Grand City Properties €500m bond paying 2% to replace old issue

Grand City Properties, the fast-growing Luxembourg-based investor in German residential housing, successfully placed a €500m 7-year secured bond with a coupon of 2.0% this week, targeting the proceeds at the buyback of an earlier €350m bond paying 6.25%.

The bond was placed with international institutions, and was oversubscribed. Morgan Stanley was Sole Global Co-ordinator, as well as being Joint Bookrunner with JP Morgan and Deutsche Bank.

Grand City has been somewhat of a stock market darling this year, doubling in value for its investors. It focuses on investing in and managing turnaround opportunities in German residential in densely populated markets, improving and upgrading the properties and then creating value by subsequently raising occupancy and rental levels.

The company's strategy is to improve its properties through targeted modernisation and intensive tenant management, and then create value by subsequently raising occupancy and rental levels.

For the six months ending 30 June 2014, the company reported an EBITDA of €143.5 million (year-on-year increase of 107%), and a net profit of €122.1 million (year-on-year increase of 111%). EPRA NAV amounts to €1,005 million and €1,276 million assuming full conversion of the convertible bond.

The company listed on the Frankfurt Stock Exchange Entry Standard in May 2012, and the stock has been rising steadily since, with each announcement of new housing portfolios acquired. The company currently has a housing stock of over 40,000 units.

REFIRE: Grand City is obviously in a strong position with its bankers and its investors, that they were able to so successfully place a €500m, 7-year secured bond so readily with eager investors, happy to accept a coupon of 2%. These are institutional players, well capable of assessing the strength of the underlying assets and business model which underpin their future returns. However, other real estate companies who have relied disproportionately on the issuing of corporate bonds for their re-financing have not always fared so well in Germany in recent times.

One company that didn't make it and which has just filed for insolvency is the Munich-based Golden Gate GmbH, a developer of healthcare and residential real estate. Golden Gate relied heavily on the issuing of Mittelstandsanleihen, a form of bond specially designed for medium-sized firms. Likewise WGF AG in Düsseldorf, a serial issuer of 5-year bonds offering an annual 6.35% to investors, which defaulted on its bonds two years ago; its erstwhile investors are now at the mercy of time and a form of self-administered company wind-down in the hope of seeing anything at all on their optimistic investments by 2020.

Curth-C Flatow, of Flatow Advisory Services in Berlin (see report on the FAP-Barometer in this issue), which focuses on capital and financing issues for real estate investors and developers, says the Golden Gate insolvency throws up questions about the seriousness of the real estate bond sector.

"Despite numerous warnings, the market is simply blinded by the promise of high returns, which continues to baffle us. You could hear it everywhere – the bond-issuing companies wouldn't have got bank financing for their projects, or if they had, then only on very poor terms. In a liquid market, shouldn't this be like raising a red warning flag? In the current climate capital is chasing deals, it's no longer the other way around. You would certainly have to question the suitability of such real estate bonds for fitness of purpose."

Real estate bonds certainly have their place in the financing market mix, since they permit companies to avail of differing forms of financing and encourage a degree of independency from the banks. Nor, when things go wrong, are the exchanges on which the bonds are traded at fault, since their job is ensure transparency and the fulfillment of publication obligations, and not to evaluate commercial figures or the underlying business models. Nonetheless, investors do need to be on their guard, particularly as the ratings of such bonds tend to be unreliable and very susceptible to sudden sharp downward corrections.

Flatow again: "Bonds are readily demonised in the marketplace. But such generalisations, just like the frequent condemnation of loan securitisation, are dangerous and wrong. There are many companies who have been successfully issuing bonds – particularly convertible bonds – for years, and continue to operate strong and healthy business models. You have to be able to differentiate, what we're seeing right now is the separating of the wheat from the chaff."