GRAND CITY Properties S.A. : Another year of earnings growth; we cannot resist to issue Buy recommendations for the new € 500m 2027 notes and € 350m hybrid

GCP continued its trend of earnings improvement in 2017, driven by a high non-cash fair value gain on its property portfolio (€ 615m), which was 75% driven by yield compression, like-for-like rental growth of 3.5% and vacancy reduction of 90bp to 7%. - LTV (as defined by us) was flat yoy at 41.5% at YE 17 (YE 16: 41.6%) and we do not foresee any material LTV or interest coverage improvements in the next few years. - The company acquired 300 newly constructed residential units in greater London. GCP increased capex spending to reduce vacancy and grow rents as a step to work around prevailing residential real estate supply crunch, which is the main driver for rising rents and vacancy reduction across Germany. - The company has fixed interest rates for c.99% of its outstanding instruments and for about 8½ years. Nevertheless, long-term interest rate risk remains a threat as it is an important factor for GCP's business model, IFRS property valuations and its corporate rating. First time earnings guidance foresees 10% FFO I growth in 2018. - >Credit opinion - We affirm our Stable credit opinion.We see an upgrade to 'A–' more as a scenario for 2019 or later. Vacancies and portfolio size have obviously not reached levels where S&P would opt for a higher rating. GCP calculates 30% upside potential to its rental income, which needs up to eight years to be realised, although it already operates with a substantial earnings cushion against rising interest rates (c.4.8x including 50% of the hybrid coupon).Recommendation - We issue a Buy Recommendation for the new 2027 straight bond as the return opportunity is in our view much higher compared with our comparable bond universe. This drives also the affirmation of our Buy recommendations for the 2025 and 2026 straight bonds. We are to some extent critical of the treatment of investment properties under IFRS and by rating agencies, but interest rate swings will likely take very long before negatively affecting property valuations.We change our Buy Recommendation for the € 200m 2.750% perpetual (first callable 22 Jan 2023) to Neutral and would switch into the new € 350m 2.5% perpetual (first callable 24 October 2023), for which we issue a Buy Recommendation.We affirm our Neutral recommendations on the 2021 straight bond, the 2022 convertible and the € 500m 3.750% perpetual (first callable 8 Feb 2022).We are generally cautious about long-dated instruments, but at the same time we cannot resist recommending some of instruments given their relative attractiveness and as they provide good value for money.