AANNF - Aroundtown: 2022 Earnings Preview

2023-03-21 16:11:59 ET

Summary

• Aroundtown is a German real estate company focused on the office, residential, and hotel segments.
• While its operational performance has been acceptable in recent quarters, its momentum is likely to have been more negative in recent months.
• A dividend cut is quite likely, and liquidity issues are also a concern for investors.

Aroundtown ( AANNF ) is currently trading at a depressed value, but the prospects of a dividend cut, lower property values, and liquidity issues are all good reasons for its cheap valuation.

As I've analyzed in a previous article, Aroundtown's dividend cut risk is significant and recent announcements by some of its German peers of dividend cuts and suspensions clearly support this view. As the company is scheduled to report its 2022 annual figures by March 29, 2023, I think it is a good time to revisit its investment case and analyze what the market is expecting for its upcoming earnings.

Earnings Preview

Aroundtown has been reporting a positive operating performance in recent quarters, even though the operating landscape has changed in the past few months, as rising interest rates in Europe have led to lower property valuations and funding conditions are difficult for real estate companies in the capital markets.

Given that Aroundtown is highly leveraged and has used hybrid bonds to a large extent over the past few years, it is one of the companies within the European real estate sector to be most affected by negative investor sentiment.

Indeed, while its reported loan-to-value (LTV) ratio, a key leverage ratio within the sector, was only 40% at the end of last September, when including hybrid bonds the adjusted LTV ratio increases to 54%, showing that Aroundtown has used hybrid bonds to a larger extent than most of its peers.

Due to high balance sheet leverage and tighter financing conditions, plus a transaction market that is almost frozen in Europe, real estate companies now focus on cash preservation rather than business growth.

This background explains why recently some of Aroundtown's peers have decided to put annual dividend distributions on hold, or have delivered a significant cut. For example, both TAG Immobilien ( TAGOF ) and LEG Immobilien ( LEGIF ) decided not to pay a dividend related to 2022 earnings, while Vonovia ( VONOY ) decided to cut its annual dividend by close to half.

Regarding Aroundtown, I also expect a dividend suspension, as the company's strategy has clearly shifted to cash preservation in recent months, which explains its decision some months ago to skip call options on its hybrid bonds.

This will help the company to save some €250 million in cash, which in normal times may not seem much, but in the current operating environment is an important step for the company to maintain its leverage within acceptable levels.

Investors should note that Aroundtown only pays one dividend per year, like many European companies, thus its dividend decision is usually reported together with its annual results.

Despite my expectation of a dividend suspension, this view doesn't seem to be shared by the market, given that the current consensus is expecting a small dividend cut compared to the previous year. Indeed, as shown in the next graph, dividend expectations (red line) have been revised downwards in recent months, but the Street is still expecting an annual dividend of about €0.21 per share, a decrease of only 9% YoY.

Moreover, another blow for Aroundtown's capacity to distribute a dividend was Grand City Properties ( OTCPK:GRNNF ) recent decision to also suspend its annual dividend. For those who don't know GCP, you can see my previous analysis here , and this decision affects Aroundtown because it is the largest shareholder of GCP, with a stake of 58%.

This means that Aroundtown will receive less income in 2023 than was expected, which could amount to about €33 million if the dividend was unchanged from the previous year. While this is not a big cash amount, it puts further pressure on Aroundtown's cash position and is not positive for its dividend sustainability.

Beyond its dividend, Aroundtown's operating performance in the past few months of 2022 is not expected to be particularly good, pressured by lower property values and a slowing economy in Germany.

Its revenues are expected to be about €390 million, a decline of 5% from the previous quarter, and its EBITDA is estimated to be around €239 million (-3% quarter-on-quarter). While its performance in the last quarter shows a slowdown in operating momentum, for the full year its revenues are expected to increase to €1.43 billion, supported by its better performance in the first quarters of the year, and also by acquisitions performed early in the year.

Regarding its property portfolio, Aroundtown is now more focused on disposals rather than acquisitions, and the company has some pending deals (about €1 billion at book value) that I expect the company to update the market about the timing for its closing, and if deal values will hold considering the recent market weakness.

This is quite important right now because Aroundtown's liquidity is enough for the next couple of years, but it needs asset sales to have enough financial resources to cover debt maturities until the end of 2025. Furthermore, the recent banking turmoil in the U.S. and Europe is not helpful for real estate companies to refinance upcoming bond and loan maturities, both in the capital markets and through bank loans, a situation that I do not expect to change much over the next few months.

Therefore, asset sales are key to raise cash over the next few years, and while Aroundtown is not a forced seller for the time being, it may need to sell assets below their book value to raise cash, which will negatively impact its earnings and free funds from operations.

Moreover, while historically its asset portfolio recycling strategy was to sell older and lower-yielding assets, this has changed in recent months, with the company selling mainly assets under development and office space. This means that Aroundtown is already seeing pressure on lower-quality property assets, as buyers are not willing to pay a premium, making transactions harder to pull off. This is not surprising given that most players in the market are also pursuing the same strategy of selling assets to raise cash, which does not bode well for valuations in the short term.

Nevertheless, Aroundtown's liquidity position at the end of Q3 2022 was acceptable, taking into account that Aroundtown had cash and liquid assets of around €2.3 billion, which together with pending asset sales are enough to cover debt maturities until the end of 2025. However, this is a key metric that investors should consider in the upcoming earnings release, as the market is likely to react badly if its cash position has decreased in recent months as it would be a sign of potential liquidity issues ahead.

Conclusion

While Aroundtown's operational performance has been acceptable in recent quarters, pressure on liquidity and property values is likely to lead to a dividend cut, or potentially a total suspension, related to 2022 earnings. While this is not reflected in the current consensus, this should not be a great surprise to investors, as other German real estate companies have made dividend cuts and suspensions recently.

Aroundtown is currently trading at depressed values, at only 0.18x net asset value, but a rebound doesn't seem likely in the short term, and therefore, investors should continue to follow its story, but there is no rush to buy yet.

For further details see: