CPI Property Group – Returning Slowly - Positioning.
All,
Please find our updated analysis here
CPI has weathered the European real estate crisis and its governance issues well. In 12 months, CPI’s five-year debt has tightened from 8.75% to 5.5%. CPI is targeting investment grade (so it can issue Hybrid bonds), but this will take time. Valuations in CEE will be supported by lower interest rates, and CPI’s portfolio is now yielding more than its cost of debt. The yields on the Hybrids now reflect the good news, so we are recycling our capital. The H1 2025 results are due on 28th August.
Investment Rationale:
- We are selling our 4.6% NAV position in the CPI Property 4.875% Perpetual securities, which have a reset date in November 2025. We bought the bonds in July 2024 at 67.8%, and today's price is 100%, so total return on the trade is 37%
- We expect there will be an exchange offer at around par, but we are going to rotate our position now. There is one point of upside and 10 points of downside if there is renewed stress in the European real estate market.
- To be able to issue Hybrids, CPI will need to get its rating to IG; we don’t see this as happening soon, so an exchange offer will be needed for the 2025 Hybrids. CPI is incentivised to reduce leverage and to continue to pay coupons in cash to regain access to the hybrid market.
- CPI has addressed the weakness in corporate governance, but having one dominant shareholder will remain a drag, even though Vitek has now stepped back from operational involvement.
- The squeeze out of minorities at Simmo simplifies the structure. There are now two silos, with CPI Property Group directly owning 75% of CPI Europe (previously Immofinanz and Simmo). Additionally, another 7.9% is controlled via derivative instruments.
- CPI Property has said it intends to focus on higher-yielding assets in CEE, so we expect the German office portfolio to be eventually sold and the capital re-allocated. However, management is not going to rush into a sale that requires large discounts to book value.
Key Conclusions:
- As our Background section notes, Germany accounts for 25% of group assets. Over time, the capital will be redeployed into higher-yielding assets in CEE.
- Our Key drivers identify that Corporate governance is improving, but there is still one dominant shareholder, and Immofinanz has 20% minority shareholders. Notwithstanding this the five year SUNs are now trading at 5.5%, inside the average yield on the portfolio.
- The company is targeting EUR1bn of sales, we are expecting the company to get close to this. There will be more development spend and we will monitor this and landbank revaluations closely
- Valuations are in increasingly stable and we are expecting the H1 sales to have been executed at or near book value.
- In our model we expect Free Cash Flow to cover Cash interest by 2x this year. Also, with CPI having access to the bond markets again, we expect to see bank debt being rolled.
CPI has been able to issue SSNs. We are expecting to see more bank debt being rolled as we note in the Maturities section. We are not expecting a return to IG within the next 18 months despite the tight yield levels on the SUNs
Our Ownership and Governance section identifies the progress made on governance, but given the development strategy of the company caution investors to be vigilant.
- The industry section covers how valuations are improving as inflation falls and rates fall with it.
- As our company section shows, the strategy is to move more into development, which will slowly increase risk. The slow sale of the German assets will help fund this as capital is recycled into CEE. This will be a slow process, and CPI will remain predominantly a Real Estate investor
Current Trading:
- In Q1 €340m of asset sales were completed with a further €260m completed post quarter end and €600m under discussion expected in Q2/Q3. Net LTV is running around 50%, comfortable as long as there is no wave of revaluations in CEE in H2 (not expected). The company has 47% of its assets unencumbered, which would be a significant source of liquidity if needed.
I look forward to speaking with you all on this.
Aengus
T: +44 203 744 7055