Share buyback at TAG Immobilien sends strong market signal

Much in the news this month has been the Hamburg-based listed residential property investor TAG Immobilien AG, which announced a huge share buyback program and the imminent departure of its star CEO Rolf Elgeti, after five years at the top of the company.

“TAG’s transformation into a stable, efficient housing company has been completed. This implies that the task profile for management has changed,” the Hamburg-based firm said. Elgeti will leave his post early, on 31 October, but is prepared to take a seat on the supervisory board. His duties will be taken over by colleagues Claudia Hoyer, Martin Thiel and Harboe Vaagt.

“After more than five very busy years, TAG has firmly established itself on the property and capital markets,” said Elgeti himself in a release. “A very strong management team has evolved, one that I am personally also very proud of. My three fellow board members are perfectly attuned to each other and do a brilliant job.”

TAG is also starting a share buyback program for up to 10% of share capital, given the firm’s high cash position – at over €250m – and developments on housing markets which will lead to more sales. It will buy back over 13m shares at a price range of €8.35-€9.35 in a form of modified Dutch auction. The acceptance period has already started and ends on 14 October, with private bank Kempen & Co. appointed as settlement agent and Close Brothers Bank as information agents.

After the completion, the firm plans an extraordinary general meeting to propose additional share repurchases and Elgeti’s election to the supervisory board. At least one new shareholder has appeared on the shareholder roster with the obligatory declaration of a holding of more than 3%. The Los Angeles-based Capital Research and Management Company now has 3.03%, or 3.98m voting rights. It is also expected that long-time shareholder Bert Flossbach from Flossbach von Storch, which owns 12% of TAG, will lighten up his position.

Over the past 12 months, TAG has bought over 7,000 residential units, but has also been a seller at a significant margin above book value. The firm believes the market has reached a level in some sectors and regions, “where holding certain assets can no longer be brought into congruence with the cost of equity.” It is thus planning to sell where prices are significantly higher than book value, it said.

“For several months now, we have observed that as the cycle progresses, sales opportunities appear ever more attractive,” said Elgeti. “Capital discipline is an important factor for succeeding in the real estate business. We began buying much earlier in this cycle than many of our competitors, in the process creating significant value for our shareholders.”

Despite a good acquisition pipeline, TAG said it is becoming increasingly difficult to reallocate the capital released to new and acquisitions whose pricing appears justified. “Simply put, our capital base is too strong at the moment, and with a dividend yield that is significantly above our marginal costs of interest, a share buyback seems the obvious course of action,” added Elgeti. “It is in line with our company’s DNA to recognise at an early stage that investment risks have increased significantly in this phase of the cycle - and then to act on this recognition.”

TAG’s nearly 70,000 residential units are often located on the peripheries of Germany’s larger cities, and the portfolio is not considered the easiest to manage given the geographical dispersity of the holdings. The share buyback plan comes after several months in which Elgeti was reported to have been in talks with other large residential investors to sell the company to them, but obviously with no success.

TAG is still an active buyer of residential portfolios as well, and recently paid €37.8m in an asset deal for 1,770 units in the eastern university cities of Freiberg, Chemnitz and Dresden.

The portfolio has 85,000 sqm of lettable space and generates €3.7m in annual rent, with about 13% vacancy, largely due to the poor condition of many of the Chemnitz properties, which will require big capex over the next few years. The price of this and an earlier deal in Dessau reflect a price multiple of about 10.7 times annual rent; TAG often sells when it can get a price of 17-18 times that figure.