Deutsche Wohnen deal highlights demand in nursing home sector

Deutsche Wohnen AG's €420.5 million nursing home portfolio deal — one the biggest transactions in the nursing home space in Germany for several years — followed a protracted bidding process that included several international bidders. 

Deutsche Wohnen acquired the 28-asset portfolio, known as Pegasus, from property group Berlinovo. Berlin finance minister Matthias Kollatz-Ahnen of the ruling SPD party, and simultaneously supervisory board chairman of Berlinovo, said in a statement that the sale generated a higher price than had been thought achievable a year ago. According to Dirk Richolt, head of real estate finance at property advisor CBRE, the German nursing home segment has seen €863 million in overall total transaction volume in the first half of the year.

This compares to a total transaction volume of €834m for the full-year 2015, following volume of €811m for the full-year 2014. Given current high demand for nursing home portfolios, total volume could reach close to €2bn for the full-year 2016, says the research team at CBRE in Frankfurt.

The properties had been held in a complex holding structure by 13 separate funds managed by Berlinovo, an entity that emerged out of Berliner Immobilienholding — a "bad bank" set up in 2006 to handle struggling structured funds from the insolvent Berliner Bankgesellschaft, which was created in the 1990s through the merger of several state-owned banks. 

More than half the proceeds — €220 million — from the sale to Deutsche Wohnen will go to pay down the debt inherited by Berlinovo on behalf of Berlin's taxpayers, as it continues to manage 24 property funds with 395 separate assets for the city, valued at over €3 billion. Berlinovo is on track to slash its debt to 70% by the end of this year from 130% of its enterprise value in 2010, Kollatz-Ahnen said. 

Berlinovo has been selling its non-Berlin property assets over the past few years, notably the "Phoenix Portfolio" of 15,000 residential apartments, which it sold to Westgrund AG in 2014 for €390 million. It also sold its remaining properties in the U.S. and the U.K. before this year's Brexit vote. To-date, its sales total €1.25 billion. 

It is targeting 2020 for the final sale of all its non-Berlin assets, and holdings by then of no more than €2 billion with 170 Berlin assets, the company said. Its final wind-up is scheduled for 2026, although it is holding sale proceeds in the m to invest in student apartments and refugee housing in Berlin. 

The previous ruling government in the city of Berlin, led by socialist mayor Klaus Wowereit, had attempted to sell Berlinovo in 2011 for €70 million to an unidentified Arab investor. That deal was scrapped, however, following resistance from the hard-left in his own party and difficulties in unveiling the buyer's true identity. Kollatz-Ahnen said the decision not to sell then had been vindicated by the latest lucrative sale of the nursing homes to Deutsche Wohnen. 

For Deutsche Wohnen, the deal represents a departure from the company's pure residential strategy and will bolster its presence in the "as yet still largely fragmented" nursing home market, CEO Michael Zahn said in mid-August when the deal was announced, alongside first-half results. "Due to the demographic changes currently underway, the German nursing market clearly represents a growth market for us, one from which we, as a company with long-standing experience in this segment, wish to benefit to a greater degree." 

At that time, Deutsche Wohnen raised its full-year forecast for full-year 2016 funds from operations, a key measure for real estate companies, to reach at least €380 million, up from its earlier forecast of at least €360 million. As of June 30, Deutsche Wohnen's holdings comprised 160,800 units, of which 158,600 are residential units and 2,200 are commercial properties.