Vivion - Buy UK - Model Update
All,
Please find our updated analysis on Vivion here.
Note: Beta testers can check Graanul on the portal here.
The perps are down 15 points in a month, and we are long the short-dated '29s. Does that make us think? Well, we've rebuilt our entire analysis on the name. Have compared property valuations to rental yields, to cash flows, considered the corporate structure and on and on, but to anticipate the conclusion: we are sticking to our position for now. Vivion is a somewhat special case among REITs, and therein lies the opportunity.
Investment Rationale
We remain long the Vivion 6.5% (+1.5% PIK) 2029 SSN for 5% of NAV. The bonds give a ca. 10% blended YTM, and we do not expect Vivion to call either the 2027 or 2028 individually, but consider it possible that the company undertakes a wider refinancing in the context of which it wishes to take out its entire capital structure.
LTV is moderate at the opco level and hovers around a conservative 40% through these bonds, with another 8% behind them in the form of the Perp. That also leaves the Perp well covered, but we don't like its volatility for the mere 1 point of uplift to running yield of 11%.
Interest coverage is tight, but a financing choice, considering Vivion can always slow down its German renovation activities to shore up cash - or even sell a UK asset for a larger need. Covenants are also well under control.
Downside comes from a widening of yields again in both markets, a scenario Vivion would best meet with an investment-grade rating. Something the company has been seeking for years and seems to have had in mind when hiring Alex Hayes Griffin as UK CIO.
We see an upside at par and a downside at 95%, and otherwise steady yields.
In relative terms, the '30s are becoming more attractive than the '29s. Perhaps not enough yet to switch, but we'll keep it in mind.
Key Conclusions
The UK now provides nearly 100% of the cash flow reaching the bonds, with triple-net leases providing stable rental income, good diversification and strong brands. The German business has effectively maxed out its debt carrying capacity, reflecting a strategy focused on capital gains rather than rental yield. (Asset Valuation, UK, Germany)
We have no difficulty matching the company's valuation of the real estate based on discounted rental streams, in line with RICS guidance, but German FCF is harder to value given the strategy of acquiring challenged assets, refurbishing them and realising capital gains. Conventional yield or FCF approaches therefore understate the economics of the German business. (Asset Valuation, Golden)
German portfolio net revaluations were -3% over 2021–2025, with no further gain in 2025 despite a modest improvement in vacancy. By contrast, UK assets generate better yields. Together, both halves of the business have remained broadly flat over the last five years (Asset Valuation, Portfolio Movements, UK)
Vivion is again relatively frugal after returning briefly to acquisitions and significant refurbishment, particularly in Berlin. The €65m Femina acquisition is being repositioned as a hotel, with refurbishment costs potentially reaching €80m; securing bank support for this project and extensions of other German lines is nevertheless a further step towards normalisation. (Portfolio Movements, Asset Valuation)
As regards Germany, the model assumes improving margins through higher occupancy, but no profitable asset sales in return. We also maintain the historic Other Working Capital outflow. Interest coverage remains tight, but this is a deliberate financing choice and could be improved at the expense of future occupancy improvements to raise FCF if the market turned more difficult. (Model, Driver)
Golden is only 51.5%-owned, with shareholder loans split similarly between Vivion and outside institutional investors, but a consolidated model remains appropriate for most purposes. Its city-centre trophy and near-trophy assets are typically tired or require a change of concept and significant refurbishment, supporting the capital-gains rather than yield strategy. (Driver, Golden)
The capital structure is materially more complicated than the property valuation: the Senior Secured Notes are secured by share pledges rather than the properties, while €1.3bn of OpCo bank debt and NCI loans sit ahead in recovery. Shareholder loans compound outside every ratio test, and the Dayan permitted-holder Change of Control carve-out neutralises the bond put. (Legal)
Continued rate rises would put the balance sheets under renewed pressure. If restructuring were required, an English Part 26A Restructuring Plan appears the realistic court route. (Asset Valuation, Legal, UK)
Miscellaneous
Despite being HQ'ed out of Berlin and holding half its consolidated investments in Germany, Vivion cash flows stem entirely from the UK. Bonds should keep that in mind. If Vivion lost all of Germany tomorrow, yes, it would remove value cover (possibly trip some covenants), but in terms of debt affordability, it would make no difference at all.
Travelodge posted a stronger summer than we had expected. If British hospitality is on the rise again, then the more significant half of the company (as far as ownership is concerned) would do well.
The consolidated view of the company's financials may overstate its assets, but for all practical purposes it gives a fair representation of leverage for now.
Here to discuss this name with you,
Wolfgang
T: +44 203 744 7003
www.sarria.co.uk