Adler - The Best Bond, Repositionin
All,
Please find our updated analysis with videos here.
After all that’s been going on last week, we have decided to make a change to our positioning in the bonds. In light of the liquidation of most of the portfolio under Adler Real Estate, the entity will be cleared of most of its debt, except probably for the bonds we are holding. Instead, a bond we thought was illiquid seems to offer at least some availability and so to reflect the limited scale in the instrument we are only reinvesting half of our position in the Consus 22s, but for what we feel are vastly superior economics and a very good risk/return profile.
Asset Coverage:
- Overall, Adler has been asset covered all along, even if not as much as in particular ADO bondholders would like to see.
- On BV alone the yielding assets would oover the outstanding debt and as we are seeing from the impressive pace of asset sales in this segment, these resi units are readily marketable.
- Going forward and as regards yielding assets, Adler will remain with only the Berlin portfolio of ADO and perhaps a few remaining units under ARE.
Development Assets:
- By our estimation however, there remains little equity in the Consus business. On the one hand, the Buy2Hold assets are overvalued from our point of view, even if we recognise that Adler have merely been taking advantage of general accounting practice.
- The Build2Sell portfolios on the other hand seem to be valued more or less accurately. Due to their more classic designation for sale, there has also been less room for creativity.
- In our CF model we are not assuming further development of the Buy2Sell assets, although that would make sense and in any event may be required to sell them on schedule. The difference however should be covered by the liquidity the company is raising.
Liquidity and Cashflow:
- There will be enough of it.
- The question we have been trying to answer until last week was how much cash Adler would require to continue developing its Build2Hold assets. The company of course gave an answer to that and, again, the increased liquidity from what could be three transactions should cover the requirements through 2024, when an increasingly large component of its debt requires refinancing and when the CapEx funding from materialising its €1.5bn Buy2Sell assets runs out.
- Risk comes from a materially slower than scheduled realisation of some of the Build2Sell assets. Because the assets that are being sold are held under ARE, we expect ARE debt to be paid down materially before cash is passed up to ADO and back down to Consus (in theory).
Positioning:
- We believe that the transactions with LEG are highly likely to materialise and also consider the Velero/KKR transaction to conclude more likely than not. From there, Adler should be well enough capitalised to finance its construction business, even if the promised schedule of disposals delays by a year.
- Because our 2026 ARE bonds are very safe, but also very low yielding and possibly together with the cheaper 2024s the last ARE bond the company wishes to pay down, we are selling our position at 92 c/€.
- We are instead re-investing half of the position in the Consus 22s. We’ve had our eyes on this convertible bond for some time, but have only recently heard of any liquidity in it. We are dropping the reinvestment volume by 50% purely due to the small size of the bond. It sits structurally sr. to the ADO debt as far as Consus' over €3bn assets are concerned, and while the proceeds loan is likely as unsecured as the ADO equivalents, the convert has been issued out of Consus Real Estate AG itself, meaning a default would trigger a loss of control of these assets - something we believe Adler Group would not begin to contemplate. We have been seeing these bonds at 93c/€ and would be buying these all day long.
- As regards the equity, we consider it worth €17/share and have been contemplating a position to take advantage of what should be positive news flow from the flagged transactions. However, risk comes from any of these transactions not materialising or once again not materialising in cash (or at least LEG shares). So for the time being we feel we are long enough via our position in Aggregate.
Please reach out to discuss,
Wolfgang
T: +44 203 744 7003