Summary

The Sarria Analysis team, comprising of Wolfgang Felix, Tomás Mannion and Aengus McMahon, focused their conference call on European High Yield Real Estate, looking closely at Haya, Vivion, Intu SGS and Adler – all names that have had recent trouble.

Starting with Haya, a servicing company from Spain, that monitors and services assets on behalf of other owners, traditionally private equity houses. The main issue revolves around upcoming maturities of November 2022 and the complications that the bonds and banks have with the uncertainty in relation to their main contract with Sareb. Tomás also looked at Cerberus, the private equity owner of Haya who are also a major client. Haya Real Estate has outstanding bonds, and in the upcoming quarters we will see discussion between Cerberus, newly appointed advisors and the bond holders on the coming to a solution for the upcoming maturities of the bond. It would currently be impossible for the entity to refinance its bonds, given market uncertainty and high leverage of 4.2x. Consolidation in the servicing market has seen Sareb reallocation its bad bank allocation.

Aengus moved on to Vivion, explaining that Sarria couldn’t give a long or short analysis on the bonds due to pricing reasons. In the last week, bonds are down from 102 to 94 and Sarria would be looking to take a loan position. Thesis hasn’t changed, but the bonds have gone cheaper. Vivion has sought to remove operational risks, by taking hotel operations outside of Vivion and the assets are managed by the Diane family with an asset manager. Within Germany, the assets are well dispersed. Yields have continued to tighten as a reflection of the vast money made available to the markets, even during tough times there has been significant demand for investors, helping to protect Vivion’s portfolio, as property yields within Germany remained tight. Aengus spoke on Vivion’s recent press surrounding Adler and Aggregate Holdings. Vivion’s selling of assets to Aggregate Holdings was driven by negative interest rates, with large costs from carrying cash until invested elsewhere. The asset is very attractive and of high quality, and Aengus suggests it is far more likely for Aggregate to sell and have the project bonds repaid, than to allow a default. Aengus concludes by saying any worst case exposure to Aggregate is worth peanuts and any perceived contagion issues with Adler are done. The Vivion bonds are expected to recover along with the market.

Tomás went on to discuss Intu – a UK based company currently in administration, having four separate filos for financing its shopping centres. Intu SGS valuations have declined over time, sitting significantly under the face value of the debt, notwithstanding that the debt still trades at a discounted price and has gone into a restructuring of sorts. Maturity of the debt has been extended to 2024, and now there is the opportunity to invest into UK shopping centres, with rental income expected to stabilize. Layouts of stores have changed to attract long term tenants, with low valuations and rental income. After the business begins to stabilize, the property can be marketed in FY 23/24. Footfall returned to as high as 80% of pre-COVID levels, and given the importance of last quarter retail sales numbers, we would expect higher occupancy rates and rental payments into the last quarter. Tomás went on to compare Debenture to Intu. The Debenture debt is trading at a lower market value than the last valuation statement. One of the main drivers of valuation is a recovery in the yields that people value in these properties. An investment in either Debentures or Intu requires one to still believe in the future of physical retail space, however there are too many shopping centres in the UK so careful to pick winners or losers.

Lastly, Adler – A German Real Estate company, recently involved a reverse takeover of one kind of business, as well as being subject to various allegations in recent days. Adler Group has been able to recognise the vale in some of Consus development assets differently to how normally seen with rental assets. Through looking at the numbers that have developed in Consus and within the acquisition, little wrongdoing has developed. Adler Group were able to replace the expensive financing in Consus with cheap financing in their own Group, with very narrow coupons. There are several bonds trading at the wrong price in this structure, and Aggregate on top holds three types of assets, including 26% stake in Adler. Wolfgang emphasizes the importance of looking at what assets are secured, and which are being financed, and to look at who else has security over these assets. Looking at the trend levels, it becomes obvious many should be trading at a higher price.

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