Adler refinances, streamlines core portfolio with Benson Elliot JV

Listed German residential real estate investor Adler Real Estate has initiated a joint venture with the private equity fund manager Benson Elliot Capital to sell off its non-core portfolio, valued at about €115m. The assets are valued at a premium of about 5% above book value, giving Adler some upside potential in the co-operation, which will see Adler holding a minority – albeit substantial – stake in the joint venture.

Adler will remain in charge of the asset, property, and facility management until the properties are definitively sold. The parties both said they expect that the joint venture contract to be finalised in the coming weeks.

Adler’s non-core portfolio now contains a total of 4,126 rental units, which is 8.2 % of its total portfolio. Of these, 70% will be allocated to the joint venture for disposal. Adler had initiated a structured sales process to divest the majority of these units in 2017, and while initial indicative offers had been submitted by the 4th quarter, they did not ultimately result in a sale.

According to Tomas de Vargas Machuca, Co-CEO of ADLER Real Estate, "The collaboration will allow us to divest our non-core portfolio at a premium and retain upside potential with the planned disposal from the joint venture. Benson Elliot has a strong track record in this field and is an internationally renowned private equity firm with whom we have worked very well in the past. Furthermore, part of the proceeds will be used for net debt repayment and thus continue to expedite our LTV reduction in order to improve our current rating and achieve investment grade as soon as possible."

Earlier this month Adler completed its acquisition of 70% of the shares of Israeli-controlled Brack Capital Properties N.V. for €550m, which will add about 12,000 'core' residential units to Adler's holdings, boosting its portfolio by 24%. Full consolidation into Adler's accounts was effected this April, and will thus be immediately accretive to group operations.

Adler's stated goals for the coming financial year are ambitious, including: an increase in Net Rental Income by about 25% to between €210m and €220m; an increase in FFO I by c. 65% to between €65m to €70m; a reduction of LTV by about 4.5 percentage points to 55%; and a further improvement of WACD by 0.2 percentage points to 2.5%.

To help fund the Brack acquisition, Adler recently placed company bonds worth €800m with institutional investors in Europe. The senior unsecured bonds were issued in one tranche of €500m with a term until April 2023, and in a €300mn tranche due in April 2026, with the bonds being nearly twice oversubscribed. The average coupon of the whole bond issue was 2.30 %.

Adler said it plans to use the proceeds primarily to repay the interim loan for the acquisition of Brack Capital Properties. In addition, up to €200m in bonds that were issued in 2015, which were supposed to run until 2020, are to be bought back. These bonds with a coupon of 4.75 % not only create higher costs, but are also secured with the company portfolio, potentially making portfolio sales such as that with Benson Elliot trickier to handle.