(Debtwire) Adler Group governance risks intensify as HY real estate credits face pressure – sector review

12 October 2021 | 18:08 BST

Adler Group’s ongoing corporate governance concerns were exacerbated by the short-seller Viceroy report published last week. The German residential real estate company took steps to mitigate the concerns, by planning an independent audit and announcing some disposals that have been well received. However, red flags still surround the name, with a domino effect on some other bonds in the high yield real estate sector, which are now facing weakening price action, according to four buysiders.

Adler Group’s BB- rated EUR 800m 2.25% senior unsecured 2029s hit lows of 76-mid on Markit last Thursday (7 October) after short-seller Viceroy Research released its report the prior day, arguing that Adler was a “hotbed of fraud, deception and financial misrepresentation designed to hide its true financial position, which is bleak.”

The report claimed the Adler Group’s base-case loan to value (LTV) was 86.66% including convertibles versus the 54.7% 2Q21 reported figure. As such, the company would be in breach of its covenants.

The Adler Group bonds have since pared losses and recovered to be indicated today (12 October) at 82.375-mid. This came after the company published an initial statement refuting claims querying the independent valuation of its assets and adding that external auditors will conduct a review of the allegations. Adler Group also said it will publish another detailed response in due course. 

Subsequently, the group announced it expects EUR 800m of net proceeds to aid deleveraging following EUR 1.5bn of asset disposals with LEG Immobilien while investment grade peer Vonovia also signed a call option agreement to potentially acquire a 13.3% stake in Adler Group. 

“The steps Adler made was an adequate response. Before the report the company was not transparent but engaging an independent auditor is positive,” one buysider said. Asset sales and Vonovia options are good fundamental aspects but for now it is not about valuations or key performance indicators, it is about how figures are reported, he added. 

A second buysider noted there could be a short squeeze as Adler Group sells development projects or existing assets to lower funding needs and while it could do disposals, it can’t do a capital increase. 

Carry versus Caner trades

The Viceroy report investigated links between the company and Austrian entrepreneur Cevdet Caner. Adler Real Estate, now part of the Adler Group, had previously been linked to controversial Cevdet Caner by market participants – ties that Adler Group previously disputed, as reported.  

Cevdet Caner established German residential real estate company Level One, which filed for bankruptcy proceedings in 2009, as reported. Caner was acquitted on all counts by the Regional Court for Criminal Matters in Vienna on 15 September 2020. Charges of conspiracy, aggravated commercial fraud, fraudulent insolvency, and money-laundering brought by the Prosecutor's Office in Vienna were, without exception, dismissed by the court for lack of merit, according to a press report. 

One other link emerged with a Caner family member, who also previously had a stake and was a managing director of subsidiary Adler Real Estate’s Caesar Immobilienbesitz und Verwaltungs GmbH, Berlin (Caesar joint venture) according to regulatory filings, a third buysider noted. The Caesar joint venture was one in which Adler Real Estate owns a 25% interest, according to a January 2021 Adler Group bond prospectus. 

The Viceroy report also touched on a previous German press report regarding the actions of Wolfgang Hahn, who is a Managing Director at M1 Beteiligungs GmbH. On 12 August 2013, M1 Beteiligungs GmbH bought shares in holding company S.I.G.RE, which was 52.8% owned by Adler AG as of FY13, according to a bond prospectus and annual report. Both Wolfgang Hahn (August 2009 to October 2012) and Cevdet Caner (2004 – current) were directors at Caner’s Green Bridge Capital Limited, according to company filings. Additionally, Wolfgang Hahn is a Managing Director at Pruss Gmbh, which has Mezzanine IX as an ultimate parent, according to a business directory.

The German-language press report noted how Adler Group subsidiary Adler Real Estate did business with both M1 Beteiligungs GmbH and Pruss Gmbh.

Furthermore, the Viceroy Report highlighted the connections between Adler Group and Netherlands-based real estate company Brack Capital Partners. Brack is an Adler subsidiary but was formerly owned by businessman Teddy Sagi, who founded London listed gaming technology company Playtech, which is now a high yield issuer. The previous governance of Brack was a concern for the third buysider. In fact, Teddy Sagi in 1996 received a nine-month prison sentence after being found guilty of bribery and fraud, according to a press report.

“Caner and governance is the most important concern. Real estate transactions may be fine from a legal perspective but they may not be sound from an ethical view,” the first buysider said. “Adler has been quite aggressive versus peers and if transactions have been done for embezzlement then Adler is a default candidate.”

Heimstaden, (the European residential real estate company), recently acquired EUR 9.1bn of assets from (property manager) Akelius, the second buysider noted. “This shows operations are not a risk for them but Adler has the long history of weak governance with the Caner links and the balance sheet receivables not materialising from asset sales,” he said.

Previous loose connections with high yield Germany-based real estate investor peer Vivion Investments also add on to Adler Group’s weak governance track record. Vivion’s founder and largest shareholder Amir Dayan has a brother Moshe Dayan who resigned as Chairman of ADO Properties (now part of Adler Group) back in October 2019, according to a company press release.

Vivion also sold its Furst Berlin asset complex to Aggregate Holdings, which is owned by Gunter Walcher and has stakes in high yield companies Adler Group and German real estate manager Corestate Capital, as reported. There was speculation Vivion Investments could have made a loan to Aggregate Holdings to get the Furst project done. Vivion’s financials featured a EUR 705.6m value of financial assets including EUR 220m quoted prices in an active market and EUR 485.6m of fair value significant unobservable inputs for which there is no market data in its financial statements. 

Vivion’s BB+ rated EUR 300m 3.5% senior unsecured 2025s are indicated at 94.25-mid yielding 5.1% versus 99.25-mid at the close of the week ahead of the Viceroy report.

Governance on Vivion is not massively impacted but Vivion sold the Furst project to Adler and only received a small consideration in cash and the rest in marketable securities and receivables,  independent special situations firm Sarria noted. “A substantial share of the securities had already been sold, but the remainder is likely impaired,” Sarria said. “We are lacking sufficient information on the receivable, which is looking vulnerable.”

“If both sides could agree to reverse the transaction, it would bestow Aggregate with liquidity and lower liabilities, and return to Vivion the full value of the property,” Sarria continued. 

The first buysider argued that clarity on related party transactions is needed but he cautioned that some of the transactions are not at arms’ length. “If true, Aggregate Holdings is involved in this situation and not just Adler,” he said.

Adler Group’s parent Luxembourg-based real estate company Aggregate Holdings, which has a 26.6% stake in Adler, faces its own issues over LTV adjustments and negative cashflow, as reported.

Aggregate Holdings’ unrated EUR 600m 6.875% senior unsecured 2025s are indicated down at 66.75-mid with an 19.4% yield versus 78-mid at the Friday close (1 October) ahead of the Viceroy report release, according to Markit.

Additionally, part-Walcher owned Corestate Capital faces concerns over mezzanine lending and tight liquidity.  Coresate at 1H21 was 19.7% jointly owned by Passiva Participations and Aggregate Holdings 2. The remaining shares are in a 80.3% free-float that includes management members having a 9.7% stake and Vestigo 7.4%. Aggregate Holdings 2 is ultimately held by shareholder Gunter Walcher, as reported.

Corestate’s BB- rated EUR 300m 3.5% senior unsecured 2023s are quoted down at 84.625-mid yielding 15.3% versus 92-mid on Friday 1 October. 

LTV limbo 

From an operational perspective, Adler’s reported loan-to-value is still high at 54.7% at 2Q21 as reported, while its falling share price means the ratio could rise going forward. Adler Group’s shares are down around EUR 11.3 per share leaving a EUR 1.31bn market capitalization. The share price was up at EUR 29 per share at the start of the year. 

Prospects that Adler Group can raise further capital look harder given where its bond prices and equity trade. Adler Group's bond volatility was previously sparked by concerns over a parliamentary inquiry from left-wing party Die Linke, which raised red flags around the 2020 merger with German real-estate peers ADO Properties and Consus, as reported.

“The yield is not refinanceable so they need a solution. There was the paper by the left-wing party that was delivered to the Bundestag asking if the merger with ADO will be reviewed,” the second buysider said. But there is a wave of shorts across the curve despite the elections meaning there is no left-wing party in government, he added.

Adler Group’s EUR 800m 2.25% senior unsecured 2029s are indicated at 82.375-mid yielding 5.2% versus 81.5-mid at the close the week ahead of the Viceroy report, according to Markit. 

The five-year CDS is indicated at 577bps-mid. The swap’s chance of an orphaning looks unlikely if a Domination Agreement between Adler Group and Adler Real Estate plus Adler Group and Consus is put in place, according to a recent Citi research note, buysiders noted. This will allow the parent to instruct other Adler management of the subsidiaries while subsidiaries may grant upstream guarantees.

An independent audit is needed for market conformity, the first buysider noted. He said that his firm believed the Viceroy loan to value and valuation concerns were exaggerations. The interpretation of the DCF method was not the best part of the paper and it was harsh on methods used for valuing properties, he said, nothing that related party concerns are valid, which is embezzlement or criminal prosecution.

“The Caner links are what they are. Meanwhile we are creating the company bottom-up and are putting context around the impacted entities so as to make educated investment decisions,” Sarria noted. Sarria added that it has no doubt Adler has accounted for the assets aggressively, but it is too early to say whether it's standard enough or if any of it amounts to actual fraud as per the Viceroy allegations – or how important such irregularities would be in the context and at which level. 

Some of the [Viceroy] valuations seem accurate, according to Sarria. “We are looking at which property is in which entity and how much debt each guarantees as well as how much money each box makes or needs.”

Sarria will host a webinar at 3pm UKT this Thursday (14 October) to discuss the European high yield real estate sector. To attend, one can sign up here.

Adler Group, Aggregate Holdings, Corestate and Vivion declined to comment.

by Adam Samoon