AroundTown - benefitting from return to the office
All,
Please find our updated analysis on AroundTown here.
We have always viewed AroundTown as a standalone entity, inferring no benefit from its 62% equity stake in Grand City Properties. Operations at the deconsolidated AroundTown entity continue to show improvement, and although we reiterate our previous comments about the higher risk profile at AroundTown due to Office exposure, this differential should contract over time. AroundTown have dealt with its liquidity concerns and recent quarters show continued improvement in the office space.
Investment Rationale:
- We are maintaining our 5% long position in the 5% perpetual bonds at 88%. We increased our exposure in September at 86% from our previous 4% long acquired in June at 58%.
- We expect dividends to recommence from Grand City Properties and coupled with AroundTown’s improving Hotel segment, we are comfortable in maintaining the position.
- The downside is primarily macro-driven, and the perpetual bonds could easily trade down 10pts+ following any adverse movement in the rates market. This is slightly mitigated by a recommencement of dividends from Grand City Properties.
- The overall size of the position should be seen in context with our changed position in GCP where we exited our long in the perpetual bonds and taken a 2% equity position.
Recent Results:
- Similar to other real estate entities, AroundTown’s operational data continues to improve quarter-on-quarter. Asset revaluation is reaching a trough now, coupled with a positive outlook.
- AroundTown continues its disposal progress, but following its refinancing earlier this year, there is no longer major pressure to execute large transactions.
- Offices and Hotels are the main standalone assets of AroundTown (deconsolidating Grand City Properties). Office take-up growth continues as confidence returns on the occupier’s side, albeit below the long-term average. The return to the office movement is strongest in Germany, with rates at c.89% of pre-pandemic, significantly higher than the USA, 66%, and London at 57%. The Hotels segment reports 4% lff rental growth, with further growth expected, driven by steady growth in international business and leisure travel.
Office Exposure (55% of standalone entity):
- AroundTown continue to see LFL growth in its office segment, as take-up continues to grow as confidence returns on the occupier's side. This remains below the long-term average, but confidence is returning to the market.
- It should be noted that average office attendance varies substantially by Geography. European Average is 60% versus 37% in New York and 28% in San Francisco. Germany lead the way in Europe, with averaged in the low 70%. Return to the office Rate is 89% in Germany (average attendance currently versus pre-pandemic).
- AroundTown have a strong tenant base, with 75% of tenants either public sector, multi-national or large domestic corporations.
Hotels Exposure:
- Hotels have always been less of a concern for AroundTown, given the overall sector’s strong rebound post-covid. RevPAR growth has now stabilised to a moderate long-term growth.
- We continue to see growth in this segment for AroundTown, with LFL rental growth of 4% in September. This is based on some hotel refurbishments undertaken recently, which should see uplift in rents over the coming years.
- AroundTown has commenced certifying its hotels for Green Building certificates. Still, at an early stage, 12% of the HOtel portfolio is currently certified.
AroundTown will publish its FY24 numbers in late March, where we are likely to see a decision on dividends from Grand City Properties.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk