Deutsche Annington unstoppable in search of growth after Südewo takeover
Rolf Buch, the CEO of listed Deutsche Annington, told German newspaper Welt am Sonntag recently that his company was looking at every residential portfolio that came on the market in Germany with more than 1,000 units, to see whether they might buy it. With the ink barely dry on Annington's acquisition of the 20,000-unit Süddeutsche Wohnen from fund manager Patrizia Immobilien, Annington is clearly still hell-bent on growing even bigger. Buch in his interview even rhetorically asks the question why his company could not go on to have a million tenants.
The Bochum-headquarterd Annington, as Germany's largest landlord, already owns and manages 370,000 apartments after swallowing rival Gagfah, and which it is still in the process of digesting. This makes it about twice as large as its nearest competitor Deutsche Wohnen. The group is en route to becoming Europe's second-largest real estate company after France's Unibail Rodamco, and will rename itself Vonovia once the €3.9bn merger with Gagfah is completed.
Annington hit the headlines again in June when it agreed to buy Süddeutsche Wohnen (Südewo) from Patrizia for €1.9bn, while launching a €2.25bn capital increase to fund the acquisition. The purchase price includes the assumption of €800m of debt on the portfolio. The capital increase is likely to be the biggest rights issue in German history.
The Südewo properties are nearly all in the southern state of Baden Württemberg. They were bought by a consortium led by Patrizia in 2012 from Landesbank Baden Württemberg (LBBW) for €1.4bn at the time, albeit with about 2,000 more units, after the bank was forced to dispose of non-essential holdings in the wake of the financial crisis. The Augsburg-based Patrizia has since invested €89m in capex in the portfolio.
According to Annington CEO Rolf Buch, "In the highly fragmented German market for rented housing we are availing of another opportunity to strategically expand our nationwide position." After a period of strengthening its presence in the metropolitan regions of Berlin, Hamburg and Dresden recently, "we are now further expanding our market position in the particularly attractive southern region. With the acquisition of the Südewo Group we are moving a step closer to our goal of having a balanced portfolio in all attractive regions of Germany,” Buch said.
The Südewo apartments are largely located around Stuttgart (where the company is headquartered), Ulm and Mannheim, with Südewo having an on-site presence in 140 locations across the state. Deutsche Annington already owns 15,000 apartments in the Baden Württemberg region.
The average rent on the Südewo properties is €6.68 per sqm, compared to the average €5.53 which Annington achieves on its existing holdings. Südewo generates annual rental income of €105m, with a much lower vacancy level of 2.4%
Patrizia said the decision to sell followed an unsolicited offer for the portfolio, which it put to its consortium members. These include a Swedish pension fund AP3 (25%), an unnamed Swiss pension fund (5%), three German first-pillar pension funds (25%), five German insurers (40%), a savings bank (3%) and Patrizia itself (2%).
Patrizia's share price has risen strongly over the past few months gven recent transactions and topped off by this sale, which sees the company raising its earnings forecast for the year from an initial €50m to a now expected cumulative operating profit for this year and next of at least €200m.
Patrizia founder and chairman Wolfgang Egger commented on the deal: “The decisions taken in recent years to retain profits instead of distributing them have proven to be spot-on. This gives us the necessary flexibility to win even high-volume projects quickly. The recent transactions once again demonstrate that we use our liquidity in a way that creates value without having to ask our shareholders for fresh funds. Our business model is taking effect. The investments we are making today form the basis for profitable growth tomorrow. As such, we are just at the start of our journey.”
Local politicians and tenants associations have predictably raised alarm signals at the hast with which Patrizia sold off the portfolio despite giving assurances at the time about being a long-term investor, and agreeing to a very protective social charter to protect tenants. The social charter will be taken over in full by Deutsche Annington, the company insists. This includes clauses for the minimum level of maintenance expenditure, capping of rent increases at 3% annually plus inflation, tenancy protection for a further 17 years and a number of other 'social responsibility' restrictions.
After an initial glitch with investors unhappy about the forthcoming rights issue, earlier this month Deutsche Annington successfully carried off the rights issue to pay for the Südewo deal. The company issued 105m new shares, offering existing shareholders three new shares for every ten owned, at a price of €20.90, and saw a 98.1% takeup. The shares are currently trading at about €27.50.