INTERVIEW Untangling the Gordian knot

CPI Property Group’s CEO and CFO talk about the latest developments in the group’s journey to become Central Europe’s largest property landlord.

Should everything go as planned, CPI Property Group (CPIPG) will add more than €8 bn of new assets to its portfolio in Central Europe this year, lifting the value over €20 bn. It is a tremendous leap for a company which just over a decade ago was a local investor active in the Czech Republic and Slovakia with a portfolio of just over €1 bn. While CPIPG’s growth story has not begun in the past few months, it is the last two M&A operations which have put it in the spotlight.

This year the company, which holds a diversified portfolio of offices, retail assets and hotels largely in the Czech Republic, Germany and Poland, raised its stake in peer firm Immofinanz to nearly 77%, effectively succeeding in untangling one of the most complicated corporate ownership structures in the region. Likewise, it is close to winning control of S Immo, another Vienna-listed CEE property specialist.

‘We have been monitoring Immofinanz’s successes and failures for years,’ CEO Martin Nemecek tells PropertyEU in an exclusive interview. ‘They were one of the largest property companies in the region, with a good quality portfolio of offices and retail assets. Last year, after a failed merger attempt with S Immo, we saw an opportunity to step in.’

He continued: ‘Our philosophy is not to buy shares but properties. However, in this case, buying shares and taking control of the company was the only way to get control of the assets. Immofinanz’s ownership structure was complicated and there was a cross-shareholding with S Immo, creating a situation where the stock underperformed. However, we could look through the corporate mess and get through with this very complex acquisition. It took a lot of time, a big balance sheet and proper financing from major banks to succeed.’

NEW LEVEL

The deal creates a group with a new level of size and scale as a landlord, adds CFO David Greenbaum. ‘Fundamentally this transaction is about adding to a portfolio in a region where CPIPG is an expert and buying at a very good price. There are synergies with our existing business, and the increased scale will strengthen our credit profile, helping us to be as efficient as possible in our capital structure.’

CPIPG offered a price of €23 per Immofinanz share representing a 24% discount versus Immofinanz’s last reported net reinstatement value (NRV) of more than €30/share. The deal was the fourth takeover bid launched for Immofinanz over the past decade, and the only one eventually going through. Previous failed takeover attempts included bids from Starwood, CA Immo, and 'S Immo.

CPIPG’s other major takeover is that of ‘S Immo, a central European property firm with a portfolio of nearly €3 bn. CPIPG had built up a 16.5% stake in ‘S Immo since last December and indirectly controls a 26.5% stake in the company through its 77% stake in Immofinanz, another ‘S Immo shareholder. 'S Immo's management board has deemed the €23.50 a share bid (cum dividend) to be fair and the takeover is likely to complete before the end of the year. The price represents a 19% discount to S Immo’s most recently reported net tangible assets value of more than €29/share.

This strategy is ‘another logical step forward in the Group’s evolution from a regional leader into a European real estate champion’, CEO Nemecek says. While he certainly hopes this new bid will be successful, he notes that the following goal will be to consolidate the new assets and manage them in the best possible way. ‘We have achieved so much growth in the past couple of years, the main goal now is to complete these transactions and make sure that we run the business in the most sensible way.’

He declined to comment on CPIPG’s immediate plans and strategy for Immofinanz, saying these need to be discussed with the company as the group is ‘mindful of minority shareholders’.

‘However, there have been changes to the executive board and we now have representatives in the supervisory board. This is the first step in being able to influence the strategy of the company,’ he adds. The company has also decided against the distribution by Immofinanz of a dividend for the financial year 2021, suggesting that the balance sheet profit is carried forward in full onto new account. The resolution will be voted during Immofinanz’s annual shareholder meeting on July 12.

Nemecek: ‘In terms of the numbers, Immofinanz owns €5.2 bn of assets while ‘S Immo is close to €3 bn. The focus now is really to complete these major transactions and start working on the properties. There is a big job ahead of us.’

THE HISTORY

Nemecek has been with the company for over a decade and is the driving force behind the firm’s expansion. A lawyer by profession, he joined the firm in 2011 when by his own admission CPIPG was a small local landlord in Czech Republic and Slovakia, with a €1.3 bn portfolio. ‘When I joined the firm, Mr Vítek (i.e. Radovan Vítek, a Czech billionaire investor as well as founder and the majority shareholder of CPIPG) hired new professionals to support the existing team. At the time we were one of the largest companies in the Czech Republic and one of our first jobs was to expand to the neighbouring markets.’

The company successfully expanded to Poland and Hungary in 2013 with the acquisition of the Ablon group. ‘At the time prices in the region were still very low, and we were able to take over a number of assets for a very good price. In the same period, we also bought good properties in the Czech market, largely shopping centres and offices in Prague. After 2013, the situation in the region improved, the banks reopened and the market experienced strong yield compression. We leveraged on the properties we acquired and we used the equity to buy more. Mr Vitek - the founder of the company - didn’t want to take any distribution in kind or cash, he always asked us to reinvest.’

The next transformation came in 2014 when CPIPG was able to take over the GSG Berlin portfolio, which remains ‘the jewel in the crown of the CPIPG portfolio’.

‘It was another milestone in the company history,’ Nemecek says. Three years later the firm obtained investment grade rating, becoming the second company in CEE to reach this goal. ‘We transformed the business from relying on local banks to being supported by the financial markets. David (i.e. CFO David Greenbaum) was our banker at the time and he was offered a job by our shareholders directly.’

Shortly thereafter the firm issued its first senior unsecured bonds with a volume of €825 mln. In January this year, CPIPG also became the first real estate company from its region to issue sustainability-linked bonds, for a total size of €700 mln with an annual coupon of 1.75%.

Nemecek says the company has continued to perform well during the pandemic with virtually no negative impact so far from the war in Ukraine. ‘The operational performance of our assets is still good. Demand in our region remains there, footfall in shopping centres and retail parks is higher than last year although slightly lower than 2019 but purchasing power is rising and people are spending more.  In terms of the residential portfolio, we are seeing very stable, very high occupancy.’

Greenbaum admits there are a number of secondary effects from the war that are affecting the business, albeit not profitability. ‘They include the energy crisis, the higher cost of materials as well as high inflation. However, inflation could be an opportunity, because most of CPIPG’s rents are indexed and therefore could increase as a result. In general, we are very comfortable with the fact that we have strong properties, good market dynamics, we feel constructive about valuations. We believe now it is the time to optimize the company and comfortably digest our recent growth.’

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