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Deutsche Wohnen Seeks Cash as Landlord’s Chief Sees Growth

Deutsche Wohnen AG increased the number of homes it owns by more than half in 2012 and Chief Executive Officer Michael Zahn predicts that Germany’s biggest publicly traded property company can double its market value within four years.

The company will ask shareholders on Dec. 4 to approve a capital increase to buy more homes, according to a statement today. The stock dropped the most in more than four months.

“We are continually working on the goal of becoming one of Germany’s top companies,” Zahn, 49, said in an Oct. 9 interview. It’s “realistic” to expect Deutsche Wohnen’s market value to reach as high as 5 billion euros within four years, from 2.1 billion euros currently, as the company widens its focus, he said.

Germany’s publicly traded property companies have expanded in the past three years as investors seek assets that generate steady rental income in Europe’s largest economy. Deutsche Wohnen has bid for 38,000 apartments being sold by Gagfah SA, the Fortress Capital Management Inc. unit it surpassed this year to become the country’s biggest real estate company by market value. Gagfah still has more than twice as many apartments.

Deutsche Wohnen owns 73,500 apartments, including 23,500 it bought in May from Barclays Plc in a deal valued at 1.24 billion euros. The company is negotiating the purchase of about 10,000 properties valued at about 485 million euros, it said on Aug. 13.

Rising Value

The Frankfurt-based company’s market value has almost doubled from about 1.1 billion euros at the beginning of the year as the stock rose by 42 percent in Frankfurt trading. The shares fell 4.2 percent to 13.55 euros today, the most since June 11.

Deutsche Wohnen raised 461 million euros selling shares in June to help pay for this year’s 2012 acquisitions.

The company’s shares are expensive relative to assets compared with competitors because of its low vacancy rate and relatively small debt burden, said Roger Quirijns, portfolio manager at Cohen & Steers Capital Management, which owns about 5 percent of Deutsche Wohnen. The vacancy rate was 2.2 percent in the first half, according to the company’s earnings report published in August.

“As long as they continue to buy relatively high-quality portfolios and keep leverage the same, or de-lever a bit, you get a better company with increasing earnings,” Quirijns said in an interview. The company sells single units to tenants more frequently than its competitors, which also helps boost profit, he said.

Different Strategies

The property company’s surge past Gagfah reflects a difference in strategy. Deutsche Wohnen, a former Deutsche Bank unit that began trading publicly in 1999, has financed its acquisitions largely by selling shares. Gagfah, founded by Fortress in 2004, often used bank loans for purchases.

“Gagfah bought most of their apartments during the German residential boom of 2006 to 2007 when it was common to buy a property with just 20 or 25 percent down,” said Torsten Klingner, an analyst at Warburg Research who has a buy rating on both stocks. “They’re still suffering from that.”

By contrast, Deutsche Wohnen made few acquisitions during that period and it’s now targeting portfolios that ran into financing trouble after the boom faded.

Barclays’ Portfolio

Barclays’ Baubecon portfolio is an example. Prelios SpA and Deutsche Bank’s RREEF Real Estate acquired the asset for 1.67 billion euros in 2007 in a deal 78 percent financed with a loan from Barclays. The U.K. lender took over Baubecon late last year after Prelios and RREEF refused to increase their investments. Deutsche Wohnen bought the asset in May.

Deutsche Wohnen will become Germany’s third-largest residential landlord by number of apartments if it wins the bidding for the 38,000 Gagfah apartments, once again surpassing the Fortress unit. The Dresden portfolio would help the company achieve its goal of entering new cities, Zahn said.

Dresden’s growing population and wealth make it an attractive investment, the CEO said. “After Berlin and Potsdam, it’s certainly the most interesting city in eastern Germany right now.”

Gagfah took preliminary bids for its Dresden Woba apartments, which make up about 25 percent of its holdings, on Oct. 5. The company plans to complete a sale by the end of the year to help repay 1 billion euros it borrowed to buy the apartments in 2006.

Doubled Value

Deutsche Wohnen’s market value can easily double in the next four years if it continues to add properties at this speed, said Klingner.

“If their portfolio grows by 20 or 30 percent, and you add in the leverage, that would boost their market capitalization to that level,” he said.

Deutsche Wohnen plans to keep its debt low, and will finance future deals with share sales, Zahn said.

The company has financed its apartments with about 60 percent debt, and Zahn said he plans to bring that number closer to 55 percent.

“We want to grow our market capital so that we can have more alternatives to a classic bank loan,” he said.

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