VIB Bridge Extension 

DIC announced it has agreed with creditors to amend terms on the €500m bridge financing used to buy a 61% stake in the logistics-focused property company VIB Vermögen AG (increased to 68% in Nov-2022). A €100m notional amount was repaid last year and a further repayment of €200m was made in July 2023 under the renegotiated amendment. Alongside, DIC extended the maturity on the remaining €200m from Jan-2024 to July-2024. Reportedly, there’s an additional financial covenant included as part of the renegotiation which was not discussed on the H1 23 earnings call.

The extension provides breathing space to sell their yielding assets in a more controlled manner and avoid a fire-sale situation. This, however, comes with a price as there are multiple margin step ups until final maturity.

The bridge currently pays “on the higher level of around 8%” and includes a 50bps step up in October and 100bps step-ups every three months from January 2024. When quizzed if the bridge can be further extended, CEO Sonja Wärntges said “I think there are always possibilities to extend but that's definitely not our plan”.

Disposing with a discount

Targeting €300m-€600m of asset sales in 2023, four properties were sold in H1 23 with a total notarised value of €132m. This included three assets worth €119m from the yielding portfolio, and an additional €13m property from the “RLI Logistics Fund – Germany II” special fund.

DIC booked an average discount of 13.6% on these transactions. Despite double digit mark-downs, DIC expects a property devaluation of just c.4% to 7% at year-end, which naturally cast concerns for those on the call whether this estimate is reflective of the true valuation and the bids being received.

CEO Sonja Wärntges reassured analysts that the high discounts on recent sale agreements were due to one large problem property, sold at a 19% discount, that required significant ESG-related refurbishment. The remaining three assets were sold at a zero or low single-digit discount to reported book values.

The CEO added that the size of discount depends on the “special situation of the asset, the one we sold with a discount was with eight parts, and a lot of capex coming up and also for security reasons but especially for ESG reasons and therefore we decided not do this in the future and to sell it with the discount we see now” [speech slightly rephrased for clarity]

Maturity wall

Source: 9fin estimates and company guidance

As shown above, DIC has €806m of current debt maturities (including €200m bridge due in July-2024 but included given the relevance) which compares against €486.7m of FY 23 pro forma liquidity. The €319m liquidity shortfall is likely to be covered by a combination of (i) FFO generated in H1 24, (ii) further disposals in H1 24 (iii) rollover of bank debt where possible. 

Secured debt capacity dried-up

Unlike other yielding real estate peers, DIC doesn't have the luxury of collateralising assets and raising secured debt as almost its entire capacity was used in H1 23 when DIC signed a €500m syndicated loan to refinance 45 properties at its VIB subsidiary level.

This has two major implications — firstly, DIC has exploited one crucial capital raising pool and secondly, disposal proceeds attributable to unsecured bondholders will be the equity release i.e. cash left after paying down the secured debt attached to properties. Q2 23 secured LTV stood at 25%, implying on average three-quarters of gross disposal proceeds will be available to pay unsecured debt.

Covenants challenged

DIC bond docs feature two incurrence and one maintenance covenant, namely — LTV 55.3% (covenant limit 60.0%), Interest cover (ICR) 2.6x (1.8x), Secured LTV 25.0% (45.0%).

Firstly, the bond LTV looks seriously challenged amid forward outlook regarding property devaluations. DIC estimates 4-7% devaluation in 2023 which elevates the covenant breach risk as illustrated below. Further raising alarm bells, the company's covenant LTV calculation is typically higher than the Adjusted LTV which is used in the model below. However, asset disposals, assuming not substantially below book values, somewhat mitigates the risk of tripping the covenant.

Source: 9fin estimates and company guidance

The rapidly rising interest bill on the VIB bridge loan increases pressure on the ICR too, although this risk is less pronounced than for a LTV breach. Secured bank debt could be rolled over but most likely with a higher margin. And that's not all. An analyst on the earnings call spotted discrepancies in the company's ICR calculations, to which management explained it excluded certain one-off items from its calculation. Including those items, ICR would be 2.4x rather than 2.6x reported (1.8x covenant limit).

Guidance revised down

FFO declined sharply in H1 23 to €22.4m versus €53m last year primarily due to the high interest burden from the VIB acquisition and no transaction and performance fees generated in the first half of 2023 (versus €22.1 in H1 22). The downturn in the transaction segment was only partly offset by like-for-like rental growth of 7.3%.

“We now expect a recovery not before 2024” said CEO Sonja Wärntges, which led DIC to revise down their forward guidance markedly. Guided FFO for 2023 was cut down to €50m to €55m (previously €90m to €97m). Due to a decrease in transaction-based management fees, income from management fees was also lowered to €50m to €55m (previously €70m to €80m)

Trading wide

DIC has previously announced the €150m SUNs due 2023 will be repaid at par in full in October from the cash on balance sheet. The longer dated 2026 bonds, naturally, are trading at distressed levels given the large amount of temporally and effectively senior debt ahead of them. The €400m SUNs due 2026 were indicated with a cash price of 55.5-mid for a 23% YTW as at time of writing. 

Source: ICE data