Grand City Properties: Oversold dusted jewel? Maybe not yet.
Back in Oct 13, 2022 I made this analysis:
Compared to Vonovia, Grand City has a double better debt position than its big competitor. Earnings payout are 23% and cash payout 64%. Vonovia's respective figures are 67% and 61%. Debt quity ratio at 57% is highly different from Vonovia's at 117%. Grand City may experiment higher costs of debt refinancing in 2023 but not as much as Vonovia in relative numbers. Grand City is able to breath better within this whole interest rates hike environment than mostly any other REIT. Sometimes, it's better to aim at 1,5B valued companies than 15B valued ones.
But then, on March 16th, 2023 GYC presented its FY 2022 results. And my analysis changed to this one:
Unfortunately, Grand City decided not to pay 2022 dividend due to macroeconomic uncertainty. The results were somewhat weak even though positive. I see GYC going down to 4.42€ in the next months. Better to avoid
January and February 2013 lows were around 4.42€. Current PER is 9.51 and dividend yield has been cut to 0% in 2022. Interest rates keep rising at the moment and before the SVB, FRC, Credit Suisse fall; investors thought they would go up until 5.5-6%. Even though debt is lower than its bigger competitor Vonovia and according to GYC website the company’s debt have a 95% interest hedging ratio, which is expected to reduce to 91% as some interest rate hedging matures throughout 2023; in an environment of increasing interest rates, investors could switch from REITs to bonds. The fact that GYC cut its dividend to 0, may look very disciplined and responsible. But a REIT who does not pay dividend is no longer attractive in my opinion. Whether it will be at 10-15€ in the next 4-5 years, that depends on: inflation stabilisation, interest rates beginning to drop at comfortable levels (1-3%), reduced banking crisis uncertainty and reduced recession fears, among other factors. It's also important to track the FFO and AFFO and compare these two metrics with competitors in order to see if the stock has been oversold or overbought.
If Central Banks stop raising interest rates or inflation drops further, then REITs will be one of the first sectors to recover as they may be experiencing overselling. When I analysed GYC back in Oct, I saw good fundamental reasons to invest in it. Macroeconomic uncertainty is now overweighting those fundamental reasons.
But when every aspect in the macroeconomic environment seemed to doom the expectations of GYC stock, I analysed the fundamentals of the company:
CONCLUSION
We may be set to turnaround very soon on GYC. However, the fact that a REIT does not pay dividends is something clearly penalising the stock value. Therefore, I would still wait and see how the market develops and if GYC reaches 4.40€ level, maybe it could act as a historic support level from January 2013 and bounce back upwards from there.
Compared to Vonovia, Grand City has a double better debt position than its big competitor. Earnings payout are 23% and cash payout 64%. Vonovia's respective figures are 67% and 61%. Debt quity ratio at 57% is highly different from Vonovia's at 117%. Grand City may experiment higher costs of debt refinancing in 2023 but not as much as Vonovia in relative numbers. Grand City is able to breath better within this whole interest rates hike environment than mostly any other REIT. Sometimes, it's better to aim at 1,5B valued companies than 15B valued ones.
But then, on March 16th, 2023 GYC presented its FY 2022 results. And my analysis changed to this one:
Unfortunately, Grand City decided not to pay 2022 dividend due to macroeconomic uncertainty. The results were somewhat weak even though positive. I see GYC going down to 4.42€ in the next months. Better to avoid
January and February 2013 lows were around 4.42€. Current PER is 9.51 and dividend yield has been cut to 0% in 2022. Interest rates keep rising at the moment and before the SVB, FRC, Credit Suisse fall; investors thought they would go up until 5.5-6%. Even though debt is lower than its bigger competitor Vonovia and according to GYC website the company’s debt have a 95% interest hedging ratio, which is expected to reduce to 91% as some interest rate hedging matures throughout 2023; in an environment of increasing interest rates, investors could switch from REITs to bonds. The fact that GYC cut its dividend to 0, may look very disciplined and responsible. But a REIT who does not pay dividend is no longer attractive in my opinion. Whether it will be at 10-15€ in the next 4-5 years, that depends on: inflation stabilisation, interest rates beginning to drop at comfortable levels (1-3%), reduced banking crisis uncertainty and reduced recession fears, among other factors. It's also important to track the FFO and AFFO and compare these two metrics with competitors in order to see if the stock has been oversold or overbought.
If Central Banks stop raising interest rates or inflation drops further, then REITs will be one of the first sectors to recover as they may be experiencing overselling. When I analysed GYC back in Oct, I saw good fundamental reasons to invest in it. Macroeconomic uncertainty is now overweighting those fundamental reasons.
But when every aspect in the macroeconomic environment seemed to doom the expectations of GYC stock, I analysed the fundamentals of the company:
- Analysis FY 2022 results: Net Debt/EBITDA = 11.4x. AFFO diminished -1.26%. FFO/per share +3% at 1.14€. P/FFO (Today) = 7/1.14 = 6.14.
- Guidance FY 2023 FFO/share to decrease -13.16% max to 0.99€/share. P/FFO (2023e) = 7/0.99 = 7.07.
- Sector P/FFO for Residential REITs in US has been moving steadily between 17 and 25 in 2010-2018 period (S&P Global Market Intelligence, Nareit 2018). GYC is clearly undervalued already.
- Technical aspect doesn’t show any signs of recovery yet. RSI(14) suggesting completely oversold but selling volume keeps increasing.
CONCLUSION
We may be set to turnaround very soon on GYC. However, the fact that a REIT does not pay dividends is something clearly penalising the stock value. Therefore, I would still wait and see how the market develops and if GYC reaches 4.40€ level, maybe it could act as a historic support level from January 2013 and bounce back upwards from there.
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