Grand City Properties - Lack of Trigger - Positioning

All,

Please find our updated analysis of Grand City Properties here. 

Grand City Properties is achieving the aim of all real estate entities - becoming boring and operationally stable. The FY24 numbers reiterate this, with the Company continuing to outperform its 2024 guidance. With further improvement expected in FY25, a rating upgrade removing the outlook negative should be achieved this year. Coupled with the recommencement of dividends post AGM approval, Grand City Properties credit and equity should improve, subject to macro influences.  

Investment Rationale:

- We rotated our position in September exiting the hybrids and going 2% long Grand City Properties equity at €12.70. Despite improving operational data, the equity has underperformed falling to below €10 currently. Therefore, we are cutting our losses, and exiting the equity at €9.95. 

- We had expected the recommencement of dividends to be the catalyst for the equity, narrowing the discount between equity price and book value. However, the discount remains at 30%, despite Vonovia’s discount narrowing to 19%.  

- Improvement of performance at AroundTown, Grand City Properties 62% shareholder, hass further reducing name specific downside. However, we are exiting the position, as we indicated we would if the share price fell below €10. 

Operational improvement:

- Grand City Properties has continued to see improvement in its key operational indicators, with rental growth further growing in FY24. Occupancy rates remain at low levels, continuing recent trends.  

- Ongoing operational improvements have insulated Grand City Properties from cost inflation, enabling it to translate rental growth into higher EBITDA.

- A combination of asset disposals, the sale of treasury shares, valuations stabilising and capital market refinancing have enabled Grand City Properties to achieve a strong cash position, reduced LTV and improved maturity profile.    

Valuations and outlook:

- FY24 has seen a further 0.1% yield expansion albeit compensated by strong operation performance. Specifically, like-for-like revaluations were positive for FY24 of 0.5%, with H2 seeing 2.5% uplift outweighing the 2% down in H1.  

- Management is projecting a low single-digit growth in EBITDA due to positive rental growth offsetting disposal impacts. Cost inflation remains a concern, but should be outpaced by efficiency gains. LTV will remain below 45%.   

- We would not be surprised if AroundTown would acquire further shares in Grand City Properties, but we don’t expect any major investments in the short term. Therefore we are not seeing any major trigger for Grand City Properties in the next couple of quarters.

- We will continue to monitor the name in the coming quarters, but for now we have exited our position in AroundTown and Grand City Properties.  

Happy to discuss.

 Tomás