CPI Property Group – Dealing with it
All,
Please find our analysis here.
CPI Property Group (CPI) expanded on cheap debt and minimal scrutiny; something it has in common with plenty of its peers. Corporate Governance is slowly improving with a new CEO and CFO, promising fewer transactions with affiliates. The cost of debt is too high relative to rental yields; CPI needs rates to fall. The recent short-seller report has forced better communication, but the substance of the allegations was a lot less incendiary than the reality.
Investment considerations:
- The €400m Jan-28 bonds yield 8.5%. It isn’t compelling, but the bonds will benefit from rate falls in 2025. There are 6 points of upside from a 100bp fall in rates.
- The longer-dated January 2030 SUN is priced at 74c/€ (YTW 8.2%), but does offer greater convexity with a coupon <2%.
- We do not see a quick return to Hybrid Issuance by real estate Issuers. The Hybrids decoupled from the bonds and will not be called or replaced, but CPI may target them in future tenders (as the lowest-price bonds). Given liquidity from asset sales and the continued stock buybacks, hybrid coupons will continue to be paid in cash. We are still investigating why the April 28 bonds are trading 12 points lower than the 25/26 series.
- The Muddy Watters's claims are overblown but shine a light on weak governance. After five reports, we wouldn’t rule out another shot being fired at CPI.
- CPI Property shares the governance failings of its peers but is addressing these issues. The structure is more complex than it needs to be.
- CPI is mainly selling assets in Western Europe as volumes in CEE have not yet picked up. LTV through the SUNs at the LTV level is 69% vs 58% on a fully consolidated basis.
CPI disposals will focus on Germany:
The group strategy is to focus on sales of lower-yielding assets, which will lead to a focus on the disposal of Offices in Western Europe (mainly Germany). We expect a greater focus on CEE when the disposal program finishes. CPI will benefit from the expected recovery in RE valuations in Germany as rates fall. On a consolidated basis, CPI has nearly €4bn in German office assets.
- €3.5bn of CPI’s directly held assets are in Germany, including €3.2bn in office properties. Immofinanz and S Immo have €750m in German office assets.
- CPI is looking to sell €450m equity stake in its German holding company to Apollo. The equity injection will reduce LTV at the CPI level by 4%.
Cost of funding will rise but maturities are modest:
- With disposals, we expect interest cover to be near 2.0x over the next two years.
- CPI recently placed a 7% €500m SUN that currently yields 7.5%.
- There is €750m of SUNs also due which could see interest costs rise by €30m at current rates. However, this will be balanced by reductions in bank interest as the ECB cuts rates.
- There are also €3.3bn of maturities through the end of 2026, but €1.7bn are bank lines. €1bn of the bank lines are at the CPI level.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055