|Shares Out. (in M):||101||P/E||0||0|
|Market Cap (in $M):||891||P/FCF||0||0|
|Net Debt (in $M):||-105||EBIT||0||0|
|TEV (in $M):||786||TEV/EBIT||0||0|
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We believe that an investment in Grivalia Property Real Estate Investment Company (“GRIV” or the “Company”) represents a very compelling opportunity to play the asset recovery story in Greece. Our analysis suggests that there is a c.50% upside from current levels, while the downside is well protected.
GRIV is the largest listed investment property fund in Greece with current market value of c. €900 mm. It owns a portfolio of high quality properties throughout Greece, mostly Athens, as well as nearby countries– Serbia and Romania. It has a noteworthy mix of blue chip tenants locked into long-term leases and has relatively low vacancies even by global standards. Most remarkably, it has a rock solid, cash-rich balance sheet, a rarity among real estate owners, which not only mitigates risks but also provide a unique opportunity for growth. Lastly, it is managed and owned by a group of savvy investors / operators with interests closely aligned with shareholders. The legendary contrarian value investor, Prem Watsa – CEO of Fairfax Financial, is a major shareholder with board representation and early this year he significantly increased his stake in the Company through a rights offering.
GRIV’s management pre-emptively raised funds to take advantage of opportunities emerging in the severely depressed Greek real estate market. Commercial real estate values dropped 50-60% during the crisis. Funding is quite limited so having access to capital does provide a huge leg up, placing the Company ahead of its peers. Three years of severe economic depression have created quite a few bargains for savvy investors. The Company is uniquely positioned to take advantage of such opportunities through its strong balance sheet and deep connections in the local markets.
A real estate investment company with such characteristics would normally trade at a superior valuation in any other market. However, GRIV is being offered at an attractive valuation discount bases on its pro-forma NAV and dividend it. This discrepancy is due to the fact that it operates and trades in Greece and therefore it’s tainted by the country’s negative general perceptions. However, there is mounting evidence that certain Greek economic indicators are beginning to trend up, suggesting that the outlook for this deeply impacted country might be brightening. Of course, there is considerable risk of relapse but it is our view that Greece has already taken firm steps towards fixing its fiscal and competitiveness issues and that provides for an improved investment environment.
What We Like About GRIV
Valuation and Investment Recommendations
GRIV valuation is trading at an attractive valuation regardless of the appraisal methodology deployed. We believe there is upside from several tailwinds: 1) multiples’ rerating, 2) yield compression, 3) normalization of rents and 4) NAVs reversing recent declines as well as from accretive acquisitions. We have factored all of these three drivers into the calculation of the target price.
There are no meaningful comps to GRIV in Greece, so we have reverted to pan-European REICs for multiples’ comparison. Real estate investors approach valuation based on 1) earnings yields – i.e. what is the cash-on-cash income an owner is receiving on his or her invested capital – these yields are usually expressed in the form of inverse multiple ratios, namely measured by EBITDA / EV or FFO / Price; 2) discount to the assets’ fair-value – as measured by Discount to NAV. Certain investors also look at P/E ratios but those are somewhat less relevant due fluctuations in non-cash items (fair-value adjustments, dispositions etc.).
We have compared these metrics across a large group of continental European and UK REICs and have found that on average the sector trades currently at approximately 4-4.5% yield (EBITDA / EV%) with the UK trading slightly more favourably than the continental Europe. Analysts expect cash flow (EBITDA) for the European REICs to grow on average in the range of 4-7% over the next 3 years. GRIV trades at an EBITDA / EV% (pro-forma for recent acquisitions) of 7.8% i.e. 40-50% discount to European peers. In terms of NAV discounts, the group trades at 0-10%, with the lower end of the range associated with 2014 NAV and the higher end with 2015 NAV.
We should note here that we believe that the long-term prospects for GRIV are significantly better than the majority of the pan-European REICs, in addition to it having a much better balance sheet (LTVs for the pan-European REICs are in the 70-90% range vs. net cash positive for GRIV). However, given the “Greek discount” we have assumed in our analysis that the Company rerates to an approximately 20%+ discount to its northern peers. We should note here that some Greek Banks, a favourite of many US investors to play the country’s recovery, are already trading at premiums to US and European peers, so there is precedent for Greek companies’ rerating.
Furthermore, rents in Greece declined c. 35% since the beginning of the crisis and have not fully stabilized yet. Similarly during the Lehman crisis, US nationwide commercial office rents US declined by 12% from the peak in 2008, while the average retail rent went down 6%. Since the bottom in US commercial real estate, marked in late 2010, rents have already recovered by at least 5% and more in some cases. We expect that Greece will follow a similar path once the recovery begins. Given the much more severe decline in rents, and the fact that supply for new properties has been severely curtailed during the crisis, the rebound should be even more pronounced.
The Company is allowed by Greek Regulations to pay up to 100% of its net income in the form of dividends (it must pay a minimum of 50%). We have assumed an 80% pay-out, which indicates a 5+% dividend vs. US and European REITS at 3.5-4%, again at a discount to global peers.
Lastly, we have assumed that the proceeds from the rights offerings, together with some moderate amount of debt financing, will be used to make accretive acquisitions. All-in-all we have taken the Company’s guidance of €400-500mm of “firepower”. Assuming the lower-end of €400mm and 10% cap rate on acquisition (below recent 11% averages) and a 5% dividend yield, this combinations implies NAV upside of €3+.
Therefore with conservative assumptions of current NAV of €8.30, €1.70 of potential mark-up reversals and €3+ of acquisition accretion gets us to a potential NAV of €13+ in the next 2-3 years. Applying a small discount to NAV implies a price target well in excess of €12, up from €8.50-€9.00 current price range. Adding 5% dividend yield offers a total return of c.50% over the next 2-3 years and possibly sooner.
Conclusions and Investment Recommendations
We are attracted to the GRIV story because it offers the opportunity to participate in a recovery of the Greek economy in one of the least risky ways. The Company possesses a very high quality portfolio of properties occupied by a blue chip mix of tenants. Its solid operations withstood unscathed the most severe depression in Greek’s modern history. The Company’s rock-solid, cash-rich balance sheet mitigates risks and provides for a unique opportunity to capitalize on emerging investment opportunities. Under the stewardship of a properly incentivized management with deep experience and relationships and with funding provided by savvy shareholders such as Fairfax Financials, Fidelity and Eurobank, GRIV is uniquely positioned to take advantage of the possibilities ahead of it. The catalysts that will provide for value appreciation include additional acquisitions, economic recovery in Greece, rent increases, real estate asset value expansion, share repurchases, dividend increases and a possible sale to a larger pan-European real estate fund.
acquisitions, asset revaluation, multiples rerating, yield compresions
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