Too-Good-to-Last Market Set to Bump Top EU Landlord to DAX

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A German company that came close to bankruptcy in 2011 is on the threshold of becoming the first residential property owner to join a European benchmark stock index. Its meteoric rise may be hard to sustain.

Deutsche Annington Immobilien SE doubled its portfolio in three years by using cheap financing and its own buoyant shares to snap up competitors, and is now Europe’s biggest homeowner. The Bochum-based company, created by Guy Hands’ Terra Firma Capital Partners in 2001, is still hunting for deals even as the risk of higher borrowing costs increases and its largest rival says property prices are too expensive.

The company “has been benefiting from a window that won’t be there forever,” said Hans Op’t Veld, head of real estate at Dutch pension fund PGGM, a Deutsche Annington shareholder. “The main concern is: for how long can you continue to buy earnings?”

Deutsche Annington’s addition to the DAX index would cement German real estate’s transformation from an investment backwater to one of the country’s most rapidly-growing sectors. The combined market value of Germany’s publicly held property companies has increased tenfold since 2012 to 26 billion euros ($29 billion) as landlords including Deutsche Annington sold shares for the first time, acquired rivals and added apartments.

“We’ve always said we don’t need acquisitions to grow, although of course acquisitions speed things up,” said Deutsche Annington Chief Executive Officer Rolf Buch, who took over two months before the company’s July 2013 initial public offering. Deutsche Annington owns 350,000 apartments in cities including Berlin and Dortmund, rented to low- and middle-income earners.

Rapid Expansion

Shareholders seeking a slice of the growth have pushed Deutsche Annington’s stock up 69 percent since its IPO. The stock was little changed on Monday at 28.25 euros in Frankfurt trading.

The increased market value and liquidity puts the company above the threshold required for DAX entry when Deutsche Boerse AG reviews the list of Germany’s 30 biggest companies in September, according to LBBW analyst Uwe Streich. It would probably replace Lanxess AG.

Terra Firma sold part of its Deutsche Annington stake in the IPO and transferred the rest of its shares to fund investors last year.

Rising German bond yields, which indicate higher borrowing costs, have hurt Deutsche Annington shares this year. Ten-year government bond yields last month breached 1 percent for the first time since September because of new supply and an improving European economic outlook.

“The idea of bond yields moving up further has a substantial impact” on property companies like Deutsche Annington, Op’t Veld said.

Too Quick

Deutsche Annington has grown too quickly and hasn’t demonstrated that the additional apartments will increase shareholder value in the long term, said Peter Papadakos, an analyst at Green Street Advisors in London.

“Annington needs to stop doing deals for a year and a half, so the market can understand the economics of the company,” he said.

The acquisitions have enabled the company to buy supplies more cheaply, cut labor costs, and obtain loans at better terms, Buch said. Deals completed in the first half will lift funds from operations, the most commonly used measure of a property company’s profitability, by as much as 15 percent this year, according to a June 1 presentation by Deutsche Annington. The purchases will increase the value of its assets by as much as 21 percent.

Deutsche Annington has also been finding ways to boost earnings without buying properties, Buch said. The company, paving the way for rent increases, is converting apartments into senior homes, modernizing bathrooms and kitchens, and improving energy efficiency. In addition, it has started selling cable-television subscriptions to its tenants and offered them a home-renovation service.

“Our business model is very different from that of our competitors,” he said. “Most of the growth on the operational side is still ahead of us.”

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