IPO season kicking off with €1.4bn LEG launch

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It’s been a relentless road show for the past couple of weeks in the run-up to its listing on the Frankfurt Stock Exchange on February 1st for Düsseldorf-based LEG Immobilien. But it looks almost certain to usher in a new era for Germany’s listed residential property sector with the arrival of a new stock market heavyweight, and is going to prove to be one of the most lucrative real estate investments for its owners on the German market (or perhaps almost anywhere in Europe) over the past five years.

The big beneficiaries of the stock market flotation will be clients of the Whitehall Funds of Goldman Sachs and private equity investor Perry Capital.  They plan to float 57.5% of the company on the public markets, which on successful take-up should raise €1.4 billion.

LEG Immobilien was established in 1970 by the government of North Rhine-Westphalia as a provider of affordable housing.  Five years ago, as the financial crisis was gathering pace, Goldman Sachs (90%) and Perry (10%) combined forces to buy the state-owned housing group, which had been primed for sale since the wave of privatisation enthusiasm took hold in Germany three years previously, which saw several major state and municipal housing sell-offs.  The investors paid €800 million to the NRW government in addition to assuming the debt on the 90,000 apartment units in the LEG group, for a total investment of €3.4bn. Last year the value of the LEG real estate portfolio was put at €4.7bn including debt.

In the intervening four years, Whitehall and Perry are thought to have paid themselves dividends of up to €350 million or nearly €90m a year, while investing €120 million in capital expenditure.  The IPO flotation may raise as much as €1.4 billion, meaning the investors will have almost doubled their initial cash outlay, which including dividends should see them garnering a profit of nearly €1bn.  Following the flotation, they will still own more than 40% of the new listed company, which will almost immediately become a component in the mid-sized MDax index.

This financial scenario looks increasingly realistic, given the enormous demand for German residential exposure among institutional investors.  The LEG book-runners are offering shares in a range between €41 and €47, with the exact price to be determined shortly before the close of play on 31st January.

Speaking recently to media in Frankfurt, LEG’s chief executive Thomas Hegel said that LEG had a war-chest of about €117 million to buy a further 10,000 apartments over the coming two years in or close to its heartland, to add to the company's holdings which are located almost exclusively in the state of North Rhine Westphalia, Germany's most populous state.

Hegel also pointed to the potential for upward rent rises across the company's holdings.  The average LEG apartment has 64 m², and an average cold rent of €312 per month.  The average rent is 13% below market prices, said Hegel, allowing for considerable legitimate upward price movement.  Rents have increased on average by 2.3% annually since 2008, he said. 

The company is committed to the tight strictures of its social charter signed in 2008, but has more flexibility after 2018, when the restrictions on adaptation to market prices are much less onerous.  Hegel also added that none of the proceeds of the market flotation would be reinvested in the company's growth, but would go straight to the current owners; nor does LEG envisage the need for any further capital raising over the next two years, he added.

Even in the most optimistic scenario, LPG is not offering the almost-typical 20% discount on net asset value that new market flotations in Germany generally warrant.  In this, the company is riding the wave of enthusiasm by investors for all residential-related German stocks, which have seen their valuations soar on the stock exchange over the past 12 months. 

Competitors such as GAGFAH, GSW Immobilien, Deutsche Wohnen AG, and TAG Immobilien AG all saw their market capitalisation increase by between 35% and 140% in the course of last year.  LEG is also arguing that its overall low level of debt is a further factor in its pricing approach, along with the fact that there are no major re-financings due until 2016 at the earliest. Last year, LEG posted adjusted earnings of €210.6 million before interest, taxes, depreciation and amortisation, and funds from operations of €111.8 million.

The majority of investors snapping up LEG shares are likely to be US and UK investors, who will take perhaps 75% of the shares on offer, followed by German funds absorbing maybe 15%, according to Frankfurt analysts.  Deutsche Bank, along with Goldman Sachs itself, is joint global co-ordinator and book-runner on the issue, which will provide a further handy €40 million in commissions to the lead managers, while Commerzbank, Berenberg Bank, Erste Bank and Kempen are also co-lead managers. 

Further shares may become available in the near future, as Goldman Sachs and Perry Capital are permitted to sell further tranches of their holdings after an abstention period of 180 days following the IPO.

Assuming a successful flotation, LPG with 90,000 housing units will be the second-largest listed German residential company after GAGFAH.  The majority Fortress-owned GAGFAH was expected to cede its position based upon the disposal of its notorious WOBA housing portfolio in Dresden, consisting of 38,000 units, but observers very close to GAGFAH have recently been suggesting that those plans for disposal have now been shelved, although REFIRE has not heard official confirmation of this.

Germany's largest private landlord, Deutscher Annington, is also widely expected to float on the stock market later in 2013, having spent most of the past year smoothing its path via the necessary arrangement of critical refinancing (see story elsewhere in this issue). 

Among other residential property peers, Berlin-headquartered investor Deutsche Wohnen AG and Berlin housing specialist GSW Immobilien have both been taking full advantage of the benign climate to fill their coffers for further expansion.  Deutsche Wohnen, with 70,000 apartment units still somewhat smaller than LEG, has managed to tap the capital markets three times since November 2011 for fresh capital, using a large tranche of it last year to buy the 34,000-apartment-unit Baubecon Group from Barclays Bank.

Its part-reversal out of LEG marks the second time that Goldman Sachs's Whitehall funds have exited a major German asset in the last few months.  A consortium led by Whitehall recently took advantage of soaring German real estate prices to cash in on its holding in 17 department stores leased to retailer Karstadt for more than €1.1 billion.

The LEG flotation also mirrors Goldman Sachs's exit strategy from Berlin housing company GSW Immobilien in staggered phases in 2011 and 2012.  GSW listed on the Frankfurt stock exchange in April 2011, allowing Goldman Sachs and joint-venture partner Cerberus to book a large profit on their investment in the company when they raised €470 million from the flotation.  They then raised a further €175 million by selling their remaining 20% stake in GSW in 2012. GSW itself saw its share price rise by more than 40% last year.