Aggregate - Bottom-up by Asset, Forecasts, View
All,
Please refer to our initiation of Aggregate Holdings here.
We are taking a view. The approach we have followed has lead us to focus on the substance that makes up the group today, its financing and the challenges it faces in the short and medium term. Much of it is guess-work as the scant disclosure requires us to triangulate much of the missing information. Yet, while we may be off in some projections here or some allocations there, we are confident that ...in aggregate… we are not too far off the mark.
The Assets:
- We have confidence in the quality of the German Build2Hold and the Portuguese Build2Sell assets. Never mind their valuation, Quartier Heidestraße is a gem and Fürst is a true trophy asset.
- The Portuguese assets are relatively uncomplicated and predictable.
Berlin Real Estate:
- Forming the core of Aggregates Germany exposure as well as large parts of Adler (ADO) - and recently being the subject of doubt voiced in a very effective short seller note - the market continues to be pushed along by a confluence of structural shortage, which should last for another five years and a wall of money from German insurance and pension funds that has only limited attractive alternatives for investment elsewhere - nor is there much need for that.
- German insurance firms earn an average initial yield on this real estate of some 4% (4.5% above Bunds), which is far better than what they can achieve in the much smaller German HY market. The can lock into these rates vs. a curve of treasuries and / or ride the upside as effective yields are closer to 7/8% in segments with higher expected growth - Berlin.
- Naturally all these valuations are incredibly tight, but they reflect no more of a bubble than the entire world does right now.
Valuation cover:
- We see the holdco bonds value covered - even when writing off the FREA division and crystallising some €300m of g’tees at holdco.
- Clearly any failure to extend the financing within FREA is not necessarily a matter of writing off the entire division, nor could it be as easily dealt with as that. Such an event would at the very least have a significantly negative effect on the holdco bonds and almost certainly trigger the SUNs’ LTV covenant and possibly some x-default somewhere. The relatively homogeneous position of creditors at holdco, however, gives us some confidence that a consensual deal could be reached that avoids a loss of its assets to any Jr. tranches within the project financings underneath - the horror scenario.
- We consider the practice of valuing development properties at residual value to be very aggressive. Valuing the SUNs in the 60s does little to move them into a suitable LTV, given how high they lie on the significant project and convertible debt pile that’s structurally and in every other conceivable way ranking ahead of them.
Status Quo:
- We expect VIC to refinance the convert - come what may. Aggregate are in no good place to negotiate favourable terms on that refinancing, but it won’t bring down the structure.
- We consider the two main German assets to be solid, which should include their project financing. Without Holdco g’tees the financing of some of the new projects, such as Walter, Green Living and Ringbahnhöfe could be delayed and their debt could be burning a hole into Aggregate’s pockets in the meantime. QH and Fürst are ring fenced, as is VIC, so no cash from these assets could pay down / service the debt on the others.
- However, Aggregate could be liquidating its €180m securities portfolio to make some repayments - probably restricted within FREA. As to the quality of the RE loan portfolio and other RE assets we have little information and are concerned they could be made up of off-market vendor notes and similar residuals from earlier transactions that will not result in a cash pay-down at maturity. However, in this RE market almost al assets have / will have substantial value.
- We are not expecting cross-collateralisation between the assets, although that remains a structural risk ahead of Aggregate Holdings.
- We have no confirmation, but on our calculations there is almost no freely available cash in the group.
Investment consideration:
- Despite the long list of uncertainties and the high LTV - by our admittedly crude methodology - the execution of QH, Fürst and VIC should see the holdco bonds through. QH and PRATA are known quantities with only limited remaining construction risk. Fürst is riskier, but successful completion is still a lot more likely than not. The project is fully financed.
- Our thesis would therefore rest on Aggregate’s ability to calm its horses and agree stable long-term financing throughout its structure. Holdco is certainly financed long enough. The subs are coming due early, but they’d act up at their peril.
We will be discussing if we are making an investment at holdco level and any further details in the coming days.
Please reach out to discuss,
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003
www.sarria.co.uk