Jan. 15 (Bloomberg) -- Hypo Real Estate Holding AG had its biggest decline ever in Frankfurt trading after the German commercial property lender said pretax profit fell in 2007 and that it will cut its dividend. The shares tumbled 35 percent.

Full-year pretax profit slid 27 percent to 890 million euros ($1.32 billion) from 1.22 billion euros a year earlier, the Munich- based lender said today in a statement on the DGAP newswire. The company also said it plans to slash its 2007 dividend to 50 cents a share from 1.50 euros for 2006.

The shares sank 11.74 euros to 21.64 euros in Frankfurt, their steepest fall since the lender was spun off from HVB Group in 2003 and one of the biggest drops ever for a German DAX Index member.

``Personally I don't think such a sharp decline was justified,'' said Thomas Radinger at Pioneer Investments in Munich, where he helps manage $96 billion. ``But investors are nervous and have become skeptical regarding the outlook for this year.''

Hypo Real Estate said ``continued weakness in international financial markets'' because of the U.S. subprime crisis required a revaluation of its CDO investments.

Hypo Real Estate completed the acquisition of public finance provider Depfa Bank Plc on Oct. 2 for about 5.3 billion euros, according to Bloomberg data. HVB Group sold its property lending business, which has been its main activity for decades, in 2003 after bad debt provisions soared to a record. In 2005, Hypo Real Estate shares replaced its former parent on the DAX.

Full-year pretax profit excluding non-recurring effects rose to 1.24 billion euros from 1.23 billion, Hypo Real Estate said. ``This figure does not include 50 million euros in expenses for the acquisition and integration of Depfa and a 390 million-euro charge taken during the fourth quarter to account for the impairment of U.S. exposure of collateralized debt obligations,'' it said.

The 390 million-euro writedown on the CDO portfolio is about the same as the company's net income for 2005.

CDO Losses

Of the fourth-quarter losses on its CDOs, 295 million euros were booked in the income statement, it said, and 95 million euros ``related to portfolio-based provisions'' were booked earlier.

The company reiterated on Nov. 7 that it wasn't involved in retail residential lending and said it therefore has ``no direct subprime exposure.''

``People thought the worst was already known, at least for the members of the DAX,'' said Fidel Helmer, head of equity trading at Hauck & Aufhaeuser in Frankfurt. The private bank has the equivalent of $20 billion in assets under management. ``There might be more negative surprises when annual reports are due.''

``We can't rule it out,'' Chief Financial Officer Markus Fell said when asked whether there may be further writedowns on CDOs.

The company plans to publish final fourth-quarter and full- year results on March 27. It's the second-largest German commercial property lender after Eurohypo AG, a unit of Commerzbank AG.

Dividend Cut

Hypo Real Estate said it will propose the dividend cut to help ``secure a sound capitalization which will permit the group to actively pursue current opportunities for growth.''

The lender also said it no longer expects to achieve its target for return on equity after taxes of 12 percent in 2007, adding that the measure of profitability is now expected to be about 10 percent to 12 percent this year while 2008 pretax profit is forecast at 1 billion euros to 1.2 billion euros.

Provisions for risky loans are expected to be higher this year than the 105 million euros reported for 2007, Hypo Real Estate said.

`Shattered'

Investor confidence ``has been shattered'' by the ``surprise profit warning,'' analyst Sebastian Reuter at Hauck & Aufhaeuser Privatbankiers KGaA wrote to clients.

The lender ``is on track'' to reach its forecast to raise return on equity to 15 percent in 2010, Chief Executive Officer Georg Funke said today in a conference call.

Today's share decline washed away almost 2.4 billion euros in market capitalization for the company. Its shares have lost 58 percent over the last 12 months.

Standard & Poor's today reduced its credit outlook for the lender to negative from stable on expectations Hypo Real Estate may face ``a period of lower profitability, making it difficult to maintain its track record of achieving earnings targets.''

A ``potentially longer-lasting, less favorable market environment could impair Hypo Real Estate's ability to restore capitalization to satisfactory levels,'' S&P analyst Volker von Kruechten said in a statement.

To contact the reporter on this story: Oliver Suess in Munich at osuess@bloomberg.net

Last Updated: January 15, 2008 12:03 EST