G City (TASE: GCT) (OTC: GZTGF), formerly known as Gazit Globe, is a real estate company that specializes in retail and mixed-use property ownership, development, and management. Founder Chaim Katzman and G City have recently come under fire for several reasons. Analysts are questioning whether the company’s assets' book value is stable. However, recent sales of assets at impressive price points demonstrate that the company knows what it is doing.
G City's wholly owned subsidiary Gazit Horizons is selling its Manhattan, New York property to The Home Depot (HD) for approximately NIS 528 million, which is comparable to its book value. The property has a specific debt of approximately NIS 460 million, but the sale of the property is expected to completely pay off G City's debt for the purchase price. The transaction is expected to be completed in 2023.
The sale of the Manhattan building follows the recent sale of three properties in Poland by G City. This year, G City Europe (formerly Atrium) sold a Polish shopping center and adjacent land for approximately NIS 433 million net, or 3% less than the assets' book value. The Manhattan deal is the largest retail lease in New York. These property sales are conducted per G City's strategic plan to divest non-core assets. Despite pressure from certain investors, the CEO remains confident in the company's ability to grow in the coming years.
G City has always been clear about its business strategy – the company intends to develop assets to maximize their improvement potential and then plans to divest these once they have succeeded in their value creation strategy. The sale of the Manhattan property is a testament to the fact that G City is executing this business strategy to perfection. The sale of this property will generate an IRR of approximately 20% and the transaction price is just 1.2% below the fair market value of the property, which also proves that G City had accounted for the market value of the property accurately in its book.
The company, over the last few years, has developed this property to increase its value and now believes further development growth is unlikely to be materialized through additional investments. Staying true to its business strategy, G City believes divesting this property to book the gains and de-leverage its portfolio is the best course of action today.
The company's stock has been under pressure because of concerns about its leverage at a time of rising inflation and interest rates. While it is easy to criticize the company, it is critical to examine the data more deeply, which paints a different picture. Although rents across Europe are rising as a result of inflation, much of the company's leverage is fixed. The company has plenty of cash on hand to cover expenses as well. At the end of June 2022, G City had NIS 3.9 billion in liquid reserves. Furthermore, recent quarterly reports from Citycon, in which G City owns a majority stake, reflect favorably on the company’s financial position.
Citycon operates in Sweden, Finland, Norway, Estonia, and Denmark, and the company reported strong financial performance in Q3, demonstrating the growing strength of G City's investment portfolio. The company's portfolio is well-diversified, with Europe accounting for 35% of total holdings, while Brazil, Israel, and North America account for 12%, 20%, and 15%, respectively.
The outlook for G City continues to improve despite the more challenging macroeconomic backdrop. Rents for both residential and commercial properties continued to rise in Europe in Q3, resulting in a 3.4% year-over-year increase in like-for-like rental income. Further, total sales are now 7% higher than they were before the pandemic thanks to a 0.1% increase in tenant sales. A favorable environment for real estate companies is being created by rising inflation, as evidenced by Citycon's realized rent per square meter, which increased by EUR 1 YoY to EUR 23.6 per square meter. By taking advantage of the opportunities in the current market environment, G City's international subsidiaries are generating impressive financial results and reporting encouraging numbers.
G City’s strategy remains sound as evidenced by its recent transactions, and it seems that Katzman, a seasoned executive, knows exactly what he is doing. Despite public pressure, the company is committed to ensuring the long-term success of its investors. Given this, one should question the motives of analysts who publish overwhelmingly negative pieces without digging deep into the publicly available data. The Manhattan lease is New York's largest retail lease, and the company is essentially playing in a league of its own. G City not only purchases properties with interest differentials but also has shown expertise in selling them for a substantial profit. Recent decisions including taking on fixed-rate debt that is not linked to inflation and selling non-core assets are yielding positive results for the company already. Although analysts often focus on the short-term prospects of a company, the company and its CEO remain laser-focused on adding value to long-term shareholders.