REITs are relatively new in Germany with the framework only introduced in 2007. Presently, tremendous real estate value is trapped on German corporate balance sheets. 73% of German companies own real estate compared to 25% in the US and 54% in UK. G-REITs as an asset class is expected to grow as German property owners free up capital trapped in real estate by selling property to tax advantaged G-REITs. Given this macro backdrop, corporate activity and property acquisition involving G-REITs should be heightened in the coming years.
The German real estate property management sector has been undergoing consolidation and further consolidation is expected. A merger of AOX and PMOX would result in the largest German office REIT with a portfolio value of €3.4 billion, which is still relatively small compared to REITs in more mature REIT markets like the US. AOX is active in Hamburg, Stuttgart, and Rhine-Rhur (Dusseldorf & Cologne) while PMOX is active in Rhine-Ruhr, Rhine-Main (Frankfurt), and Berlin. The combined REIT would command a presence in six of the “Big 7” office markets of Germany. Management expects €17.5M of cost synergies that include reduced administrative and financing costs.
At the close of trade on 9/23, there is a 1.89% spread between PMOX’s current price and the value implied by AOX shares based on the published 0.381 conversion rate. This is approximately an 11.4% annualized return assuming PMOX shares trade as new AOX shares in two months as scheduled. There are no scheduled dividends from either company during the period prior to closing.
Both AOX and PMOX trade near book value of equity. The merger is intended to be NAV neutral. PMOX has appreciated 4.5% and AOX has depreciated 2.6% since the merger announcement (see Exhibit 1 below). If the deal collapses, downside risk may be mitigated because PMOX is comparatively a better value than AOX (see Exhibit 2 below):
The macro market is beneficial to office G-REITs as a whole:
|DO Deutsche Office (PMOX)||alstria office (AOX)||Combined|
|Real Estate Portfolio|
|Real estate property value||€1,705M||€1,692M||€3,397M|
|Number of properties||51||74||125|
|Lettable area (sq-m)||866,280||873,000||1,739,280|
|Equity (Balance Sheet)||€805.5M||€922.2M||€1,727.7M|
|REIT Equity Ratio||41.5%||52.9%||47.2%|
|Gross Rental Income, 2014||€94.2M||€89.0M||€183.2M|
|Fund From Operations, 2014||€46.6M||€47.6M||€94.2M|
|Fund From Operations, 2015||€52.0M||€49.0M||€101.0M|
|FFO Growth, 2015||11.59%||2.94%||7.22%|
|P / FFO, 2014||17.09||21.13||19.13|
|P / FFO, 2015||15.32||20.53||17.84|