2023-12-20 01:51:27 ET
Summary
- Gecina is an undervalued Parisian real estate company with strong institutional investors and a stable financial position.
- The company reported positive rental growth and occupancy rate in the Parisian CBD, indicating upside potential.
- Gecina is ranked 1st out of all 100 European listed Real Estate companies and has an A-rated credit grade and a well-covered yield.
Dear readers/followers,
I've been a follower and investor in Gecina ( OTCPK:GECFF ) for some time. I updated on the company back in August , after my first article back in 2022, and expanded my investments in the business.
For those just arriving at this company, Gecina is a Parisian real estate company that has underperformed but is undervalued with significant upside potential. The company owns a large portfolio of Parisian real estate, primarily office spaces, and has strong institutional investors.
The company complements these advantages with a stable financial position, high rental growth, and a solid occupancy rate in the Parisian CBD - and if you know anything about Paris, you'll know the appeal of Gecina knowing its properties in exactly these geographies.
I recently published an article on French REIT Icade, I'm doing an update on Gecina at this as well, where I point to the upside in this company after the 9M23 update, given the structural improvements in the company.
A reminder on Paris here and the company...
...and moving into the 9M update.
Looking at Gecina's 9M23 and the upside in Parisian Real Estate
So, Gecina. We're talking about a European REIT with some of the best fundamentals you'll ever see in the current market.
Why?
Because Gecina, to begin with, is A-rated from both Moody's and S&P. There is reason for this. The REIT has an LTV of less than 33%, including duties . It's also at an EPRA net tangible asset per share of €161.4, compared to a current native share price for the Gecina ticker of €109.6, marking a significant discount to NAV still.
However, we've seen some non-trivial movements in the share price following the recent macro changes - my Gecina position is now in the green, and I'm very pleased with the high dividends that I've been receiving out of this company.
Gecina has a market cap of around €8B, with current dividends of €5.3 distributed for 2023, putting the company at the midpoint of that 4-5% yield, which for an A-rated yield is absolutely superb. Only the best REITs like Realty Income ( O ) manage this sort of rating/yield combination.
Based on that, I would consider Gecina to be incredibly undervalued previously and still undervalued today.
The latest set of operational results for the 3Q23 period in my mind only confirms this upside.
The company reported a Gross rental income, or GRI increase of 7.3% on a current basis, and even 6.1% like for like, with a positive reversion on leases. I have been expecting this to materialize for months, and this has now come. We see 26% reversals for CRE in pairs and 13% for residential. Compare this to the CRE/Office market in the US, and you can see some of the fundamental strengths in Gecina and the Parisian office market.
The company's current 2023-2024 pipeline is now 100% pre-let, with two major projects in Paris recently also pre-let, the Mondo and the 35 Capucines objects, totaling 35k+ sqm. The entirety of the Mondo building, for instance, is leased to a major CAC40 group.
Again, find me another CRE or similar REIT that is managing that here.
Gecina is now ranked 1st out of all 100 European listed Real Estate companies in the GRESB and is estimating a 2023 recurring net income on a per share basis confirmed upward of €6/share.
Occupancy trends for Gecina, both for CRE and for Resi are up 130 bps for offices and 110 bps overall, meaning offices are growing faster than resi here.
And the positive trends in CRE and offices are not yet done either. Rental trends for CBD 5-6-7 in Paris are still positive, and for the Central areas like Neuilly and the Southern Loop, they're even better than other areas. La Défense is almost leading the charge here with a like-for-like GRI improvement of over 12.5%, which in this environment is nothing short of amazing.
These GRI improvements are results of structural occupancy improvements, secured for buildings vacant in 2021-2022, and showcasing that the trends we see for CRE in the US are not the trends we see in Europe - at least we don't see them the same way in pairs.
When we look at the residential assets the company has, the numbers are now at almost 96% for the traditional resi, weighed down only by the company's remaining student/campus residential, which by their nature have a far higher turnover and volatility rate, and which in this economic environment are also harder than they've been before. The group Resi total occupancy is at 93.6% here.
The company is of course still actively disposing of non-core and other assets, with a current 9M23 of €111M of sales under prelim agreements. The company has completed a full billion euros of sales under the first half, showcasing the appeal of its sold assets with an average premium to appraisals of 7.7% , with an average rate for the loss of rental income of less than 3% for the occupied buildings. None of the sold assets were core or close to the center of Paris.
What is also unique is the combination of A-rated institutional credit grad safety and nearly 4-5% well-covered yield. This high yield coupled with A-credit is otherwise fairly unheard of in the entire segment, and certainly in Europe.
That's why I initially invested in the company, and that's why I'm happy seeing that investment now slowly starting to pay off here.
Let's say you don't believe in Gecina - that's fine, but in that case, let me detail just exactly what you're being negative or bearish upon. Due to the company's fundamentals and solid assets, in order for you to be negative long-term on Gecina, you have to be long-term negative on Paris as a whole.
So let's say that if you - like me - believe that Paris won't change, or that the appeal of Paris won't change as a hub won't change, then you really have very little business being negative on Gecina, because the company owns and lets some of the best properties in the core of the city.
This is because there simply isn't much real estate to go around in Paris. We're talking about one of the core cities in all of Europe, with a structural scarcity in terms of real estate. Paris is very much comparable, or worse, to NYC, Tokyo, Singapore, and other similar cities. There's virtually no vacancy in the CBD. Despite the economy and the current political situation, the Paris CBD vacancy is less than 2.5%, and as you saw, this goes for both CRE and Resi.
Remember, these fundamental improvements that Gecina is showcasing are setting it apart from what the company used to be over a decade ago. t used to play leverage much like some international REITs did, but post-GFC, Gecina dismissed its leadership in charge of this and moved on to a new strategy. It divested €3B worth of assets in 2011-2013, paying down debt, issuing convertible bonds, and refinancing borrowings. This has left the company in an extremely comfortable position financially.
That's why it's A-rated, and that's also one of the main reasons that I am 0.55% invested in Gecina at this time.
Let me showcase my view on Risks and upsides here.
Risks & Upsides for Gecina
Gecina's upside is based on the two combined appeals of the company, namely Paris and the fundamentals. With most of the risks for Gecina out of the way here, meaning the times of high debt are absolutely over, the main influencing risk factors that decide where Gecina goes are the first, the appeal of Paris, and the second, macro.
Neither of these factors are things that the company, or any company, holds all that much sway over.
Management in this company is stellar - and I believe the way they have navigated the past 10 years shows that they know what they are doing.
Given that they know what they are doing, and the reversal I have been forecasting for some time is happening, I stick to my stance that there is very little actual risk to this investment, and am moving to valuation.
Valuation for Gecina
So, my position for Gecina is, as I mentioned, already in the green. In terms of an OCF multiple, the company has now recovered from the worst of its lows, because it's trending up.
What makes this CRE/Resi REIT investment different than most of the US ones I invest in, is that Gecina is forecasting growth. And not just any growth, but 2-7% for the next years every year. That's good growth for a REIT.
And it's still below its typical premium, which is at 23x P/FFO. Before you go complain about that, keep in mind that this company is rated on par with Realty Income, and also manages a portfolio that has one of the best metropolitan appeals on the planet - period.
I have no issue forecasting at this premium, and this means that Gecina could by all rights reach as high as €140-€150 eventually.
My previous PT was €110. I could stick to it, but I'm bumping it to €120 here to account for the clear reversal of the company's operating fundamentals, and I say that this upside is no longer as unclear as it once was.
My own investment in this company is currently up double digits including dividends and FX - and I am investing more before things get "too expensive" here. At €109, the company is still attractive even to my old PT, but it's time to bump it here.
The following thesis is relevant for Gecina at this time.
Thesis
- Gecina is a superb Parisian/French REIT with an appealing mix of Paris CBD office and residential properties. It's not seen much of the negative trends seen in the American office market, and its leverage makes it one of the most conservatively leveraged real estate companies out there. It's a fundamentally safe investment, as I see it. Beyond that, I believe it has an upside over time. It's A-rated and has a 5.5% yield, which puts it on the higher-yield level.
- If you allow any sort of premium based on these factors and consider a 17-19x P/FFO valid for this company, then you have a double-digit upside when investing here, even one above 15%, which is what I am looking for.
- I Give Gecina a PT bump to €120/share for the long term, which means that at the current valuation, the company is a "BUY" to me.
Remember, I'm all about:
1. Buying undervalued - even if that undervaluation is slight, and not mind-numbingly massive - companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime.
2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
3. If the company doesn't go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows.
4. I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1.
Here are my criteria and how the company fulfills them ( italicized ).
- This company is overall qualitative.
- This company is fundamentally safe/conservative & well-run.
- This company pays a well-covered dividend.
- This company is currently cheap.
- This company has a realistic upside based on earnings growth or multiple expansion/reversion.
I went back and forth between calling this company "cheap" here or not, but I do believe that it qualifies as cheap at this valuation.
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
For further details see:
Gecina: Seeing Structural And Operational Improvements, Buying More