July 3 (Bloomberg) -- Fonciere des Regions SA, the French office landlord with stakes in five other real estate investment trusts, will report a drop of about 5 percent in property values for the first half, according to its chief executive officer.

The estimate, based on preliminary property valuations, compares with the 10.2 billion-euro ($14 billion) value of FDR’s properties at the end of 2008, following a 3.1 percent decline for the whole of that year.

“It shows how well our portfolio has held up,” said Christophe Kullmann, 43, in a July 1 interview at his office near the Arc de Triomphe in Paris. “We have long leases, low market rents and high capitalization rates, plus we have few prime assets in central business districts -- the assets which are suffering the most.”

FDR’s offices, 70 percent of its assets, are mostly mid- market properties in the Paris region and provincial French cities with an average annual rent of 128 euros a square meter. Their depreciation contrasts with the 30 percent to 40 percent drop for prime office space in Paris, where average rents in the Defense business district peaked at 550 euros a square meter in the first quarter, according to BNP Paribas Real Estate.

Prime Paris office capitalization rates, or rent as a proportion of a building’s value, rose above 6 percent at the end of the first quarter from 4.5 percent a year ago, BNP Paribas estimates.

French Stakes

FDR owns 25 percent of Fonciere des Murs SA, a sale-and- leaseback property investor, 67 percent of warehouse owner Fonciere Europe Logistique SCA and a 38 percent stake in Fonciere Developpement Logements SA, a residential landlord in Germany and France. FDR also has a 15 percent holding in Altarea SA, France’s biggest retail-park developer.

In June 2008, FDR bought 73 percent of Beni Stabili SpA, a Rome-base company that invests in office properties. Values for these buildings were equally resilient as they were for the specialist REITs in which the company owns stakes, Kullmann said.

FDR declined 31 percent in the past 12 months in Paris trading, while the index of French REIT stocks compiled by Amsterdam-based Global Property Research fell 26 percent. Some investors are concerned that falling property values may cause the company to breach the terms of its bank loans, forcing it to sell more shares.

“The shares are penalized by the apparent high levels of debt,” said Henri Quadrelli, an analyst at Societe Generale with a “buy” rating on the stock. Quadrelli estimated FDR’s property values would fall 15 percent in the first half.

FDR is scheduled to release first-half results on July 24.

Long-Term Leases

Some investors have overlooked FDR’s income from long-term leases to companies like France Telecom SA, Accor SA, Electricite de France SA and Telecom Italia SpA, Quadrelli said.

Net debt amounted to 6.33 billion euros at the end of 2008, or 59 percent of the value of FDR’s properties. That was close to the 65 percent loan-to-value limit that applied to FDR at the time.

“The focus to 2010 is deleveraging,” said Kullmann. “We want to remain below 60 percent” loan-to-value, he said. Kullmann declined to say what debt level the company will report for the first half.

FDR shares trade at about eight times the 7.67 euros a share cash flow generated by the company in 2008, whereas French REITs trade on an average multiple of 12 times, according to Quadrelli.

New Debt Terms

FDR renegotiated its debt with four groups of banks at the start of the year, lifting the agreed loan-to-value ratio to 70 percent for two years, in return for paying 0.1 percentage point more in interest.

The company has slowed its large development projects, saved 187 million euros by paying its 2008 dividend in shares rather than cash and plans to raise more than 500 million euros from asset sales.

FDR announced June 23 the sale of 65 buildings to the main tenant, France Telecom, for 133 million euros. This, along with other asset sales, means FDR will surpass the disposals target set for the year as a whole, Kullmann said.

FDR’s debt burden “is a problem that’s more or less forgotten now. We have dealt with it,” he said.

With 98 percent of FDR’s office buildings in France and Italy occupied, the company plans to five additional developments by the end of 2010, adding 162,874 square meters (1.75 million square feet) of space.

CB21 Tower

The two largest ones are in Paris: 33,000 square meters at the CB21 Tower renovation project at La Defense and 25,000 square meters at the Carre Suffren development near the Eiffel Tower.

A six-month freeze on leasing ended in the second quarter, when FDR began talks with prospective tenants.

“There isn’t a huge pressure to lower rents” because there is no oversupply, Kullmann said. “I don’t see market rental values collapsing in coming months in France or Italy.”

To contact the reporter on this story: Simon Packard in London at packard@bloomberg.net.

Last Updated: July 3, 2009 06:10 EDT