A few weeks ago I was surprised to see a familiar name readmitted to AIM, Summit Germany (SG). SG, which is managed by Zohar Levy, invests in commercial property in Germany. It is a fund that I used to hold in the portfolio of Advance UK.
Listed in May 2006, SG raised €80 million (£66 million) at €1 per share. It was then expanded twice, issuing 75 million shares in October 2006 and raising a further €150 million by issuing 120 million shares at €1.25 in June 2007.
It built up a portfolio of offices (plus some associated retail and logistics space) worth well over €900 million. Then, as we know, things started to fall apart in the leveraged property sector.
SG had taken some precautions against this, having planned for the fund’s launch since 2004, when German property was in recession. From day one, it concentrated on ensuring that it had a strong tenant base on long leases.
It had leverage on the special purpose vehicles that held the properties but loan to value (LTV) ratios were not as extreme as other leveraged property funds and the maturities of these loans were relatively long (out to mid-2014, on average).
SG also had a substantial pile of cash (over €100 million) and, using interest rate swaps, had fixed its debt at what then looked an attractive 4.2%.
Investors were panicking however, which is why, in October 2008, I was able to buy 3.5 million shares for Advance UK at 12.5 cents each – what looked then like an 88% discount.
Fast forward a few months and Levy could buy sufficient shares in SG to take his holding in the company up to 29.98%. In April 2009 he made a bid for the rest of the company at 21 cents per share.
In February this year, SG was readmitted to AIM at 63 cents per share, raising €30.7 million of fresh capital in the process so I thought I would have a look to see if it looks attractive at that level.
Today SG has a market cap of about €185 million; 79% of it is controlled by a company listed on the Tel Aviv Stock Exchange and Levy has an indirect interest in just under half of SG (48.2%). SG is self-managed, with a team of 50 people based in Berlin and Frankfurt.
It owns 86 properties, covering 647,000 square metres and let to around 500 tenants, with a weighted average lease term of 4.4 years and valued at €500 million. These throw off a yield of about 8% (rental income of circa €39 million).
This seems a lot higher than the average yields on prime office properties of 4.67% that Jones Lang LaSalle was quoting at the end of 2013, and reflects the fact the portfolio is not all in prime city centre locations.
At the end of December 2013, prior to the fund raising, SG had borrowed €312 million of bank debt from RBS and had a loan from Summit, a major Israeli shareholder, of €46.5 million. This equated to a LTV of 62.4%. SG says the plan is to reduce this over time.
The portfolio is spread across Germany. About half (by rental value) comes from Frankfurt, Berlin and Hamburg and three quarters are based in major German cities. The portfolio is a subset of the one SG had in 2009.
It has started exploring opportunities to undertake limited residential development within the portfolio as the residential property market in Germany is more buoyant than the commercial market.
The money raised in February may go towards new acquisitions. SG said it hoped to double the size of the portfolio over time and, in February, it said it was in talks that could have led to the acquisition of about €250 million worth of property.
It raised less than It hoped in February but I would guess it will try again when conditions permit.
SG says it is a good time to be buying commercial property in Germany as banks are still reluctant to lend, there are distressed sellers and portfolios backed by non-performing loans are available.
So is it attractive? Some potential investors might be deterred by the degree of control still exercised by Levy but SG plans ‘over the medium term’, to target a 7% dividend yield. This would certainly be attractive. There is also a chance of capital appreciation in the portfolio – though this is one of those things that has long been hoped for.
James Carthew is a director at Marten & Co