Branicks - Never mind the NAV - Model Update
All,
Please find our updated analysis of Branicks here.
Loved it when it was higher, but not keen 15 points lower. That does not sound very steady, but to be fair to ourselves: back then it was a fundamental bet on asset value; now it is a technical bet on posture in a second restructuring. The agreed split of the SSNs creates a subordinate PIK instrument that is very much calibrated on a timely turnaround and would not be able to defend itself if x-holders changed their minds. Meanwhile, the balance sheet looks fully levered through the New SSNs, and resembles deals agreed in other REITS that only ever aimed for a tax- and liability-efficient solvent liquidation. So never mind the NAV, we are not as enthusiastic as we were with the old structure.
Investment Rationale
We exited our 5% long position in the 2026 SUNs for 72c/€ in February and are not immediately buying ourselves back into the name. At first appearances, the bonds are fairly priced, assigning less than full value to the new SSNs and letting the Subs travel for free. But on second thoughts, this new capital structure does not seem laid out to be refinanced in an orderly manner. It rather looks like an Adler or Steinhoff perpetuation. In a second or third restructuring, the Subs will not be able to fight for themselves, and the SSNs might eventually sacrifice them if they have to. This strategy remains reserved to the biggest committee players only.
On the downside, we don't see much risk for the new SSNs. Even if Branicks takes a whopping 30% write-off next year (more than Adler had to take), they would still be covered by non-real estate assets through par on the New SSNs. But they would admittedly not trade well on the news.
While the notes are as illiquid as they are now, we will remain watching on the sidelines.
Key Conclusions
The restructuring has broadly landed as expected, the bifurcation being driven primarily by German regulatory constraints rather than economics, with both instruments remaining controlled by cross-holders. The recapitalisation is only the first transaction. It leaves too little value to the equity, and the PIK on the subordinated instruments will consume it. The capital structure is now reminiscent of that of Steinhoff or Adler, following their first restructurings. (Current Trading; Recap).
Cash flow is only just sufficient. While FCF covers cash interest with modest headroom, DCF value supports barely more than half of the existing debt pile. This is to be expected from an opportunistic REIT, but it highlights the increased equity nature of the risk position (Valuation).
At 70% LTV against the full book value of Investment Properties, 50% of associates and 2.5x NAV for the Institutional Business, VIB is already heavily leveraged. Post-restructuring, the New SSNs are only just covered by the real estate, while the Subs rely principally on VIB equity and related-party receivables (Valuation; Waterfall; Model, Recap).
Branicks' operating metrics are not far from Vonovia's despite a materially more opportunistic business model. We retain meaningful value for the Institutional Business, although we apply a 50% discount to NAV to reflect a more conservative growth path and realistic CapEx requirements. Valuing it purely on cash yield would not be fair to the business (Valuation; Asset Valuation).
The capital structure is sustainable on current cash flows, but CapEx is the key swing factor. Management will use any headroom to invest in assets that could support higher values. With the German real estate market stable rather than improving, the credit therefore depends on disciplined capital allocation rather than a cyclical recovery (Model; Industry).
Current Trading
Branics succeeded in reaching an agreement with bondholders to restructure the balance sheet. Bar a successful appeal, the bonds are extended through the end of 2026 and will likely extend beyond that deadline if it's required to settle the deal.
The deal involves the split of the current SSDs and SSNs into future SSNs and Subordinated Notes.
Fresh cash requirements are limited and intended to fund the time through recovery. The company has plans for selling further assets through 2027, but we don't expect those to be honoured.
Creditors are set to skim the entire future equity value accretion via a €15% PIK on the subordinated instruments.
Reports of insolvencies in the circles around the shareholder will have no bearing on the success of the restructuring. Chairman Pfrof. Dr. Gerhard Schmidt will resign, and Josef Schultheis will be taking over as CRO.
Sub PIKs
At 60c/€, bondholders assign no value to the subordinate PIKs. We find the Subs fundamentally attractive, but must concede that they won't survive a second restructuring on their own. If they PIK too fast, they will be victims of their own success.
Here to discuss the name with you,
Wolfgang
T: +44 203 744 7003
www.sarria.co.uk