Accentro: Questioning the driver
All,
Please find our updated analysis here.
Accentro has sought to shift its strategy, ostensibly to reflect changes in German housing legislation. It has moved from being a nicely dull refurbisher and seller of apartments mainly in Berlin, to large-scale reconstruction of stressed rental assets in eastern German cities. Yet we struggle to shed the idea that Accentro may only have been a passive player in its acquisitions and that its size and shape today may not be the result of ordinary in-house corporate strategy. While bondholders are primarily concerned with asset value - we have made only minor adjustments to our previous valuations - implications from the aforementioned concern - if true - would be complicating matters.
Bond prices beginning to reflect reality:
- Our liquidation analysis for Accentro values the bonds at 69c/€. This is below the current trading price, and we see better entry points as the price drops further as restructuring talks start
- Accentro needs to roll €250m of bond funding by February 2023, with bonds trading at 64c/€, a simple refinance is not going to be possible. There is also another €100m bond, issued in March 2021 to a single buyer which matures in March 2026. The buyer is described as a “pension fund” but there are no further details. Any restructuring discussion would need to involve the holder of this bond.
- Management has not said how much it needs to spend or why it thinks it can reduce the vacancy rate. Bond funding needs to reflect that risk and that is impossible on current information.
- The SUNs were a “bet” on the value of an inventory of flats largely in Berlin and other major German cities. The new notes will be financing a construction company with significant exposure to stressed assets.
The Driver behind buying the East portfolio:
- It is hard to understand why Accentro entered the residential rental market by acquiring such deeply stressed assets. We have concerns that the vendor was seeking to temporarily park some particularly ugly assets, and Accentro is now stuck with them. Accentro's lack of progress in refurbishing the portfolio or in reducing vacancy rates in the five quarters since the acquisition raises questions about what its original plans were.
- We believe these assets may have emanated from Adler. The December 2020 sale to Accentro, coincided with Adler’s own merger.
- Of the 3,000 units acquired, 2,500 were in Halle/Gera in eastern Germany. Both are cities that saw significant population declines after reunification as industries were shut (chemicals and spinning) and Soviet families went home. No further details of the east portfolio have been forthcoming apart from the >40% vacancy rate.
- Accentro has morphed into a very different company from the one that sold the SUNs. Persuading investors to roll into a new instrument is possible with a modest injection of cash. However, management needs to explain what its plan for the East portfolio is, how much it is going to cost and why they are confident of success. Otherwise, the balance sheet will need restructuring with the attendant time and costs
Investment Considerations:
There is asset value in the company, but assessing fair value for the east Portfolio is troublesome given the vacancy rates. Management says they have a plan, but they need to tell investors what it is and why they should back it. The lack of clarity as to why such stressed assets were chosen does not help Accentro’s credibility. For now, we are going to bide our time as we see a lot more volatility and we need evidence as to what is going on internally. The next catalyst will be the Q2 numbers on 31st August. The AGM on 22 June could provide some sparks, but it is likely too close to the Q1 results announcement for much to have changed.
I look forward to discussing this with you all.
Aengus