Investors hungry for expanded Grand City bond issue

There has been growing investor interest in Frankfurt-listed residential turnaround specialists Grand City Properties since it went public last year and has seen its stock go in only one direction so far. This month the company increased its seven-year 6.25% bond tap issue for the second time due to strong investor demand, and raised total issuance by a further €50m to €350m after raising the original €200m issue by €100m.

The new funding will give the rapidly-expanding group about €400m in additional firepower while keeping it within its 50% LTV target. The Luxembourg-registered Grand City specialises in buying and turning around residential properties in Germany’s larger cities. Last year’s earnings (EBITDA) rose 150% to €306.2m, while net profit rose 186% to €266m, while EPRA net asset value was put at €860m. Last year the company added 14,000 residential units, and currently holds 30,000 units, so much of the rapid growth has come in the last year.

REFIRE discussed the company’s business strategy last year with CEO Christian Windfuhr in Berlin, and reported on it in these pages. Grand City buys undervalued, under-let and under-maintained residential properties and repositions them with investment, higher rents and higher occupancy levels. The company avails of all its own in-house property management skills and its own proprietary IT management systems, helped by the bolt-on acquisition of an integrated property management company. It claims that all the in-house expertise gives it major cost advantages versus competitors.

We must admit we haven’t fully figured out how a company that competes against a lot of highly sophisticated competitors can continue to identify, acquire, upgrade and reposition so many properties in such a short time, but the goals as described by Grand City and Windfuhr sound admirable, right down to the level of providing garden landscaping and playgrounds for children, even enticing several ex-tenants to return to their new, improved abodes.

The group’s holdings are also geographically diverse, with 45% of the properties in North-Rhine Westphalia, 22% in Berlin and 9% in Bavaria, along with assets in cities as dispersed as Leipzig, Dresden, Mannheim and Bremen – normally a disadvantage in this industry, and certainly requiring very comprehensive management systems to compensate for the extra work and distances involved.

Potential vendors are private and institutional owners who for one reason or another no longer wish to operate the properties, said Windfuhr. The company has no specific growth rate planned in terms of housing transaction volume, but will buy opportunistically as undervalued situations present themselves, he said.

The key to the company’s growth is its turnaround capabilities which provide high and growing cashflows, said Windfuhr. Fresh deals already signed and an extensive pipeline of at least €200m will ensure further growth this year, he says, a prospect underpinning investor appetite for the group’s growing bond issuance – which he says is only done on a need-to-issue, just-in-time basis when a deal needs to be concluded.

A recent roadshow in London did seem to underline the company’s credentials as a niche player specialising in turnaround opportunities. The shareholder base has also been broadened, which often comforts investors.

There may have been some profit-taking recently after the share price’s stellar rise over the past nine months, but some analysts (e.g. Close Brothers Seydler) are issuing a buy recommendation for the stock with a target of €13,00. The stock is currently trading at just under €8.00. For 2014 EPS is forecast to be €1.49 (up from €1.22), while for 2015 it is estimated to be €1.62 to €1.94 per share, and as high as €2.50 per share in 2016. The dividend is expected to be €0.35 for 2015, for a dividend yield of 4.3%. Not unreasonable, if recent growth rates can be maintained and investors continue to show such enthusiasm for the company’s bonds.