Adler - Staying our Course
All,
Please refer to our slightly updated analysis here.
So we’ve been looking at Adler as a company that has a company with two daughters: a pretty one in plain clothing and one that’s all dressed up, but they don’t like to mention. Yesterday and today, news were all about the pretty daughter. Management did not give us what everyone wanted yesterday, more information of some of those property transactions around Consus. But we did of course receive news of the sale of the Brak option to LEG. There is some uncertainty around a difference in valuation of the portfolio transaction with LEG, but that aside the news have been reasonably positive.
Gerresheim:
- The project sale was unwound and the company reversed its prematurely recognised €126m of cap gains.
- Interestingly, Adler took the financing of €148m on the books as “Financial Liabilities to Banks”. Aggregate are not a bank.
- To suspect that Aggregate had provided the financing was very convenient and perhaps the classification does not really mean what it says on the account name, but it does not necessarily trigger another write-off at Aggregate.
- Whether or not the project needs another write-off is one of the many unanswered questions management did not address yesterday.
Brack:
- The sale of 7% and option over another 63% in Brack to LEG, who also just bought another 25% in Brack away from Adler seems a) likely to materialise in the sale of the full stake and b) realises significant equity in the subsidiary. The sale may be for cash or LEG shares, but the latter should be marketable.
- The additional cash of €850m net to enter the company addresses the remaining uncertainty around the funding of Consus as we see it. Until yesterday there was still uncertainty around Adler’s ability to fully fund Consus through the construction of its Build1Hold properties, but the additional liquidity here should solve for that.
Increasing Operating Risk:
- Adler are selling the safe assets to concentrate on executing on the risky developments. The name is becoming less and less of a RE company and increasingly a developer. This may have a bearing on how its shares will trade in the future.
- A number of the Consus assets are making little progress. Gerresheim and the Steglitz Kreisel are two large ones. Again, management could provide further detail on these assets.
Going Concern:
- Insolvency risk appears remote now. We have no reason to believe that the marketed assets to LEG and KKR won’t fetch book+ and LEG’s purchase of a 25% stake in Brack seems to confirm their interest in the subsidiary as well.
- We see potential for value corrections of approx. @500-600m, but think those unlikely to be taken in the short to medium term - perhaps with exception of Gerresheimer, where a change of plan seems to be required. Those value corrections should however be within the limits of covenants once several of the near-term transactions are executed. So again, we are not concerned about any insolvency risk anymore.
Positioning:
- Absent insolvency risk, we are looking at Adler from a yield perspective, with near term events to look forward to.
- We remain long the ARE 26s for 5% of NAV and the Aggregate 24s, on both of which we took a bit of a bloody nose yesterday. In the turmoil we failed to pick up some of the equity as was previously our intention. The lack of disclosure is not comforting and news of the LEG call were not out. We will be revisiting a change in our positioning in the coming days.
- Among all the noise, all that’s really happened yesterday was that management, ill advised or just ill, did not make any disclosures on its ugly duckling Consus, but kept communication stricktly to the yield assets.
- The announcement this morning however changes the company’s liquidity position for the better. In some ways it’s as if it is selling assets for a 5% yield to throw more resources at assets that are (should be) much higher in yield - even if the accounting no longer recognises that. Will the accounting need to be materially adjusted? Probably not. Why?
Please contact to discuss,
Wolfgang
T: +44 203 744 7003