New IPO beckons with TLG Immobilien listing

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Now it’s official. After months of speculation, some of it public, the eastern German commercial property specialist TLG Immobilien announced that it plans to float on the stock market, with its launch set for before the end of this year.

TLG’s parent company, the US private equity investor Lone Star Group looks like it’s making hay while the sun shines, figuratively. If it happens soon, the launch on the Prime Standard of the Frankfurt Stock Eschange will follow on from two big recent internet IPOs (shoe and textile online seller Zalando, and Rocket Internet) and relative recent strength across the German listed property sector. Issues of new shares should bring in €100m for further acquisitions, and it is expected that Lone Star will be looking to raise €500m from its part-flotation.

Lone Star bought the commercial division of the former Treuhand Liegenschaftsgesellschaft from the German government two years ago for €1.1bn, including €594m in equity, with the rest being debt.

TLG has a mixed portfolio of commercial properties, including high-profile assets such as the Kulturbrauerei and the ‘ Spreestern’in Berlin, as well as Dresden’s Hotel de Saxe and retail property Zwinger Forum. Prominent blue-chip tenants include Daimler and software firm SAP, along with several government-backed organisations. Average remaining lease duration is 8 years, and the (EPRA-defined) vacancy rate is a low 4%. About 35% of its rental income comes from retail grocery stores, such as Edeka and REWE as well as discounters Aldi and Lidl. The group’s real estate assets are now valued at about €1.5bn and it generates annual rental income of €118m.

With solid cashflow and a conservative approach to its financing, TLG earns a 7.3% FFO yield on its net asset value (EPRA NAV) with FFO for the first six months of this year being €26.0m, up 6.6% on last year. The company said it planned to pay out 70-80% of its FFO in dividends.

The net proceeds generated by the IPO will be used to finance 'accretive acquisitions' in line with TLG’s stated strategy to expand the office and retail portfolio in its core regions of Berlin, Dresden/Leipzig, and Rostock on the Baltic coast, where it has been active for 20 years since reunification, as well as for “value-enhancing investments into the company’s core portfolio”.

Victoria Partners is acting as independent IPO adviser and process coordinator for TLG Immobilien. Banks JP. Morgan and UBS will act as joint global coordinators and joint bookrunners, while Kempen & Co, Commerzbank and HSBC have also been mandated as joint bookrunners.

Over this year’s third quarter, TLG bought two further core office assets, increasing the value of its core portfolio to €1.4 bn. At the same time it sold 48 non-core properties with an aggregate value of €70m, the company said. The remaining non-core assets, valued at €100m, are marked down to be sold in the near future.

The core portfolio now consists of 320 properties, many of them upgraded, with an in-place rental yield of 7.5%. About half the core portfolio comprises office (36%), retail (50%) and hotel assets (15%), with about half located in Berlin. When Lone Star bought the portfolio two years ago it had 780 assets across the full commercial property spectrum.

REFIRE: This looks like a very lucrative part-exit for Lone Star, who are likely to hold on to a good chunk of TLG even after the capital raising and IPO. TLG Immobilien has been trimmed, slimmed and focused since Lone Star bought the group two years ago, after the Berlin government had stumbled a couple of times in its attempts to privatise the whole TLG entity in the preceding couple of years.

Lone Star bought the commercial assets and TAG Immobilien the residential assets from the old Treuhand property business, which by then had had twenty years to turn itself into a well-managed company focused on its traditional eastern German heartland.

REFIRE has visited the company at its Berlin headquarters on a number of occasions going back a few years – the company in our view has taken admirable pains to explain its evolving strategy and its financial foundations to its diverse stakeholders, who are now about to include a range of private and institutional investors.

REFIRE met recently with finance director Peter Finkbeiner in his office to discuss TLG’s approach to financing. Finkbeiner’s banking and private equity background left little doubt that the finance function within TLG has clearly been streamlined and simplified since the Lone Star takeover, with visibly clearer lines of reporting to a private equity parent than to the myriad political interests that had to be kept in the loop in the old state-owned days. It was very refreshing.

Finkbeiner was interesting when describing what almost sounds like a return to the old days of relationship banking – having deeper and more reliable relationships with a handful of banks who understand your business and who can react quickly in competitive situations. His views underpin the argument that German banks are getting back into the driving seat and seeking closer relationships with key clients, despite the much-cited threat of the rise of alternative lenders, such as insurance companies and pension funds.

They had never come calling, smiled Finkbeiner. Not surprisingly, for many of these alternative lenders, their narrow focus on prime property investments means they are precluded from participating in many of the more opportunistic deals that TLG can zone in on.

TLG also issues no bonds, as it has ‘head space’ with its banks to grow. The company now has an average cost of finance of 2.99% on its debt, with average loan maturities of 5.9 years. Currently 94% of its loan obligations are at fixed rates or are covered by interest rate swaps, so minimising the risk of nasty surprises. Net LTV ratio is currently 47%, well within TLG’s own guidelines of 45-50%. FFO is forecast to rise further again next year as a result of cost savings and new acquisitions (€90m in this year alone, at financing costs of about 2%).

Not surprising that Lone Star sees the benefits of lightening up a little right now, with a good hand and a stock market backdrop only slightly dented by the less-than-stellar debuts of the two internet IPOs.