Immofinanz’s Buwog buys DGAG portfolio, IPO planned

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It’s been the biggest deal of the year so far in Germany, although at least two others are vying to take over that mantle – which we at REFIRE thought might even been concluded before the start of January this year, but no. First out of the starting gates was Austrian-listed Immofinanz Group, which has been pushing forcefully ahead on its plans to boost the housing stock of its subsidiary Buwog prior to a spin-off and a public stock market flotation, while investor sentiment still so strongly favours the German residential property market.

Wholly-owned subsidiary Buwog, is buying the former DGAG residential property portfolio with about 18,000 units and 1.09 million sqm of lettable space across northern Germany. The agreed purchase price for the portfolio amounts to about €892m (or €819,-/sqm). This equates to a gross yield of 7.6% based on a vacancy rate of only 2.3%. The portfolio has been generating annualised net ‘cold’ rent of about €68m, giving the portfolio a multiple of 13.6 times annual rent.

The transaction will be executed through several share deals and is subject to customary closing conditions (e.g. approval of the antitrust authorities). The closing is expected to take place in this year’s second quarter.

The actual seller is Solaia RE, a joint venture between Prelios (the former Pirelli Real Estate) and an investment fund managed by Deutsche Asset & Wealth Management – Real Estate (formerly RREEF). Buwog will also take over the residential asset and property management business of Prelios Deutschland with its 300 employees, in line with Prelios’s stated objectives of withdrawing from the residential sector to concentrate on asset management and third party services for commercial property.

RREEF and Pirelli originally paid €1.7bn for the then-27,000 unit portfolio from private equity group Cerberus, including €1.37 bn of assumed debt. RREEF had 60%, with Pirelli holding 40%.

The deal will increase the Buwog portfolio to about. 54,000 residential units with 3.72 million sqm of usable space and give it a gross asset value of € 3.49 billion (€ 939,-/sqm). The gross rental yield of the enlarged portfolio will equal 5.5% based on an overall vacancy rate of 4.5%. Over 80% of the portfolio’s properties are in and around the region’s largest cities, including Hamburg, Hannover, Kiel, Lübeck and Braunschweig.

Buwog said in a statement that with the acquisition, the company will reach its strategic goal of lining up a portfolio of standing investments equally between the core markets of Austria (51% of the residential units) and Germany (49%).

Immofinanz’s executive and supervisory boards have approved a proposal that will be made to shareholders at an extraordinary general meeting on 14th March, calling for the spin-off of Buwog and the subsequent listing of Buwog on the stock exchange. Their proposal is that Immofinanz shareholders will receive one Buwog share for every 20 Immofinanz shares, such that 51% of Buwog will be owned by free float investors. The proposal includes admitting the Buwog share for trading on the stock exchanges in Frankfurt (main listing), Vienna and Warsaw (in each case, the regulated market). After the spin-off Immofinanz will hold a stake of 49% in Buwog AG, which it expects to reduce over the medium-term. The EGM has to vote by a 75% majority for the proposed changes.

Assuming the deal goes ahead, the €892m price tag is due on closing, probably end-Q2. According to Immofinanz, the financing for the deal is secured through a combination of roughly €402 million in already committed mortgage loans, about € 213 million of subsidised loans that will remain in the acquired property companies, and the proceeds from the planned issue of a convertible bond by Buwog. This market standard convertible bond is expected to have an issue size between €260m and €310m and a term of five years. Immofinanz CEO Zehetner had already ruled out (as we reported in REFIRE in November 2013) any further capital-raising to plumpen up Buwog, as the parent company had about €640m in liquidity.

Commenting later on the deal, Daniel Riedl, chief executive at Buwog, said that taking over Prelios’s asset and property management business would allow the Austrian company to increase cost efficiency in its German operations. “In addition, all existing mandates for the property management of approximately 33,000 third-party-owned residential units will be transferred to Buwog,” he said.

Riedl will continue to be the CEO of Buwog, but planned personnel changes now in the wake of the deal include bringing in Roland Roos as CFO from Aurelis, which itself is in the process of being sold by 50%-owner Hochtief, while Buwog’s German holdings are being beefed up by the arrival of Andreas Engelhardt (from Prelios) and Herwig Teufelsdorfer from IVG Austria.