Vivion Investments Sarl – Perception, probability, value.
All,
Please find our initiation on Vivion Investments (Vivion) here.
Young, opaque, complex. We’ve been looking at valuations, risks, and opportunities. Ultimately, there is significant equity value in the business, particularly in a world where a lot of cash is chasing assets. Not being property specialists, we don’t see the assets as being glaringly overvalued, nor do we see an imminent downward re-valuation. We do view Vivion as being more levered than investors may realise. The primary risk is management choosing to lever up the portfolio to transfer risk from equity to debt. This is too nebulous an event in terms of probability and more importantly, timing for us to take a short position in the SUNs. As a result, we are going to observe from the sidelines for now.
Valuation risk:
We were initially focused on the valuations used by the company. The ocean of liquidity currently supporting asset valuations makes an argument for an imminent downward shift in valuation of commercial real estate and branded hotels hard to make. The UK hotels will have cost the Dayan family directly and through Vivion €75m in 2020 and a similar sum in 2021. However, the size of the implied equity value accruing to the shareholders allows this to continue for some time.
More levered than you think:
Vivion’s headline loan to value ratio is 40%, but this understates the reality. The German portfolio, (accounting for 60% of the assets, including cash) is fully consolidated but only 51.5% owned through a holding in Golden Partners. Using proportional consolidation, LTV rises to 47%. The German portfolio currently has an LTV of 22% excluding €1bn of cash from a recent disposal. Given where property yields are today it looks ripe for the addition of some leverage, debt that would be secured and structurally senior to the SUNs.
Lots of cash, so what is the plan?
Our model shows €1.5bn on a consolidated basis. There is a further undrawn €565m in loan facilities (to be secured over €851m of assets in the German portfolio). If a target of 50% LTV was set, this equates to up to €4.3bn of purchasing power. Management has said it is seeking to expand in Germany. More office buildings or an expansion into cheaper retail assets or more construction risk? Or management could buy out the minorities in Golden, using cash at the Vivion level and then levering up the German assets. Whatever direction they move, the future is likely to be a more levered business.
Protection:
Protections in the SUNs are weak. There are no guarantees from asset holding companies rendering SUNs subordinate to any liabilities at the asset holding entities. There is no single proceeds loan and no charge over any intercompany loans made by Vivion to fund its subsidiaries. There are covenants, however, they fully consolidate the German assets which are only 50% owned.
Positioning:
We will not be shorting the Vivion SUNs at this time. We have been unable to confirm the thesis that property valuations would be materially inflated because of the pandemic and certain sales of assets and operations over the last two years. Moreover, we are unable to identify a tangible trigger that would send valuations tumbling in the foreseeable future.
Risk to Vivion investors comes primarily from a potential management decision to buy out its co-investors in Golden at dilutive prices, using cash on balance sheet and thereby leveraging up Vivion and with that the SUNs. Further risk, albeit limited, would come from a general rise in German Bund yields. Finally, German office yields could widen if the shift to work-from-home proves materially lasting over a period of several years and UK assets are exposed to tourism. However, either asset class is strongly sought after in a world awash with liquidity, thus far fully making up for temporary operating losses incurred substantially at the OpCos, which are not directly part of Vivion.
Happy to exchange ideas and discuss.
Aengus
E: amcmahon@sarria.co.uk
T: +44 203 744 7055