Bettina Schragl

IMMOFINANZ - Live blog from the extraordinary general meeting on the BUWOG spin-off

It is shortly after 11.00, the extraordinary general meeting has begun. Supervisory Board Chairman Michael Knap greets all shareholders and opens the GM. "Thank you for coming in this beautiful weather".

There are about 630 persons present (at our last ordinary general meeting there were more than 700).

Knap then explains the formalities, the voting process, etc. And there will be a "snack".Knap turns the floor over to CEO Zehetner. There is a single item on the agenda, which is: the decision to spin off a stake of IMMOFINANZ AG to BUWOG AG in return for granting BUWOG AG shares to IMMOFINANZ AG shareholders.

But before it gets to that point, Zehetner addresses the question of "why?", that is, why the Executive Board of IMMOFINANZ has decided to recommend shareholders this method of separating BUWOG from IMMOFINANZ and to establish an independent capital market presence with listings in Frankfurt, Vienna and Warsaw.

Zehetner addresses the current portfolio distribution (asset classes and countries). "This is a part of our history which we've been able to simplify in the last few years". But not yet to a satisfactory degree. The idea now is to separate residential and commercial properties.

Currently, about half of the portfolio is located in Eastern Europe and about half in the west. In the last few periods we have managed to generate much more added value in Eastern Europe than in the western countries. For the total return from our CEE properties (basically the “former” IMMOEAST) from 2010 to 2012 we were awarded the "IPD Property Investment Award in Central & Eastern Europe" for the portfolio with the highest performance of a total of 49 portfolios in the region.

Nevertheless, the discount of the share price to NAV is still about a third. "Our advisors from Victoria Partners called this a conglomerate discount" – because international investors are reluctant to invest in such a mixed portfolio.

"That is why we have decided to propose splitting commercial properties (IMMOFINANZ) and residential properties (BUWOG)".

About 27% of our real estate assets and 18% of our rental income will go with the BUWOG spin-off.

The CEO then addresses the alternatives examined:
An IPO: in this case we would probably have been forced by international investors to sell the shares at a considerable discount.
This is not the case with a spin-off, even if the BUWOG share will not be traded at NAV from the start.

To prepare BUWOG for the capital market, its portfolio has been expanded in Germany, with BUWOG recently reporting the acquisition of 18,000 flats in northern Germany.

"The logic of the spin-off is that afterward the market cap of both companies – IMMOFINANZ and BUWOG – should be larger than that of IMMOFINANZ now", says Zehetner.

We now have 830 people attending the EGM – more than at the last ordinary GM after all.

Thus the spin-off's logic from the perspective of IMMOFINANZ, briefly summarised:

Clear focus: IMMOFINANZ as leading commercial real estate company in Central and Eastern Europe (including Russia) by portfolio size and market cap.

Simplified structure, higher yields: higher yields on the capital invested and capital turnover – the real estate machine runs "faster". And a streamlining of the company and its organisational structure.

Strategic options: better potentials for strategic transactions and medium-term reinvestment of funds from the 49% BUWOG stake in IMMOFINANZ's core business
Upside valuation potential: clear positioning and increased yield illustrate relative undervaluation
Following the spin-off the IMMOFINANZ portfolio will be represented as follows: carrying amount will be reduced from EUR 10.1 billion to EUR 7.3 billion, retail will increase from 30% to around 42%, the share of office will increase from 28% to 39%, logistics will constitute 11% (up from 8% previously), the remainder miscellaneous properties.

At that point Austria will no longer be the biggest market (currently 38%, followed by Russia at 18% and Germany at 10%), rather Russia (at that point 25%) followed by Austria at 20% and Romania at 14%.

The CEO now addresses the transaction's structure and explains how a sample securities account will look like before and after the spin-off.

"If you have 1,000 IMMOFINANZ shares now, then after the spin-off you will have 1,000 IMMOFINANZ shares and 50 BUWOG shares. In numerous portfolios the division will not be carried out precisely by 20. If you have 1,010 IMMOFINANZ shares in your portfolio, then after the spin-off you will have 1,010 IMMOFINANZ and 50 BUWOG shares plus 10/20 times the value of one BUWOG share (share price)” These are called fractional shares, which will be sold by Erste Bank. The proceeds from the sale shall be credited to your account after about three weeks.

So how will things proceed with IMMOFINANZ after the BUWOG spin-off? "We will continue to pursue the real estate machine concept. Two thirds of the portfolio will then be in Eastern Europe, one third in Western Europe. We will expand our development pipeline – that depends on the market, of course, but we are also hoping that the markets recover further".

Developments are financed through the cycle-optimised sale of properties; dividends and share buybacks (if any) can be financed through the asset management.

Then Daniel Riedl, COO of IMMOFINANZ and CEO of BUWOG, takes the floor. He discusses the logic of the spin-off from BUWOG's perspective – independence, access to the capital market, visibility and transparency as well as prospects for employees. "We have a clearly focused market presence in our core markets Germany and Austria".

BUWOG's business model is based on the pillars of asset management, property sales and the development business. "What sets us off from peer companies the most is property development", according to Riedl. "We are developing condominiums in Vienna and Berlin and we are also adding rental units to our portfolio in Vienna".
All three pillars generate cash which can to be used for dividends to investors, in addition to investments.

Riedl discusses the BUWOG portfolio, which includes about 53,500 flats with a gross asset value of EUR 3.5 billion. The rental yield is 5.6% (4.3% in Austria, 7.7% in Germany).

The expansion in Germany resulted in a considerable increase in the portfolio's rental yield (in 2012/13 the rental yield was 4.8% – now it is 5.6%).

Where might be the share price of BUWOG?
Riedl: What I can tell you is where the share prices of our peer group companies list: the average EPRA-NAV discount is 2.4% (peer group: DAIG, Deutsche Wohnen, GSW, LEG, Gagfah, TAG). IMMOFINANZ (and with it BUWOG) currently trades at a discount of nearly 35%. "Our aim of course is to reduce the gap between the share price and NAV", Riedl says.

BUWOG's outlook: in the development business BUWOG will continue to focus on developing its project pipeline in the federal capitals Vienna and Berlin further. The sale of individual flats is to be intensified in Austria and to be established in Germany. There will also be property and portfolio sales in peripheral areas in Austria; in Germany further acquisitions in the regions of Berlin and Northwest Germany are planned on a scale of 2,000 to 4,000 units per year.

To conclude, Riedl then addresses the dividend policy:
"The good news: IMMOFINANZ is going to distribute a dividend again after this year".
As the preparations for BUWOG's spin-off required the extensive acquisition of residential properties in Germany, the Executive Board of IMMOFINANZ is planning to suspend the dividend for the current 2013/14 financial year. Dividend distribution will be resumed in subsequent years. BUWOG is also positioned as a dividend-bearing security and is already planning to pay its first distribution in the 2013/14 financial year. That is likely to be in October of this year.

CFO Birgit Noggler then addresses the spin-off process and spin-off agreement.

The interim status on attendance from the GM service: we have nearly 35% of share capital present – that is a great figure. In shares/votes this is currently about 392.12 million.

Ms Noggler then reads the proposed resolution.

Mr Knap extends his thanks to her for the "reading marathon" – as well as to the two gentlemen of the Executive Board. The general meeting has a quorum, says Knap.

We now come to the requests to speak. Mr Knap asks for questions and remarks that are as "compact" as possible.
So far 10 shareholders have asked to speak in person. 19 want to have their questions read.

It begins.

Mr Rasinger comes to the podium. He is president of the Austrian Shareholders Association (IVA) and proxy.
"I represent about 20 million votes; this is more than 5% of the share capital in attendance or 100 shareholders". International and institutional investors took particular advantage of the proxy.
In the run-up there were numerous questions sent to the IVA because such a transaction is "new territory" in Austria – even if Siemens/Osram already occurred in Germany.
Mr Rasinger has prepared a model calculation for the IVA, which we have also posted in our blog.

There is a question concerning BUWOG, which is aiming for a dividend yield of 4%: how high will the distribution ratio be and on what scale of standing investments, trade and development?

"What I'm extremely pleased about: the structure with the convertible bond. And I'm really pleased that IMMOFINANZ will continue to hold a stake in BUWOG. Because this enables participation in positive growth over a longer period of time", Rasinger continues.

Rasinger is also interested in the costs of the transaction. "I am no friend of multiple listings. I would of course prefer the primary listing to be in Vienna. But the turnover on the stock exchange should ultimately decide this".
Won't it be more complex for the company due to such multiple listings for investors?

And a question to Mr Zehetner: will he remain on the Supervisory Board of BUWOG after departing the IMMOFINANZ Executive Board?

Conclusion from Mr Rasinger: we recommend approving this measure.

Mr Riedl starts answering:
Regarding the BUWOG dividend: 4% of EPRA-NAV for the first year. We've generally planned to distribute a 60% to 66% bandwidth of the recurring FFO. Property management: in Austria properties will be managed by BUWOG itself, in Germany a smaller percentage is managed by BUWOG (particularly in Berlin). "But with the acquisition of the DGAG portfolio we have also acquired an asset management platform". It is therefore planned that over the medium-term BUWOG manages its entire German portfolio internally.

Timetable: We expect to list the BUWOG shares in Vienna and Frankfurt on 28 April and in Warsaw presumably on 29 April.

Why the primary listing in Frankfurt: "All peer companies are listed in Frankfurt. That's where the greatest affinity of investors is for this segment".

Then the CEO also addresses the listing: in Germany there is a significant demand for companies listed on the Frankfurt Stock Exchange. BUWOG is also aiming for inclusion into the MDAX.

Concerning the Russia/Ukraine issue and the effects on IMMOFINANZ, Mr Zehetner says: "I was in Moscow during the weekend the Crimea was basically marched into - because we had a soft opening for our Goodzone shopping centre. The Supervisory Board was also there. I can assure you it is our most beautiful shopping centre in Moscow. Although Goodzone was kind of a difficult child", he says, referring to the lengthier development period (due among other things to the general contractor's insolvency).

Zehetner continues: "Obviously this political conflict is problematic for the entire region. We can only hope that reasonable action will be taken here and that it does not come to measures that impair the economic upturn. Apart from that it won't have an influence on our business. As long as purchasing power in Russia isn't impaired".

What are the effects of the weaker ruble? "Paradoxically, the effects are even positive in the short term. If the ruble weakens, our euro-valued properties will appreciate. In the medium- and long term this effect is not positive, as the purchasing power of the Russians weakens, and as pressure on tenants rises. But if you look at how we emerged from the major crisis in 2008/09 with our Russian retail properties, it's reassuring. The vacancy rate went up at that time from about 0% to 3%. But of course, we're hoping for a recovery of the ruble exchange rate", according to the CEO.

Zehetner on his activity after leaving IMMOFINANZ Group: When I leave IMMOFINANZ, I will also leave the supervisory board of BUWOG.

One shareholder asks about the proceedings for reviewing the exchange ratio for the IMMOFINANZ/IMMOEAST merger (which dates back to 2010).
Zehetner: The Commercial Court Vienna has commissioned an expert report from the committee to review the exchange ratio. The result is still pending

One shareholder isn't "entirely satisfied" with BUWOG because IMMOFINANZ is suspending the dividend for a year due to the spin-off.

The next investor takes the podium: like Mr Zehetner, he also poses a "why question". It involves the spin-off's structure in terms of corporate law (interposition of several companies) and asks for the simplest explanation possible.

Ms Noggler discusses the structure of the split, which was tax optimised. To this extent it is an advantage to shareholders because less money was spent.

One shareholder says to Mr Zehetner, whose contract expires at the end of November 2014: "For me it's essential you stay on board".

Mr Riedl then discusses the financing of the DGAG portfolio: the financing of the purchase price is secured by a combination of EUR 402 million in mortgage loans that have already been approved, the EUR 213 million development loan available in existing companies as well as funds from the planned issue of a BUWOG convertible bond.
BUWOG's LTV will then be between 50% and 55%.

Zehetner on the scenario of IMMOFINANZ being relegated from the ATX five following the spin-off: "I don't consider our membership in the ATX five that important – regardless of the fact that we probably would have been forced out by Raiffeisen Bank International in the long run anyway. What is important is that we remain a significant and liquid share. And I think that's guaranteed". He also reports on the numerous roadshows in the last few weeks and the positive feedback from investor’s side.

One shareholder addresses the effects of the political events in Russia again.

Mr. Knap on the composition of the IMMOFINANZ Executive Board after Daniel Riedl's departure: “At the moment we are leaning toward refilling the position. There are external and internal candidates. As soon as we have reached an agreement, we'll inform you".

Zehetner on BUWOG's anticipated share price: "We don't know where the share price will be at the end of April". It is the consequence of supply and demand on the capital market. "If BUWOG's NAV is assumed to be EUR 1.6 billion (and BUWOG will have about 100 million shares), NAV per share will be about EUR 16. With an assumed discount of 35% on NAV, the share price would be about EUR 10 to EUR 11". And he adds: "Anything else would be speculation. That's why we aren't showing any model calculations – either downside or upside. Because we can't guarantee anything".

Mr Rasinger on his fee as proxy: EUR 2000.

Zehetner again on the discussions with analysts and fund managers: "The IMMOFINANZ conglomerate that this management inherited and whose structure it significantly improved, is no longer desired by the market. And that is one reason why the share price is considerably below the net asset value". And further: "In the interest of the shareholders I have to consider this and lead the company in this direction (remark,BUWOG spin-off)".

Zehetner on the subject of risks: "What many international investors think about the IMMOFINANZ conglomerate is, that they want to determine their asset allocation themselves - either commercial property or residential property investments. They don't want the company to determine it for them".

One shareholder speaks up and finds "the procedure we are to decide today very good". He also regrets that Mr Zehetner will depart at the end of November, mentions that he was "Man of the Year", and describes the BUWOG spin-off as a "masterpiece”.

Question: What about the financial liabilities in Russia? And how should the further growth in Russia proceed?
Answer: The Sberbank loan is USD 715 million. There are also additional financing facilities in Russia.
The CEO also says we plan to continue developing in Russia, particularly in logistics and the retail segment in Moscow. The yields there generally vary between 10.5% and 13% – thus on scales that are double what can be earned in Western Europe. It is also conceivable, that minority shareholders can take a share in IMMOFINANZ’s Russian assets.

Another shareholder regrets the coming departure of CEO Zehetner and wishes him well.

Mr Riedl on BUWOG: corporate headquarters is located in Vienna and will remain in Vienna. It is also planned to continue to hold the general meetings in Vienna.
The settlement of fractional shareholding amounts will be also free of charge for shareholders.

Another person welcomes the spin-off solution, but as an IMMOFINANZ shareholder he does not agree with the fact that there will be no dividend from IMMOFINANZ for the current year. Was any thought given to simply reducing the dividend?
Zehetner: "I've already said that money can be spent only once. That also applies here. And BUWOG will also pay a dividend for the current year". And further: "We have made enormous investments in order to enable BUWOG these acquisitions. We also have to make the remaining payments on our shopping centre Rostokino and have completed our shopping centre Goodzone".
IMMOFINANZ plans to remain flexible and feasible in terms of liquidity.

Question: BUWOG dividend - with or without capital gains?
Mr Riedl: due to the splitting of our tax records, a repayment of capital will also be possible at BUWOG - to a certain extent.

Further questions are then answered:
Mr Zehetner on the influence of the ruble exchange rate on the IMMOFINANZ share: there is no “direct” influence on the share price. The weaker ruble exchange rate issue and possible consequences for IMMOFINANZ has already been addressed.
And: "We're hoping there won't be any EU sanctions".

Question: Why first the merger of IMMOFINANZ and IMMOEAST and now the spin-off of BUWOG?
Zehetner: The merger was a step in the group's further development and the spin-off is now another step. The basic rationale is always to create added value for the shareholder.

Question: Why is the company making acquisitions instead of paying shareholders "reasonable dividends"?
Zehetner: "I think we've paid quite reasonable dividends in the last few years. We taught the Austrian real estate business to pay dividends in the first place and will also continue paying dividends in the future".

Question: When can the sale of the remaining 49% holding in BUWOG be expected?
Zehetner: We anticipate a period of two to three years.

Concerning the LTV: That of IMMOFINANZ will continue to be below 50%. BUWOG will show an LTV of 50% to 55%. BUWOG is largely mortgage-financed.

Ms Noggler on the capital repayment/dividend: "At IMMOFINANZ as well as BUWOG there is enough scope to make dividend payments treated as a repayment of capital. For both companies, a few years are possible".

Question: To what extent can Mr Zehetner assess whether implementation of the IMMOFINANZ real estate machine and strategy will continue after his era?
Zehetner: "I'm fully confident of this".

Question: When does the financial year for BUWOG begin and end?
Riedl: 1 May to 30 April

Question: What will happen with the convertible bond which BUWOG is going to issue in the course of acquiring the DGAG portfolio and which is subscribed entirely by IMMOFINANZ?
Riedl: It will be floated in the market later on.

Mr Riedl also says he and his Executive Board colleague Roos will go on a roadshow in the next few weeks.

We are likely approaching the end of the round of questioning.

Mr Knap puts the proposed resolution to vote.

The result: the shareholders have voted with a clear majority (99.96%).
Knap: I note that the proposed resolution has reached the required majority and has therefore been adopted by the general meeting.

Mr Knap also thanks Mr Riedl, who will leave the Executive Board of IMMOFINANZ when BUWOG spins off.

Knap: "Thank you for your attendance, your contribution, and your in part highly interesting questions. I hereby conclude the general meeting".

It is shortly before 14.30.

Thank you for reading and for your interest.

Postscript: The presentation of today's extraordinary general meeting can be found here: