Germany’s real estate companies may need to undertake very large rights issues as refinancing becomes more challenging, according to analysts at Stifel Nicolaus & Co.
(Bloomberg) — Germany’s real estate companies may need to undertake very large rights issues as refinancing becomes more challenging, according to analysts at Stifel Nicolaus & Co.
Residential property firms will find it difficult to refinance their debt as loan-to-value ratios spike, and they may need to tap investors for funds through “potentially enormous” rights issues, analysts led by Denese Newton wrote. They downgraded Vonovia SE, LEG Immobilien SE and TAG Immobilien AG to sell from hold.
Loan-to-value ratios — a measure of the amount borrowed versus the current price of an asset — have been rising, with real estate valuations hit by higher borrowing costs and an economic slowdown. Stifel estimates that German property valuations could “easily” fall 20% from where they were at the end of last year, pushing LTVs above 50%.
“This could make refinancing even more difficult,” Newton wrote in a note as she took over coverage of the three stocks. “Were companies then to be forced into remedial rights issues then the amounts of equity involved are potentially enormous.” To get LTVs back below 45% would require raises of around 50% of the current market capitalizations, according to Stifel’s analysis.
The analysts said that the companies probably aren’t entertaining rights issues — which involves asking existing investors to buy newly issued shares and typically dilutes the share price — at the moment.
A Vonovia spokesperson said this year’s refinancing needs are fully covered, as well as a significant part of those coming up in 2024. There’s no need and no plans to take action on capital, the company said. A spokesperson for LEG Immobilien said that it has given investors a clear path to refinancing bonds maturing in 2024, and that there’s further headroom to expand its secured financing base from current levels.
Last month, LEG Immobilien boosted its guidance for adjusted funds from operations and said it expects a devaluation of its real estate portfolio of around 7% in the first half of the year. It sees no impact on its ability to refinance, the company said today.
Bloomberg has also reached out to TAG Immobilien for comment.
TAG Immobilien shares fell as much as 5.7% in Frankfurt on Wednesday, while LEG and Vonovia also dropped. The heavily-indebted real estate sector is the worst-performing group in Europe over the past 12 months, down 18%.
Read More: German Commercial Property Deals Tumble 50% to Five-Year Low
The three companies have a combined $13 billion-equivalent of debt maturing by the end of 2026, according to data compiled by Bloomberg. TAG Immobilien has a €470-million convertible bond maturing in 2026, representing a “potential cliff edge” for the company, according to Stifel.
Even if rights issues are avoided, companies face a decade of limited earnings growth, Stifel said. After an era of rapid growth, fueled by cheap debt, “the next phase will be a protracted hangover, rather than a civilized after party,” the analysts said.
–With assistance from Thyagaraju Adinarayan, Tasos Vossos and Steven Arons.
(Adds comment from Vonovia and LEG Immobilien.)
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