Adler - Putting it all together, Positioning
All,
Please refer to our updated analysis of Adler here.
In analysing the valuations of the various Consus properties as well as Adler’s yielding assets and receivables, we are coming to the conclusion that on a static basis the debt is not fully covered by the group’s assets. However, with the German RE market in full swing, this may change between now and 2024, when it matters.
Like many a house of cards, Adler is a house that will stand as long as confidence does. It is a delicate construct that relies on two rare things: flawless execution of its asset sales and its Build2Hold construction projects. But there is also upside.
Yielding Assets:
- The only portfolio sticking out as aggressively valued relative to competitors is the Berlin portfolio of ADO. However, the 0.2% yield differential is so small that it will take a second auditor longer to determine that than it will take the market to lift competitor valuations. So we are not bothered.
- The yielding assets look solid.
Consus:
- Caner’s aggressive move would have been less contentious if he were among us, distressed investors. But mingling among the sheep, he occasionally serves a shocker when he takes one down. So it was with ADO. Using ADO’s access to cheap RE funding, allowed the Consus investors to refinance its crippling expensive debt and thus unlock value for themselves. Nicely done.
- From here, Adler have to execute flawlessly on the sale of Consus’ secondary portfolios so as to finance the Build2Hold projects quickly enough to deliver sufficient yield assets into Adler’s pool to allow it to refinance from 2024 and beyond. We see significant risk in that but are not sure the market quite cares at the moment.
- Its Build2Hold assets are very aggressively valued. Consus will have to work several years "for free" to construct itself out of its commitments. Valuing these assets in line with Aggregate properties for instance would suggest a €500m value correction. But we see no trigger for that.
Receivables:
- The promised deleveraging by €700m will likely not involve much cash as a number of the debtors seem to have limited resources themselves.
- The receivables have predominantly arisen from transactions in which Consus sold assets to “friendly parties” at only mildly discounted GDV. The cash involved in these transactions seems to have reflected underlying book value and in some cases apparently included the financing of further development of these assets - off-balance sheet. This allowed Consus / Adler to post a better balance sheet, but should only come into its valuation over the course of construction. So there should be no receivable to collect at this time, no matter how their maturities are structured. To be sure, we see no immediate fraud in this. But in the land of sheep, it’s a behaviour associated with wolves.
- So whichever accounting rule will be bastardised to recognise these receivables towards LTV, we are unlikely to take more than €600m into account before 2024.
- From our perspective, therefore, there is upside in some of these receivables actually proving valuable over time. We just cannot observe what is happening off-BS and so are not taking it into account in our base case.
Positioning:
We remain long for 5% of NAV in the ARE's 2026s. This position is a little unfortunate. While it is safe, it is ARE that Adler Group will be looking to plunder in order to finance Consus through 2024. So we'll be looking to exit this position and perhaps shift half of it into Adler Group shares. Through our 5% of NAV position in Aggregate 2024s we are already long Adler Group, and so the timing will depend on when is a good day. Following the Thanks-Giving route, Monday may be too expensive for a major last-minute shift. To be seen.
Happy to discuss,
Wolfgang
T: +44 203 744 7003