Merlin Properties Socimi’s takeover of Madrid-based rival Metrovacesa is likely to spark further consolidation in the sector, according to Borja Ortega, head of capital markets at JLL in Spain.
‘If I had to bet, I would say that we’re likely to see more consolidation in the sector,’ Ortega said. ‘Merlin and Metrovacesa will be much bigger than the others in terms of size, so other companies might look to merge. There are other REITs, such as Hispania Activos, which is valued at around €1.5 bn or Lar España Real Estate REIT, at around €1 bn.’
Merlin Properties announced in June that it had reached an agreement to take over Metrovacesa to create the 'undisputed leading Spanish REIT' with €9.3 bn of real estate assets under management.
The combined company will be catapulted into the top tier of listed European real estate companies. The new REIT will be in provisional 15th place among its listed peers, based on PropertyEU's ranking by AUM in the first half of 2015. The ranking was part of the Top 100 Investors which was published in October 2015.
Single largest diversified property portfolio
The new entity will own the single largest diversified property portfolio in Spain, with greater exposure to the Madrid and Barcelona office CBDs and a dramatic increase in scale in shopping centres, according to Merlin. Once the integration is completed, the company will reach a pro-forma gross asset value of €9.3 bn (or around €4.5 bn of market cap), and annual gross rents of €450 mln.
Merlin Properties’ advisory board is expected to approve the merger in September and the group is hoping to close the deal by the end of October. Goldman Sachs advised Metrovacesa, while Merlin was advised by Morgan Stanley.
For Merlin Properties, the draw of the merger was Metrovacesa’s office and shopping centre portfolio, according to Merlin Properties’ director of investor relations, Fernando Ramírez. ‘Together, we now hold an office portfolio of 1. 1 mln m2, of which 97% is in Spain, with the remaining 3% in Lisbon,’ he said.
Interestingly, Merlin Properties has been mulling acquisitions or mergers for the past two years, Ramírez said. ‘We were looking at three-to-four companies, including Testa, which we acquired in June last year (for €1.79 bn), and now Metrovacesa. We’d been in talks for about a year with Metrovacesa. Initially, we debated whether to acquire portfolios within the business before it morphed into something bigger.’ He declined to comment on the identities of the other two firms.
The merger will take place in several stages. Firstly, Metrovacesa will be spun off into three business lines: commercial property with a GAV of €3.2 bn and annual gross rents of €152 mln; rented residential with a GAV of €692 mln and annual gross rents of €22 mln and development assets, which will be retained by Metrovacesa’s shareholders.
Controlling stake
Secondly, Merlin will pay €1.7 bn in stock to the banks that own Metrovacesa and get a controlling stake in the combined firms’ commercial property portfolio, issuing 146.7 mln new shares at € 11.40 each. The resulting stakes will be held by Merlin shareholders (68.76%) and Metrovacesa’s shareholders, who took control of the firm after the Spanish property bust - Banco Santander SA, Banco Bilbao Vizcaya Argentaria SA and Banco Popular Espanol SA - (31.24%), with the latter covered by a lock-up period of 180 days.
Metrovacesa, like the Spanish listed sector in general, collapsed following the outbreak of the global financial crisis in 2008. A year later, the company reported a €738 mln loss and sold itself to its creditor banks to cancel around €2 bn in debt.
Also, under the terms of the deal, Metrovacesa will combine its multi-family rented residential portfolio with Testa Residencial, a subsidiary of Merlin, to create one of the Spanish leaders in the sector. Metrovacesa’s shareholders will control 65.8% of the residential business to Merlin’s 34.2 %. The combined residential business will have 4,700 units with a gross asset value of €1 bn, and annual gross rents of €35 mln.
Nonetheless, Spain’s listed property sector remains a shadow of its former self. A decade ago, the market capitalization of the sector totalled €45 bn. Today, it has shrunk to less than €10 bn, according to Ramírez.
However, he is feeling optimistic: ‘We are seeing a new era in the listed sector since so many property firms went bust. When the music stopped, they realized that their portfolios were contaminated by over-leveraged residential assets. That killed them. That’s why we focus on commercial property and prefer LTVs of around 40%. The tailwinds we are enjoying in Spain today are rare. The bottom of the market here was deeper than in many other EU markets. It is improving but we still have a long way to go,’ he said.
