AroundTown - What's Next - Positioning
All,
Please find our updated analysis of AroundTown here.
Our previous analysis of AroundTown always aimed to view It as a standalone entity, inferring no benefit from its 62% stake in Grand City Properties. This approach enabled us to ensure AroundTown had sufficient liquidity to refinance its capital structure. We maintain this approach but do acknowledge that dividends from Grand City Properties are likely to recommence in FY25. Operationally, the deconsolidated AroundTown entity continues to improve, specifically in the hotel segment.
Investment Rationale:
- We are exiting our 5% long position in the 5% Hybrids at 89%. We originally purchased 4% at 58% in June 2024, topping up the position further at 86% in September. However, with the running yield now inside 6% we see limited upside in these hybrids.
- The downside remains primarily macro-driven, with any adverse movement in the rates market resulting in asset coverage falling.
- Its subsidiary, Grand City Properties will recommence dividends this year, subject to AGM approval. But this isn’t a mitigation as dividends will likely be suspended with GCP management seeking to protect liquidity as a result of any adverse rates movement.
- Our other concern for both AroundTown and the wider real estate entities is a renewed effort to modernise its estate, which may lead to a sustained higher CAPEX level in the future. We were a little surprised this topic received little attention on the FY24 conference call.
Recent Results:
- AroundTown’s FY24 accounts demonstrated continued European real estate market improvement including like-for-like rental growth. Net Rental Income was 1% lower due to disposals.
- Headline property valuations are falling -0.5% for FY24, although this is mainly due to the negative H1 movement masking the positive H2 revaluation across all segments including offices.
- Ratings remain at BBB+ with a negative outlook, and the company expects further disposals in FY25 to remove the negative outlook. We are a little surprised that management isn’t guiding to higher CAPEX going forward, instead remaining cautious due to rating concerns.
Turnaround Capital:
- Separately, as part of the FY24 release, AroundTown confirmed it has set up a real estate fund where AroundTown will be the General Partner of the fund.
- AroundTown aims to be a minority holder in the fund, through which it will co-invest alongside other investors, driving external growth while still enabling the Company to deleverage.
- The vehicle will invest in acquiring across all major asset types including residential, hotel, industrial/logistics, office and mixed-use.
- Geographically the vehicle will target Germany, The Netherlands and the UK.
Next Steps for the Company:
- Our fundamental view is that AroundTown wants to fully own Grand City Properties, and we expect AroundTown will recommence squeezing out the minority shareholders at Grand City Properties. The discount to Book Value at 30% makes it attractive for AroundTown but we don’t envisage any major stake purchasing in the short term.
- We will continue to monitor AroundTown and Grand City Properties despite exiting positions in both names.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk