Q&A: TLG portfolio sale

Georg Schüttken, managing director of Barclays Investment Banking, which advised the German state on sale of the TLG portfolio to Lone Star for €1.1 bn, speaks to PropertyEU about the ins and outs of the deal.

Lone Star Funds, the Dallas-based opportunistic investor, closed the acquisition of German state-owned TLG Immobilien' mixed-use portfolio in December. The deal represents the German government’s largest privatisation in more than five years.

TLG, which was set up in 1991 to manage government-owned real estate in East Germany following reunification, was first put up for sale in 2008, but the disposal fell through in the wake of the financial crisis. The German government put the assets back on the market last spring, with potential bidders asked to express interest by April 2012. To facilitate a sale to separate buyers, the TLG assets were split into two units for commercial (TLG Immobilien) and residential use (TLG Wohnen).

Barclays Investment Banking Division's managing director Georg Schüttken, who advised the state on the sale of the assets, told PropertyEU about the ins and outs of the deal, which allowed the German state to generate net proceeds of €594 mln, excluding debt.

PROPERTYEU: How much interest did the TLG assets receive?
Schüttken: Over all the phases of the process we had strong competition. More than 150 investors expressed their interest in the two portfolios at an initial stage of the sale process. Over 50 potential investors received the teaser and asked for the Information Memorandum. However, with regard to TLG Immobilien (the commercial portfolio) there were not too many strategic investors with a long-lasting interest. In any case, we were happy to be in a situation where we could turn down all indicative and binding offers which reflected a discount of 25%, 30% or above to Net Asset Value. This level of pricing was absolutely not acceptable.

PROPERTYEU: Why was Lone Star selected as preferred buyer?
Schüttken: At no point in time during the auction process was Lone Star a preferred bidder or anything like that. They never got that formal status and didn’t ask for it. They did an excellent due diligence which was very well prepared. Their involvement in the first auction process of the TLG Group in 2008 - when the deal collapse on the wake of the (first) financial crisis in the autumn - was obviously an advantage.

PROPERTYEU: In your view, what were the main difficulties of closing this transaction?
Schüttken: The main difficulties identified were refinancing the portfolio and the acquisition, the capability of banks to provide enough finance on a moderate level and a lot of nitty-gritty regarding details of the debt agreements-contracts with the local bank-partners. After the separation from TLG Wohnen, the capital structure of TLG Immobilien was a little unusual because the commercial portfolio was just 33%-leveraged. Even so, it was a challenge for investors to secure a mortgage. Furthermore, the uncertainty regarding the economic environment and the development of the financial and sovereign crises, as well as - last but not least - the initiatives of certain (political) parties to destroy the process complicated the sale. Also, the diversity of the assets involved, from retail, to hotels and nursing homes, all of them located in the eastern part of Germany, contributed in making this sale a slight difficult one.

PROPERTYEU: What does this deal say about the German property market today?
Schüttken: The German property market is in good shape and in the next months we will see a lot of activity in the residential market. This is a perfect momentum for IPOs and SPOs if you see LEG NRW, owned by Whitehall and others, such as Deutsche Annington, owned by Terrafirma. And we can expect some larger share deals and/or mergers of listed and non-listed residential companies like TAG Immobilien, Deutsche Wohnen, GAGFAF and GSW in Berlin. In April or at latest in May one of the German federal state saving banks (Bayerische Landesbank ed.) will finalise the auction process of GBW Immobilien in Bavaria which started in November 2012. It comprises more than 30,000 units of residential properties and the estimated volume of this transaction is €2.5 bn or above. The commercial real estate companies, as far as they are listed and of relevant size, will perform better and better in 2013. They have significantly reduced their discount to NAV. I anticipate a wave of deals because these companies were able to solve their problems on the finance side and to get rid of a lot of risk and burdens of the past.

Read more below in our Deal in Depth on the transaction.