ANALYSIS: Does Germany's IVG have a future?

Will IVG succeed in restructuring its massive debt burden? Experts debate the future options for the former leader of Germany’s listed property pack.

Whether the individual creditor groups are able to agree on a consensual solution for IVG or not, the company, once the leading light in Germany’s listed real estate universe, will never be the same again, according to Helmut Kurz, fund manager of the E&G Fonds Immobilienaktien Europa.

With his parted grey hair and neatly trimmed beard, Kurz is a role model for the Swabians, a minority group living in Germany’s southwestern Baden-Württemberg state as well as the rural area known as the Swabian Alb and parts of far western Bavaria. Swabians are well-known for their thriftiness and conservative risk strategies - attributes that have helped E&G’s fund manager steer the €3.4 mln property stock fund of Stuttgart private bank Ellwanger & Geiger successfully through the financial crisis.

With a return of 8.83% since the beginning of this year, the fund is again outperforming its benchmark, the EPRA Europe Total Return Index, which had only gained 5.68% by mid-August. One stock Kurz had shied away from all those years was IVG. ‘There was just too much unpredictability in the company for my taste,’ the fund manager told PropertyEU.

Crown jewel
Kurz stood alone in that assessment for quite a long time. Most of his peers and many investors viewed the Bonn-based company as a jewel in the crown of German listed property firms. IVG invested on its own and on behalf of closed-end funds set up for institutional and private investors in prime office buildings including London’s Gherkin tower and gas and oil storage caverns, and for many years turned in healthy profits on rental income and management fees.

Investors subsequently put IVG on a pedestal in 2007 against the backdrop of the German government’s preparations for the introduction of Real Estate Investment Trusts (REIT) and the company went on a buying spree to acquire a portfolio for the REIT that it planned to take public. ‘It would have been a good plan if management had provided for an alternative exit strategy,’ Dieter Thomaschowski, owner of Thomaschowski Research & Advisory in Erkrath, commented.

Massive writedowns
When the financial crisis broke out and the European economy started to sour, the prospects for floating a REIT suddenly looked very different. Instead, IVG has been forced every year since the outbreak of the crisis to massively write down its portfolio. As a result, the company ran into serious trouble with the refinancing of its overall debt of more than €3 bn. Since 2007, its share price has plummeted by 99%, slashing the market capitalisation to a scant €16.6 mln on 20 August from €2.7 bn at its peak.

Following a further €350 mln in writedowns this year, IVG was teetering on the brink of insolvency over the summer. In a last-ditch bid to avoid bankruptcy, CEO Schaefers hammered out an agreement on 10 August with creditors including Apollo Global Management, Black Rock, Cerberus and Morgan Stanley which had bought the company’s loans. Under the proposal, new shares were to be issued in a debt-for-equity swap, giving creditors complete control of the company.

Holders of the €1.35 bn syndicated loan I (Syn I) were to receive 80% of the new shares and holders of a €400 mln convertible bond the remaining 20%. The agreement would have effectively wiped out the company’s shareholders. However, a number of creditors refused to join in and the deal fell through, forcing IVG to seek court protection. ‘We are watching a poker game with individual creditors seeking to gain as much control as possible over the company,’ Thomaschowski said.

Nevertheless, he is certain that IVG will be saved in the end, arguing that ‘nobody would profit from an insolvency.’ Regardless of the outcome, shareholders will carry the greatest losses. Under the aborted proposal, share capital would have been cut to 0.5% of its current value. ‘Now it seems as if shareholders could be left with even less,’ he said.

Restructuring plan
IVG CEO Schaefer now plans to restructure IVG under the protective shield proceedings and create ‘a much more conservative and considerably less volatile business model compared with the years before the financial crisis’. Under the plan, the investment and fund division will become an integral component of the new IVG. Kurz is convinced that the restructuring will create a very different company and that IVG will at best be reduced to a small player in the fund business. ‘In order to fend off bankruptcy, IVG will need to sell its properties and turn its cavern business into an infrastructure fund. In the end, IVG will just be a plain property service provider running its former buildings and caverns for new owners.’

Georg Kanders, an analyst at Bankhaus Lampe in Düsseldorf, paints a slightly less gloomy picture. While he shares the view that IVG will sell off most of its own property, he believes the company will continue to set up new closed-end real estate funds for institutional investors. ‘It is a business in which IVG has been very successful and which it could easily continue should management be able to stave off insolvency.’

Share prices tumble
IVG’s troubles have also left their mark on other German property stocks. When the problems at IVG escalated in June, most other property stocks also saw their prices take a tumble - by more than 10% - and have only partially rebounded since then. ‘Some investors panicked and sold off their shares, offering an opportunity for bargain hunters,’ noted Thomaschowski.

At end-August, Kanders of Bankhaus Lampe and a number of other analysts had Alstria Office REIT, DIC Asset and residential companies Gagfah, LEG Immobilien and TAG on their buy list. Opinions on Deutsche Euroshop, GSW and Patrizia are divided. Despite the fall in June, many analysts still regard their share prices as ‘ambitious’ in relation to the potential growth of income and dividends and do not see not much room for further price increases.

However, at end-August Kai Klose of Berenberg Bank had a buy rating on Deutsche Euroshop and Patrizia, arguing both companies are well positioned to boost profits in the future.