Prime Office/OCM merger to create larger non-REIT entity
Despite the protestations of a disgruntled minority shareholder of listed REIT Prime Office AG, shareholders are likely to give the green light to the merger between the troubled REIT and OCM German Real Estate Holding, a division of US private equity firm Oaktree Capital (also known as German Acorn) when they vote to approve the merger on September 24th.
In a recent teleconference with journalists, incoming Prime Office CEO Alexander von Cramm clarified the goals of the new company, and highlighted the steps required before the deal becomes reality. While the company will retain the name Prime Office, Oaktree funds will become the largest shareholder. The new proposed company will be valued at more than €2bn.
For the merger, German Acorn is officially the acquiring entity, while Prime Office is the transferring entity. Prime Office shareholders receive one share of OCM for each share of Prime office they hold. OCM will raise its share capital to €82m from retained earnings before the merger, reflecting the relative values of 38.78% Prime Office and 61.22% for OCM.
A post-merger capital increase, in which Oak Tree will contribute at least €60m, will cut leverage to 60% loan to value. The firm aims to grow its asset base to €3bn. "By merging, Prime Office REIT-AG and OCM German Real Estate Holding AG aim to create a leading German office property company that is focused on continued internal and external portfolio growth", both firms had said in a prior statement. "The medium-term plan is for the merged company to become listed in the MDAX-Index of Deutsche Börse.”
Both companies plan to dispose of property assets worth about €250m, including Prime Office’s Süddeutsche Verlag and Hufelandstrasse properties in Munich, and the prestigious but vacant Westend Ensemble near Frankfurt’s trade fair (which REFIRE visited with Prime Office just over a year ago). At least a further €40m on write-downs is expected on this asset alone by year-end.
Von Cramm made it clear that this means for Prime Office taking hefty write-downs on some of its troublesome assets, but failure to resolve problems with these assets have been acting as a dead weight on the company for some time. Prime Office made a loss of €60m in the first half, as vacancy rates of more than 20% in some of its principal assets took their toll, with turnover figures down 28%.
Just last week Prime Office sold the property at Hufelandstrasse in Munich to UniCredit’s Wealth Cap for €20.5m, below the book value of €24m in 2012
A new capital increase is the first thing on the cards for the new merged company. “In order to ensure that the entity resulting from the merger is adequately capitalised, a capital increase from authorised capital is to be carried out preserving shareholder subscription rights and expected to generate €125m to €175m”, the two companies said in a joint statement. The capital increase is expected to cut the combined leverage to 60% loan to value, before lowering this to 55% and growing its asset base to €3bn
Von Cramm emphasised the – from the company’s perspective – positive aspects of the merger, stressing that the new quoted group would have a size that would make it more attractive to larger investors and that no longer being a REIT would even improve its growth prospects. “Prime Office is too small on its own, its high vacancy rates means it has a too-high risk profile and with such a high discount to NAV can’t push through a big enough capital increase to help us grow further. We need to become larger and more liquid, we need to broaden our investor horizon. Size in itself is not a strategic value on its own, but in a capital market, being a larger company, having more free float, having more liquidity, having broader analyst coverage and greater visibility makes a difference.”
“Typical long-term real estate investors - the big pension funds, the big insurance companies, even to a certain degree wealth funds - they cannot invest in a company of our size where, if they have ticket sizes of €20m or even €50m, they immediately own 25% of the company.”