GLP’s Gorgeous Turn – After Selling Offshore Asset Management Business

Overall Operating Performance was Fair, with Strong Ability in Asset Disposal

GLP announced its 1H2024 result. As of end-June 2024, if excluding the asset under management (AUM) of GCP International, the Group’s AUM was USD 81.0 billion.

In the first half of 2024, GLP’s revenues were around USD 1.05 billion, dropped by 11% YoY, mainly due to lower rental income amid ongoing asset disposals to peers and GLP’s managed funds. The core EBITDA (including monetised fair value gain and recurring EBITDA) dropped by 10% YoY to USD 590 million. The overall operating performance was fair.

Notably, GLP significantly reduced operational and capital expenditures. As shown in Chart  2, in the first half of 2024, the Group's main cash expenses (including direct costs, operating expenses, and capital expenditures) decreased by 20% YoY to USD 1.20 billion, which is expected to improve the Group's cash flow performance.

Chart 2: GLP’s Direct Costs, Operating Expenses and Capital Expenditures

In the first half of 2024, GLP successfully raised funds of around USD 3 billion for its managed funds, with the dry powder at a high level of USD 12.5 billion. The fund raising and dry powder are solid liquidity for GLP to sell assets easily at reasonable prices, which significantly reduces the uncertainty of macro environment when selling assets.

As shown in Chart 3, since 2022 (the Chinese real estate crisis), GLP sold over USD 10 billion in assets, reflecting its strong ability in asset disposal and boosting its monetised fair value gain.

Chart 3: GLP's Investment Cash Inflow from Divestment and Monetised Fair Value Gain

Selling Offshore Asset Management Right to Enhance GLP's Liquidity and Serve as Source for Repaying Next Maturing Bond

On 8 October, GLP announced its proposed transaction of selling GCP International (which is responsible for offshore asset management business and a subsidiary of GCP) to Ares Management. The total consideration is USD 3.7 billion (including USD 1.8 billion in cash and USD 1.9 billion in Ares shares) and an additional long-term performance incentives of up to USD 1.5 billion. The Group’s attributable stakes in GCP and GCP International are 58%, so the Group chooses to receive a higher proportion of cash, i.e. receiving USD 1.5 billion in cash and USD 300 million in Ares shares for the transaction consideration.

GLP indicates that after selling GCP International, GCP will still retain around 68% of fee-related earnings (FRE), with the group expected to lose only about 8% of core EBITDA, which will not significantly impact its profitability.

Furthermore, GLP expects the contribution of international business (mainly around USD 5 billion in overseas investments) to its core EBITDA to remain at around 30%, retaining its advantage of regional diversification and still being one of the Chinese issuers with more international backgrounds, which we are bullish on.

Since the group is only selling its offshore asset management right, which is unrelated to its managed funds, this will not affect the Group's dry powder. The Group can still sell its assets to its managed funds as one of the ways to recycle liquidity and capital.

We believe this transaction will enhance GLP's liquidity. Over the past 1.5 years, GLP repeatedly mentioned selling Chinese logistics assets, with rumors even suggesting selling its stake in the key subsidiary, GLP China. However, these significant asset sale transactions have not made much progress to date, but the Group indeed needs some funds for debt repayment.

This $1.8 billion in cash and shares will alleviate the Group's liquidity pressure and serve as a source for repaying the next maturing bond "GLPSP 3.875% 04Jun2025 Corp (USD)", with principal amount of USD 1 billion.

Transaction is Expected to be Completed in 1H25, with High Likelihood of Completion on time

The transaction is expected to be completed in the first half of 2025. For Ares, this transaction will result in a 10% increase in their AUM to USD 492 billion, including approximately USD 19 billion in asset management rights in Japan, allowing for an immediate expansion of Ares's presence in Japan. Another benefit is that almost all of GCP International's revenue comes from fee-related income, aligning with Ares's goal of pursuing an asset-light strategy.

As of the end of June 2024, Ares had around USD 1.19 billion in liquidity (including USD 280 million in cash and USD 910 million in undrawn credit facility). Ares secured commitments for a USD 2 billion bridge loan for this acquisition. Additionally, Ares currently holds a high investment-grade credit rating of BBB+ / A- (S&P / Fitch), indicating that raising funds through bond issuance should not pose significant challenges. Therefore, Ares has a high likelihood of completing the transaction on time, with relatively low execution risks associated with the transaction.

Manageable Leverage Level, with Several Ways to Repay upcoming 2025 bond

Regarding the credit profile, as of the end of June 2024 (refer to Table 1), GLP's net debt to total investments (including investment properties and equity investments) stood at 44%, with a net debt to core EBITDA ratio of 6.2 times, indicating a manageable leverage level. The interest coverage ratio was 2.2 times. Overall credit performance is satisfactory.

Table 1: GLP’s Credit Indicators

Table 2: GLP Pte and GLP China’s Credit Indicators

During the earnings call, GLP mentioned that it has around USD 5 billion in repayment sources, including cash and proceeds from asset sales. These asset sales are highly certain and represent signed transactions. Additionally, the Group disposed of approximately USD 2.2 billion in investments in the first half of 2024, which generated significant cash inflows. This demonstrates the Group's ability and timely execution in asset disposal. Going forward, it could continue reducing and repaying debt through asset disposal.

We mentioned GLP has several advantages, including (1) resilient business model, (2) diversified regions, (3) a gorgeous lineup of shareholders, (4) debt level not high, with massive property and equity Investments and (5) dry powder of the GLP’s managed funds and equity financing opportunities. These advantages will help the Group navigate through the Chinese real estate crisis.

In the next two years, GLP (including GLP China) has two offshore bonds to be matured, which are “GLPSP 3.875% 04Jun2025 Corp (USD)” and “GLPCHI 2.950% 29Mar2026 Corp (USD)”, with a principal amount of USD 1.0 billion and USD 700 million respectively. Given the strong ability in disposal of assets or businesses (including investment properties, equity investments and the fund management businesses), the Group should have enough liquidity to repay these two bonds. We believe that the bond credit risks are under control.

Amongst these, “GLPCHI 2.950% 29Mar2026 Corp (USD)” offers a yield to maturity of 9.7%, which is higher attractiveness and suitable for investors who look for a higher yield choice.

Table 3: GLP (including GLP China)’s Offshore Bonds (Excluding Perpetual Bonds)

Perpetual Bonds are Unlikely Called, but Offer Decent Investment Value

About the perpetual bonds (see Table 4), since we propose it is possible that GLP perps could be a super high-yield strategy for investors (related article), the perpetual bonds increased around 50% from $37 - $39 to $55 - $57. We are not surprised about this sharp performance, and the GLP perps already bring a good return for investors.

Table 4: GLP Perpetual Bonds

We believe the GLP perpetual bonds still offer decent investment value:

• If GLP chooses to call the bond in the first reset date, the net yield to call will be as high as 30%. However, it is unlikely that the issuer calls perpetual bonds in the first reset date, because the Group once attempted to issue a new bond (which was subsequently announced to be canceled) and the coupon rate of such proposed new bond (around 10%) was much higher than the estimated reset rate (estimated at approximately 7.2% to 7.8%).
• We are more than happy to see GLP not redeeming the perpetual bonds early. The coupon reset rate for these perpetual bonds is estimated to be around 7.2% to 7.8%, which is equivalent to a current yield of 12.6% or more after coupon reset. The credit spreads are on the high side, which makes them very attractive.
• If the credit spread is tightened further, it will drive the bond price to go up. The annualised return (including coupon and capital gain) could be higher than the existing or estimated current yield.

• If GLP is under some liquidity pressure, it can suspend coupon payments, which does not constitute a debt default, meaning that investors could not claim the bond principal and accumulated coupons against the company in a legal way.
• The GLP’s perpetual bonds are subordinated. If the Group unfortunately defaults on its debt, under the scenarios of debt restructuring or forced liquidation, the repayment seniority of the perpetual bonds is lower than that of fixed-tenor bonds.

Related Risks

GLP is relatively dependent on bank loan refinancing. If the banks are unwilling to refinance its loans, it would significantly increase GLP’s liquidity pressure and default risk.

GLP’s asset disposal is dependent on the fund raising ability and dry powder of GLP’s managed funds. If these GLP’s managed funds lose the fund raising ability and dry powder, it would add uncertainty to GLP's asset disposal.

The proceeds from the GCP International transaction are the key repayment source. If the transaction unexpectedly falls through or is delayed, it could increase liquidity pressure on GLP.

After the GCP International transaction, the contribution of international business to its core EBITDA will be down to around 30%. It means GLP’s business and assets are more concentrated on Mainland China. Its operating and credit performance will be more affected by China’s economy downturn and Chinese real estate crisis.

GLP’s sources of profits appear to be diversified but they are in fact interrelated. If the logistics property market is under pressure, its rental income, investments and fund management will also face certain degree of revenue declines or valuation loss.

GLP recently intends to issue new bonds and conduct a concurrent tender offer to repurchase the 2025 bond. However, due to weak market demand at the time of issuance, it was unable to issue the new bond at a better coupon rate, and it chose to terminate the issuance of the new bonds and the tender offer. This reflects that the Group is not freely to issue new bonds in the secondary market for refinancing and still needs to rely on other debt repayment methods, such as asset disposal, which involves a certain degree of execution risk.

Conclusion

GLP’s overall operating performance was fair. The fund raising for its managed funds and dry powder are solid liquidity for GLP to sell assets easily at reasonable prices, which significantly reduces the uncertainty of macro environment when selling assets. The ability in asset disposal is still strong.

GLP sell its offshore asset management right to Ares Management, in order to enhance its liquidity. The proceeds serve as a source for repaying the next maturing bond. The transaction is expected to be completed in 1H25, with a high likelihood of completion on time.

GLP’s leverage level is manageable, with several ways to repay bonds. The bond credit risks are under control, with the 2026 bond offering a yield to maturity of 9.7%. The perpetual bonds are unlikely called, but they still offer decent investment value.

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a NIL position in the abovementioned securities. The analyst who produced this report holds positions in GLPSP 4.500% Perpetual Corp (USD).

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