuing to tighten to c. 4-5% range, we would expect Grand City Properties to access the unsecured market in the coming months. It isn’t economical to finance at that level, but the indication to the market that they have access beyond the secured bank debt market would be a huge positive indicator to the wider market.
- The Company is due to report H1 numbers, with a further revaluation of the estate, on August 27th. The AGM is due to be held next week, 25th June.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk