(Bloomberg) -- Real-estate company Aroundtown SA is proving it sometimes pays to rush in where others fear to tread.
The Luxembourg-based company's nose for assets with turnaround potential has gleaned properties like the Crowne Plaza hotel at Berlin hotspot Potsdamer Platz or the more demure Schlosshotel in the leafy Grunewald neighborhood. That helped the shares, which hit a record in January, return eight times as much as the Stoxx 600 real estate gauge last year, making Aroundtown the envy of its European peers.
“They look for ugly ducklings in real estate and find assets others might have missed because there may be something slightly complicated about them,” said AllianceBernstein fund manager Tawhid Ali, who bought Aroundtown shares in the second half of 2017. “When we look forward to the return potential of the company, we see a strong cash flow growth story.”
The rally hasn't damped enthusiasm for the stock, which has 11 buy ratings, no holds and no sells, according to data compiled by Bloomberg. Deutsche Bank AG analysts added Aroundtown to its model portfolio of German stock ideas for 2018, tipping the company to join the MDAX Index for medium-sized stocks in a March review. The firm also has exposure to Germany's booming residential property market through its stake in Grand City Properties SA, an MDAX member.
Targeting at least 1 billion euros ($1.25 billion) of commercial asset acquisitions in 2018, executive director Andrew Wallis said he sees “tremendous upside potential” for rental growth.
“We are seeing a clear vacancy squeeze, rents are going up and that re-basing is falling into our hands very nicely,” Wallis, who has previously worked as an investment banker at JPMorgan Chase & Co., said in an interview. “We're not generally looking at finished, prime core assets. We're looking for assets that we can turn into those kind of assets.”
Almost 80 percent of Aroundtown's commercial properties are offices, mostly located in Berlin, Frankfurt and Munich, and hotels. Investors poured about 58 billion euros into German commercial real estate last year, the second-best showing of all time, according to BNP Paribas SA. That's as the country's economy is firing on all cylinders and as cities including Frankfurt stand to benefit from the migration of financial professionals from London as a result of Brexit.
Founded in 2004 by Yakir Gabay, the former chief executive of the investment banking division of Bank Leumi Le-Israel, the company didn't go public until 2015. Back then, the market was fixated on the residential sector, yet Aroundtown could feel demand picking up in commercial areas that already had low vacancy rates, Wallis said.
The surge in activity in the past year hasn't crowded the market in which Aroundtown operates, he said.
“The crowdedness is more focused on the deals you see publicly, but in terms of this area where you need capital, time and resources to work on the assets, we see quite an attractive playing field of opportunities in 2018,” Wallis said.
A nascent risk for property stocks including Aroundtown this year are rising government bond yields, a trend that can derail bond-proxy sectors like real estate. AllianceBernstein's Ali says he prefers to focus on the fundamentals, adding that the company's ability to increase rents and grow cash flows is independent of the direction of yields. He sees its earnings and net asset value growing by 15 percent annually in the next two to three years.
“We've done our due diligence and they have a very strong management team,” Ali said. Our sense is that they are very disciplined, hard-working and quick to make decisions. That's a big advantage for them.”
To contact the reporter on this story: Aleksandra Gjorgievska in London at agjorgievska@bloomberg.net.
To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, Angela Cullen
©2018 Bloomberg L.P.
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