Securities of income-producing real estate company G City (TASE: GCCT) (formerly Gazit Globe) have fallen sharply over the past three months, indicating significant disparities between the views of the company’s management, headed by controlling shareholder and CEO Chaim Katzman, and investors, of the true value of its assets. G City’s share price has fallen 28% over the past three months, giving the company a market cap of NIS 2.7 billion, just 45% of its shareholders’ equity.
The company’s bonds have also fallen sharply over this period, with their yields climbing to the high single digits. G City’s 12 bond, for example, has lost 8% of its value in the past three months, and its current price gives a yield to maturity of 9%, plus index linkage.
IBI Investment House real estate analyst Nadav Berkovich says that this is a dramatic development, pointing out that the company, which mainly specializes in commercial centers, has an NIS 8 billion debt to its bondholders. "We’re in a situation of a wide gap between the way the market is pricing the stock and the way in which the company presents the value of its assets in its financial statements, and even a gap with the way the bondholders price it," Berkovich explains.
Berkovich stresses that the shareholders’ equity as derived from the book value of the company’s assets reflects very high upside in relation to the company’s market cap. The reason for that, he says, is that the market does not believe in the company’s shareholders’ equity, and prices its assets lower, as in Europe, where income-producing real estate companies are traded at a multiple of just 0.5 on shareholders’ equity.
This mainly applies to G City subsidiary Atrium, which is active in Central and Eastern Europe, and which represents about 40% of G City’s asset portfolio. In early 2022, G City completed the purchase of the minority holdings in Atrium (which has since changed its name to G Europe) for NIS 1.4 billion, after a raising NIS 470 million in a private placement with Israeli financial institutions.
Berkovich says that G City’s bonds also reflect the possibility of a future cash flow problem, because some of them are already traded at below adjusted par value. The longer term 17 bond, for example, is currently traded at just 75% of its par value.
"The conclusion is that the company is under pressure from all sides to realize assets in a substantial way, in order to demonstrate that its shareholders’ equity is genuine and positive," says Berkovich. "If it manages to sell assets in a way that broadcasts to the market that the assets are worth what appears in its books, then things will gradually come right. But if it doesn’t realize assets, time is not currently on the company’s side."
In this context it should be pointed out that publicly traded subsidiary Citycon (HEL: CTY1S), which brings together G City’s activity in the Nordic countries, is traded at a market cap well below its book value, and so selling at the market price will create a large loss.
The activity in Israel and the US represents the main growth and development engine for the group for the coming years, while the business in Brazil was put up for sale in January this year.
"In the US, it will be possible to sell assets at values close to their book values, and of course the company has good assets in good locations in Israel, which could yet be sold, or partners could be brought in, or any other action could be taken that will generate liquidity. In addition. Atrium’s assets could perhaps be realized, with the proceeds being used to repay Atrium’s own bonds and reduce the leverage a little," Berkovich says.
"These are, however, challenging moves, and the company will have to demonstrate to the market that they are possible. Until then, the company’s bond yields will remain at current levels, if not higher," he adds.
To sell an asset in each territory
G City has been taking action in recent months to realize assets, with the aim of reducing the group’s leverage, which stands at 70%. The company is at various stages of marketing three Atrium assets in main cities in Europe, and in marketing another three assets in Brazil. The goal is to complete the sale of at least one asset in each territory by the end of 2022.
In addition, targets have been set for cutting management and general expenses. In that context, Atrium’s offices in Amsterdam and on the island of Jersey have been closed.
Atrium has moved all its offices to Cyprus, in a move meant to save about €8 million annually. Atrium is also due to downsize following the buyout, both in its assets and in its workforce, which will find expression in reduced costs in 2023.
At the end of June 2022, G City had liquid reserves of NIS 3.9 billion, of which NIS 2.4 billion was cash and the rest unutilized credit lines. Excluding Citycon, the group’s total debt was NIS 18.4 billion.
Norstar down 35% in three months
Katzman does not control G City directly, but through publicly traded holding company Norstar (TASE: NSTR), which holds 51.5% of G City. Norstar has two bond series totaling NIS 814 million in adjusted liabilities. The longer series of the two, the 12 series, with a duration of 2.8 years, is currently traded at an annual yield to maturity of 9.6%, after a 9% drop in its price in the past here months.
Norstar’s share price has fallen 35% in that period, and the company now has a market cap of NIS 800 million. Besides Katzman, who holds 28% of the company, a substantial stake in Norstar, 22%, is also held by real estate developer Israel Canada (TASE: ISCN), controlled by Barak Rosen and Asaf Tuchmair, which tried to take over Norstar earlier this year, but withdrew in the face of the sharp fall in the company’s share price, which resulted in a large paper loss for it.
Published by Globes, Israel business news - en.globes.co.il - on October 24, 2022.
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