It is clear that the 2009 regulation on SOCIMIs (and in particular the December 2012 amendment) came at the right time and is well adapted to the requirements of investors. We are now starting to see the results. Activity in the investment market in the last eighteen months has been very high and SOCIMIs have played the leading role. What are the reasons for such success?
First: transparency. Unlike real estate companies in recent years, that mixed property development with land management and tenure and leasing of properties, SOCIMIs are vehicles to manage properties with rental income (minimum 80% of the value of the assets has to be in this category). Hence investors know where they are putting their money.
Second: the legal and tax regime and the trading in the stock exchange, that allows the investor to manage liquidity, and the company to raise funds by convincing the market of the suitability of its strategy. And it represents an additional control, based on the reporting requirements of the stock exchange.
And third, the big four that we list below have been formed and base their strategy on professionals of recognized acumen in the structuring of transactions and with deep knowledge of the real estate rental market. Ismael Clemente, Luis and Miguel Pereda, Luis Lopez de Herrera Oria or Concha Osácar and Fernando Gumuzio are names that inspire confidence because, basically, they have not changed their good record in the last twentyfive years. Or as Luis Pereda told us recently, he is conscious of his mistakes but he will “try not to make the same ones again”.
We can speak of two main groups of SOCIMIs. Companies listed on the continuous market of the stock exchange and those that are part of the MAB –the Alternative Equity Market-. Among the first, the big four: Merlin Properties, Hispania, Axia Real Estate and Lar España Real Estate. Among the latter, Entrecampos Cuatro, Mercal Properties, Promorent, Uro Property, Fidere and Trajano Iberia. In this article we will deal with the first four.
1.- HISPANIA ACTIVOS INMOBILIARIOS
Hispania [ticker HIS] is listed on the Madrid Stock Exchange as of March 14th 2014. Market cap has increased from € 596.9 M in 2014 to € 1,067.9 M today. Hispania made an accelerated capital increase of € 350 M on April 29th. Among its reference shareholders are George Soros and John Paulson. At the last closing, price for shares was € 12.93, a 25.2% increase over the initial price (€ 10.325). As of June 30thHispania has made a net profit of € 10.7 M.
Hispania advises that they are considering investments of up to € 1,500 M, although one of its biggest bids, the takeover of Realia, failed when faced with the competition of Carlos Slim for the same prize. Successful, however, has been the agreement of Hispania Real SOCIMI –a subsidiary- with Barceló Hotels Group, to form Bay, a SOCIMI that will invest € 340 m in the acquisition of 11 Barceló Group hotels –with 4.000 rooms- and one shopping centre in the Canary Islands. Of that SOCIMI, Hispania will hold 80.5% and Barceló, who will manage the hotels for a minimum of 15 years, the rest. Hispania previously acquired a hotel in Marbella, an apartment complex in Fuerteventura, several office buildings and a housing complex with 284 units in Sanchinarro (Madrid). The investment strategy includes hotels, residential and office sectors.
Hispania is managed by Grupo Azora. This is a group formed by Concha Osácar and Fernando Gumuzio, as founding partners. Chairman is Juan del Rivero. They all have extensive experience, as Grupo Azora manages more than € 3.000 M in assets comprising social infrastructure, real estate and renewable energy.
2.- LAR ESPAÑA REAL ESTATE
Lar Spain Real Estate [ticker LRE] is listed on the Madrid Stock Exchange starting April 3rd 2014. Market cap has increased from € 367,3 M in 2014 to € 540.6 M on September 9th. In June 2015 a capital increase for € 135 M was completed. Previously, in February, it issued € 140 million in bonds due 2022, with a coupon of 2.90%. At the last closing share traded at € 9.01, a 12.01% over the initial price (€ 10,25). As of June 30th it has achieved a net profit of € 19.3 million.
Lar Spain Real Estate is managed by Lar Group under a mutual exclusivity agreement. Independent of Lar España, Lar Group conducts residential development in Spain and Latin America. On new acquisitions for such residential business it must offer LRE an option to acquire up to 50% of it. You can see the explanation (in Spanish) of this agreement by Luis Pereda, president of Grupo Lar here.
The portfolio of Lar Spain Real Estate consists of 21 major assets, 8 of which are hypermarkets and shopping centers, 5 are office buildings (Madrid-4, Barcelona-1), 5 are logistics warehouses (Madrid-4, Valencia-1), 2 are retail warehouses and a 50% of a residential development in Madrid. Its latest acquisition, which will be implemented in October 2015, has been the Megapark in Barakaldo, the largest mall in the Basque Country, which has been purchased from Oaktree for € 170 M. Grupo Lar’s proven experience in shopping centres is a knowledge bonus for this SOCIMI.
3.- MERLIN PROPERTIES
Merlin Properties [ticker MRL] is listed on the Madrid Stock Exchange since June 30th 2014. Market cap has increased from € 1,296 M in 2014 to € 3,360 M today, due mainly to the acquisition of all (99.6%) of Testa from the Sacyr Group, for € 1,793 M, agreed last June. Testa, in turn will become a SOCIMI and will then merge with Merlin. For this acquisition Merlin has made two successive capital increases, in May and July 2015, for € 613.8 M and € 1,033.7 M respectively, both completed successfully. Although, it has to be remarked, Marketfield Asset Management, UBS and EJF Capital, some of its reference shareholders, did reduce their stakes. There is trust in the management, but the acquisition of Testa is a very large deal that, some may think, has yet to prove its worth. At the last closing shares traded at € 10.40, 7.8% higher than the initial price (€ 9.75). Morningstar has indicated as “fair value” € 12,13 therefore considers Merlin to be undervalued. As of June 30th Merlin has achieved a net profit of € 119.6 M.
The interim financial statements submitted to BME as at March 31st 2015 do not reflect the agreement to buy Testa, which will take place in stages until June 30th. In any case, this acquisition makes Merlin the largest SOCIMI in Spain. Merlin has a portfolio of 902 assets, valued at € 2,231 M, an area of 717,000 m2 which is 96.7% let. It is generating € 134.6 M in annual revenue with an average lease term of 17.7 years. The “Tree Portfolio” composed of 885 assets –mostly bank branches- acquired in June 2014 from BBVA, are based on very long-term contracts and has been the foundation that gives stability to the whole. Something that its CEO, Ismael Clemente, is using with skill to build a large diversified portfolio of offices, shopping centers and logistics parks.
Testa, in turn, is providing a portfolio of good quality consolidated assets, offices in Madrid and Barcelona in a large proportion, ith a € 3,180 M valuation and 1,043,000 m2.
A great portfolio and a great company, which now must consolidate its position, ensure long-term profitability and increase Net Asset Value on an on-going basis.
4.- AXIARE PATRIMONIO
Axiare [ticker AXIA] is listed on the Madrid Stock Exchange since July 9th 2014. Market cap has increased from € 389.4 M in 2014 to € 790.6 M today. Axiare completed in June 2015 a capital increase of € 394.6 M. At last closing share traded at € 11.00, 12.8% above is initial price (€ 9.75). As of June 30th 2015 has achieved a net profit of € 31.3 M.
Axiare has assets valued at € 806 M, comprising 551,000 m2 in total, of which 72% are offices, 18% are logistics and retail 9%. More than 90% of its acquisitions in 2015, € 173 M, has been in Madrid. The occupancy rate is 94%.
Axiare CEO is Luis Lopez de Herrera-Oria, who was director of Prima Inmobiliaria, which later became Testa Inmuebles en Renta. He has over twenty five years experience in managing, successfully, this type of property.
In a nutshell, with a market cap of € 3,360 M, Merlin is the clear leader of this group. By purchasing Testa it will surely become a leader in the office market in Spain. Hispania follows with market cap of € 1,067 M. It should still have room for growth, with a clear vocation in the residential, hotel and office markets. Close behind is Axiare, with € 790 M market cap, with special dedication to office investments. And finally Lar España Real Estate, that has market cap € 541 M and a particular interest in shopping centres. Activity should continue at high levels for some time, although yield compression indicates that there may be increasing difficulty in achieving investment targets while preserving profitability.
Source: World Office Forum