London-listed Globalworth Real Estate Investments (GRE) is a leading real estate company that acquires, develops and manages commercial real estate assets, primarily in the office sector across the Central and Eastern European (CEE) region. GRE’s geographical focus is in Romania and Poland, where it owns over 70 standing buildings in prime locations within their respective sub-markets in 13 of the largest and most liquid sub-markets in Romania and Poland.
The company’s portfolio primarily consists of Class-A office buildings, along with investments in mixed-use (office and commercial), logistics, and light-industrial properties. As of its latest 2022 annual report, GRE has a combined portfolio value of EUR3.2 billion ($4.7 billion), 85.6% standing commercial occupancy and around 1.406 million sq m of gross leasable area (GLA), with 106,000 sq m under development and refurbishment.
We think GRE is investment-worthy because it has decent fundamentals, but is trading cheaply. Its year-to-date and one-year total investment returns are –17.3% and –39.1% respectively, denoting that it is trading significantly cheaper. The business fundamentals indicators have at worst only marginally declined over this period, taking into account the total portfolio value, gross leasable area, contracted rent, and number of properties.
GRE’s focus on the largest real estate markets in the CEE region offers supporting macroeconomic and real estate fundamentals along with broad opportunities for growth and value creation. The European Commission (EC) forecasts a 4.3% growth in European Union GDP for 2023, with Poland and Romania above this average at 4.9% and 4.5% GDP growth respectively. Further, inflation rates in the short to medium term in the EU, Poland and Romania are expected to be at 6.4%, 11.7% and 9.7%, respectively, in 2023. Higher inflation rates imply higher potential rents, supporting the case for GRE’s strategic geographic focus.
The company’s portfolio has recorded and maintained positive operating cash flow over the years, and is expected to grow with its current development pipeline. The cash flow is also robust and sustainable, as GRE’s portfolio is predominantly leased to a diverse and international tenant base on triple-net, long-dated, annually indexed, euro-denominated leases.
GRE’s balance sheet is relatively safe, with strong liquidity represented by a current ratio of 3.4 times, and cash alone enough to cover all current liabilities. Based on our worst-case scenario of balance sheet projections assuming a heavy discount to property valuations, our revalued total assets to total liabilities is at 1.08 times, indicating that the company has a wide cushion to fall back on. Also, its assets and liabilities are principally euro-denominated, which minimises local currency exposure.
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The company is trading at a significant discount, with a P/B of 0.39x. Compared to global peers, GRE trades at a whopping 57% discount for its forward P/B, indicating that it is a very attractive pick-up.
Given its consistent record of positive operating cash flow, GRE’s dividends have become more attractive with higher yields as the share price dropped significantly. At current prices, a dividend yield of 9.7% is relatively more attractive than Romania and Poland’s risk-free rates of 7.4% and 6.2% respectively.
In terms of ESG, 89.8% of GRE’s portfolio is environmentally certified, with several of its properties holding additional ESG-related certifications. This includes 82.6% of the portfolio being green-certified by BREEAM (Building Research Establishment Environmental Assessment Method) and holding an “A” rating for the MSCI ESG ratings. Furthermore, 98% of the energy used in GRE’s portfolio of buildings are from renewable sources.
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There is one “buy” call for GRE with a target price of EUR7.60, more than double its current trading price of EUR2.93. Based on our in-house valuations, we think that the company is worth at least 25% above its current trading price including dividend returns.
Disclaimer: This company is for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy or sell stocks, including the stocks mentioned herein. This stock does not take into account the investor’s financial situation, investment objectives, investment horizon, risk profile, risk tolerance and preferences. Any personal investments should be done at the investor’s own discretion and/ or after consulting licensed investment professionals, at their own risk.
