LEG on acquisition trail, Goldman exits

The Whitehall Funds of Goldman Sachs took the opportunity earlier this month to dispose of practically its entire holding of 15.2m shares or nearly 29% in LEG Immobilien AG, Germany’s fourth-largest property company by market value.

The accelerated book build was 1.5 times oversubscribed, suggesting there was strong demand for the stock. The sale raised €646m for Goldman. In October last year Goldman sold a further 7m LEG shares at a price of €41.25, raising €290m.

Goldman sold all but 0.5% of its holding in the listed, Düsseldorf-based LEG at a price of €42.50 per share through its Saturea BV fund. After a minor dip, the stock has recovered to over €44.00, suggesting that the market essentially approved of the sale, glad that there is no further big overhang of shares held by private-equity investors in such a sizeable company. Analysts have long being eyeing such private equity holdings in competitors Deutsche Annington and Gagfah AG with a certain caution, fearful of a major block being dumped on the market at an inopportune time. Private equity groups Terra Firma and Fortress are still prominent shareholders in these two listed companies.

LEG owns and manages about 95,000 apartments in North Rhine-Westphalia, Germany’s most popular state, with about 260,000 tenants. It generated rental income last year of more than €500m. Average rental growth has been 2.3% since 2008, with LEG’s average price at €4.94 per sqm/month, below the regional average in North Rhine-Westphalia of €6.44.

LEG was floated last year by owner Goldman Sachs and minority partner Perry Capital in an IPO which raised €1.3bn. Goldman and Perry had bought LEG in 2008 for about €3.5bn including assuming the housing company’s debt.

One analyst commented that the sale will have been widely noted by LEG competitors, looking for their own exit. The success of the Goldman disposal right now “bodes well for the giant overhang that Deutsche Annington is facing, roughly five times as big as the stake that Whitehall just sold”, a reference to the manner in which Annington only just managed to get its IPO away last year after an initial stumble.

That left owner Terra Firma with a larger stake in its subsidiary than it had anticipated before the hiccup. Terra Firma’s own lockout period prohibiting it from selling stock after last July’s IPO has also now expired, so the market will be expecting further sales by the private equity group fairly soon, so long as the listed housing sector is still enjoying investors’ favour.

LEG has been on the acquisition trail, recently signing for 537 new apartments and negotiating on a further 2,000 units throughout North Rhine-Westphalia. The apartments bought are generating an initial FFO yield of more than 8%. The company bought 6,700 apartments last year and is targeting 3,300 further units this year.

Speaking at a conference recently, LEG’s CEO Eckhard Schultz said the company was in direct dialogue with alternative debt providers, particularly large domestic insurers, to explore new forms of financing LEG’s planned acquisitions. Many such large insurers, particularly Allianz which has a war-chest of €5bn to invest in European real estate, are looking for ways to increase their exposure to property debt markets.

Financing acquisitions via these insurers could help to lower LEG’s current average cost of financing of 3.3%, commentd Schultz. More highly leveraged acquisitions of 60-65% could also help LEG boost its LTV ratio to about 55% from its current 49%, he said.

Meanwhile, fellow listed residential investor Deutsche Annington, Germany’s largest private landlord, says it has €4bn available for acquisitions, and says it plans to leave no available portfolio unexamined in its quest for growth. This may be just a demonstration of intent by new boss Rolf Buch, recently arrived in the top job from media concern Bertelsmann, designed to put down a marker for rivals from the industry heavyweight – and tempered somewhat by his more risk-averse statement that, “We won’t risk our rating with just any acquisition.” Annington was rated “BBB” by Standard & Poor’s at the time of the IPO last year.

Buch says his priorities as Annington’s CEO are paying a first dividend ( a possible €0.70 has been mentioned) to new shareholders, growth for the company, and satisfied tenants.