AroundTown - Macro Opportunity - Model Update - Positioning

All,

Please find our updated analysis on AroundTown here. 

At first glance, there appears to be limited opportunity in AroundTown and Grand City Properties. AroundTown continues to deliver stable operating cash flows, with a modest decline in core FFO offset by strong reported profits driven by revaluations, alongside proactive balance-sheet and capital measures to reduce interest costs. With dividends reinstated and strategic repositioning underway, including the bid to increase its stake in Grand City Properties, the unsecured bonds and hybrids had tightened meaningfully until the onset of the Middle East conflict.

While our initial inclination was to place the name on the shelf, several clients have asked us to update our numbers and assess a potential macro-driven trade. In particular, we are exploring the impact of a sustained or escalating Middle East conflict, and the associated risk of higher interest rates, on the credit profile and valuation of the capital structure.

Investment Rationale:

- We have initiated a 2% short position in the 5.25% €700m hybrid issued by AroundTown, at 93%. This trade reflects a macro-driven view rather than any immediate credit concerns specific to the company. A prolonged escalation in the Middle East could reignite inflationary pressures, pushing interest rates higher or keeping them elevated for longer in Europe; in such a tail-risk scenario, real estate credits would likely reprice wider. In such an environment, real estate credits would likely reprice wider, and given AroundTown’s relatively higher leverage versus peers, we view its hybrids as the most effective way to express this downside risk.

- During the higher-rate period, Aroundtown chose not to exercise calls on its $700m 5.25% perpetual hybrid in July 2023 and its €400m 2.125% perpetual hybrid in January 2024, highlighting the extension risk embedded in its hybrid capital structure when refinancing conditions are unattractive.

- The Ukraine war provides a relevant precedent. Around six months after the conflict began, inflation in Europe reached double-digit levels in September 2022. That surge in inflation and interest rates drove a sharp repricing across real estate hybrids, with AroundTown’s hybrids trading below 50% of par for much of 2023. We have sized the position conservatively, reflecting the fact that underlying fundamentals across offices and hotels are materially stronger today than they were in FY22.

What Is Different This Time?

- AroundTown’s liquidity profile today broadly resembles its position in mid-2022, with sufficient liquidity to cover near-term maturities. However, several balance-sheet metrics have weakened at the margin. Unencumbered assets have declined from around 83% of rental income in FY22 to approximately 70% today. The average cost of debt has increased to about 2.3% from 1.3%, while loan-to-value has edged up to 42% from 40%.

- The group has also shrunk in absolute terms since FY22, with investment properties reduced from roughly €29bn to €25bn, driven primarily by asset disposals rather than valuation declines. 

- That said, underlying operating fundamentals are arguably stronger today. Offices, which account for around 30% of the portfolio, face a far healthier demand backdrop than in the immediate post-COVID period, with improved occupancy, stable rent collection, and market rental yields of around 5%.

Tender Offer for Grand City Properties:

- In parallel, AroundTown has launched a voluntary public tender offer to increase its stake in Grand City Properties via a share-for-share exchange. The offer caps AroundTown’s ownership at 90%, a deliberate threshold designed to preserve Grand City Properties’ stock exchange listing and avoid triggering a full domination and profit-and-loss transfer agreement, which would materially change the group structure and potentially constrain financial flexibility. 

- The transaction carries no minimum acceptance condition; if acceptances exceed the targeted level, allocations will be scaled back on a pro rata basis. 

- Our initial view is that the tender will be a success. At current trading levels, the exchange offer implies a clear premium to Grand City Properties’ share price, making tendering economically attractive versus holding the stock standalone. Combined with the board recommendation and the prospect of rolling into the more liquid, dividend-paying Aroundtown, this significantly increases the tender’s chances of success.

FY25 results:

- Aroundtown’s FY25 announcements point to operational stabilisation and continued deleveraging; however, the reinstatement of dividends and the move to a higher payout target mark a clear shift towards equity prioritisation, modestly weakening what had previously been a conservative credit stance.

- In parallel to the tender, Aroundtown confirmed the reinstatement of dividends, to be proposed at the June AGM. Newly issued shares to GCP shareholders will carry full dividend rights. The FY25 dividend equates to a 30% payout of FFO I earned in 2025, with management signalling an intention to increase the payout ratio to 50% of FFO I per share going forward. FY25 operating performance met guidance, with rental growth of 3% and flat EBITDA, while LTV continued to decline to 41% from 42%.

Tomás

E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk