GTC: Share price detached from earnings (stays BUY)

GTC’s recurring earnings have recovered to pre-pandemic levels, but the stock is still some 30-35% cheaper. This means that GTC is now trading at around a 9-10% FFO yield and nearly 0.6x P/NAV, well below the long-term averages of c.6% and 0.8x. This puts GTC on a par with the depressed WE retail players, and some 2-3x cheaper, on earnings, than its office real estate peers. We do not see these levels as justified. We forecast the FFO to be flat next year, at around EUR 70m. If the office markets stabilise from 2023E-onwards, we believe that developments and an improvement in occupancy could drive the FFO to around EUR 90-100m by 2025E, a c.6-10% CAGR and a 12-14% FFO yield. In an adverse scenario (recession in 2023-24E, weak leasing demand, rising yields and substantially higher borrowing costs), we believe that the FFO could decline to c.EUR 50-60m (still a 7-8% yield on the current price). An additional 100bps of yield expansion would trigger a revaluation loss of around EUR 250m, reducing the NAV by c.20-25% and pushing the LTV to 50-55% – not pleasant, but survivable, and GTC would still be valued at 0.8x P/NAV, in this bearish scenario. With offices accounting for two-thirds of the portfolio, and over 80% of the assets green certified, GTC’s valuation stands out in the context of European listed real estate. We maintain our BUY recommendation on GTC and we have increased our 12M price target (PT) to PLN 8.4/share.