German Real Estate - comment

Vonovia’s Q3 results this morning highlight that there remains at least minimal liquidity in the residential market in Germany, with €1.7bn of sales in Q3.  Reassuring for other market participants, the majority of the sales are close to par value (range -7% to +43%).  Included in the €1.7bn is a JV with Apollo, where Apollo have agreed to take a 30% minority stake in Vonovia’s “Northern Portfolio” (consisting of 31k units in Kiel, Bremen and Lübeck) for €1bn.  Vonovia will retain operational control and fully consolidate the JV.  Apollo will benefit from higher than pro-rata share of dividend distribution from free cash flow, but Vonovia retain a long-term call option giving the right to repurchase the participation at an IRR of 6.95%-8.3%.  

We have some doubts about the headline numbers. We expect the deal is structured where the disproportionate cashflow to Apollo reflects a de-facto seniority in the deal. Also, some deals in the sector are structured around a pretty headline figure, but include numerous contingent subtractions that ensure the buyer does not take on the full risk.