The results call itself was reasonably uneventful, perhaps partly as a function of the lack of Q&A session, lasting just 20 minutes (compared to 1hr 20 mins for Q2). There were, however, certain information gaps filled in with regards recently signed asset disposal agreements and management disclosed that the board has appointed KPMG’s specialised forensic accounting division to review historical transactions, with their report due in Q1 22. 

Having an independent view is welcome, but the lack of Q&A meant that management didn’t have to face questioning on some of the allegations made in Viceroy’s short-seller report, nor address concerns raised by recent site visits by journalists to its development sites. The company has, however, shed light on the impact of the reconsolidation of its Gerresheim development asset. This aside, credit metrics have deteriorated temporarily as the group awaits crucial cash proceeds from its asset disposal program. 

Light shed on secured debt at assets to be disposed:

We know from releases in October that Adler had signed agreements with LEG and KKR to dispose of just under 30k of its ~70k unit portfolio for a combined transaction value of ~€2.5bn Net cash proceeds would be €1.4bn after the repayment of secured debt and other transaction-related expenses, but the quantum of debt secured against the assets was not disclosed. We now know that €734m of cumulative project/secured debt is due to be repaid with the disposals, €379m of which relates to assets involved in the LEG deal while there is €355m of secured debt at assets subject to the agreement with KKR.

Management reiterated that €1.4bn of net cash proceeds would be used to de-leverage the balance sheet and fund the refinancing of upcoming maturities, setting a medium-term target (i.e. following the expected close of KKR deal in Q1 22) of net LTV between 45%-50%. But in the meantime, LTV (including convertible bonds) has risen to 57% from 54.7% as of Q2 21. 

The deal with LEG is in the final stages of negotiation and “could materialise promptly” - the deal is expected to close during 4Q 21. 

The group also sold an office development project in Frankfurt during July for €185m with proceeds expected to be received in Q4 21. These too will be directed towards debt repayment with view to aiding the de-leveraging strategy. 

With the yielding portfolio disposal program due to end once the KKR deal closes in 1Q 22, Adler Group will now “focus on the planned disposals of non-strategic development projects to further reduce debt and decrease development exposure.”

Credit metrics deteriorate despite further portfolio appreciation: 

Reported net LTV (different to covenant definition) as of 3Q21 spiked to 57% including convertible bonds, up from 54.7% as of Q2 21 and 53.4% as of FY20. Per covenant definitions, net LTV was at 53.4% (60% financial covenant level), secured net LTV was 21.3% (45% covenant level), the interest coverage ratio (ICR) was 3.2x (>1.8x covenant level) and the unencumbered asset ratio was 125% (130% covenant level). Management noted on the earnings call that this leaves €340m of capacity to issue secured debt.  

Although there is currently slim headroom under certain financial covenants, management has guided that the majority of near-term debt maturities will be refinanced with available balance sheet cash or disposal proceeds, or be termed out on agreement with creditors. In fact, management noted that the maturity profile of certain short-term debt had been extended as of the time of the call. The €170m outstanding of the €500m Adler RE December 2021 1.5% SUNs will be repaid with available balance sheet cash next week. 

Another €237m of financial instruments are in advanced extension discussions while €619m of other debt maturing in 2022 (including Adler RE 1.5% SUNs and Consus RE 4% convertibles) is covered by the €1.4bn of net cash disposal proceeds expected to come in by Q1 22. The group has a favourable debt maturity profile with 40% of its €8.3bn of total debt as of Q3 21 not maturing until 2026 and beyond. 

RCF provides liquidity life support

The company’s portrayal of a “significant liquidity buffer” of €396m of cash on the balance sheet was given a dramatic boost by the complete drawdown of the company’s €300m RCF during the quarter. This liquidity will be needed to cover cash needs in Q4 21, depending on the timing of cash receipts from disposals. It’s not necessarily especially reflective of a healthy credit profile that the company has been required to draw down on its RCF to support near-term debt refinancings. A €500m commercial paper program was established in June, however only €5m of capacity had been used as of Q3 21 and we expect the group’s access to this liquidity source to be limited at the very least. 

The ‘selected’ financial assets/receivables balance of over €1bn as of Q2 21 is expected to fall below €300m by year-end as a result of incoming payments from disposed development projects, further supporting liquidity. We note that this is partly a function of the derecognition of a ~€135m purchase price receivable relating to the sale and reversal of the Gerresheim asset. 

Gerresheim asset reconsolidated

Adler reconsolidated the Gerresheim development SPV during Q3 21 at a valuation of €270m - close to the €261m asset value related to the project on balance sheet as of Q2 21 (more in Adler RE deep-dive). €148m of loans and other borrowings were also consolidated, answering our question about the balance of the outstanding mortgage at the SPV. The company says the fair value of the property was determined independently, however we note that re-consolidating the project as a build-to-hold asset means it can be held at fair value rather than in inventory at the lower of accumulated costs or net realisable value. We still favour adjusting the value of the asset to the price Brack/BCP paid to acquire it in 2017: €142m. 

Humorously, the company noted that the project “now perfectly fits into our build-to-hold approach” after changes in the zoning permit means properties built will now be rented apartments rather than the condominiums initially planned. This borders hyperbole in our minds, when considering the project’s progress has been stalled for several years. 

A final note on Gerresheim: “no cash will be paid to any party involved, nor has any cash been paid to any other party since the sale.” This means that any cash consideration received by Adler for the sale of the 75% stake in the development will not be returned to the buyer; the sale was done at a valuation of €375m. We leave it open to the reader to interpret this as you wish. If you would like to know more, our deep-dive on Adler RE is a good starting point, while the Viceroy short-seller report is another useful resource.  

KPMG hired to review transactions:

Finally but “perhaps most importantly” - in the words of co-CEO Maximilian Rienecker - management revealed that the Adler board has appointed KPMG’s specialised forensic accounting division to review, amongst others, certain historical transactions. The firm will produce an independent report on allegations from Viceroy’s short-seller report, with completion expected in early 2022. In the meantime, KPMG will immediately notify Adler’s board of any material findings. The outcome of the analysis will be made public, however the group has not signalled that it will make the report itself public. 

Annual results are due on 31 March 2022.