Between The Lines > interview with the management board

Developments on the stock markets and, in particular, among public property companies have been and continue to be extreme. This is reason enough not to whitewash the situation but to confront the CA Immo Management Board with critical questions.

The interviewer was Dr. Georg Wailand, editor of the business magazine GEWINN.

Question: Your company has not remained unscathed by the property crisis; did you expect the downturn to occur with such speed?

Ettenauer: In all honesty, no! The momentum and severity of this development was as much of a surprise to us as to everyone else in the industry. I can therefore understand the consternation of the shareholders all too well. The price of our shares is totally unsatisfactory and we are putting all our efforts into moving ourselves back to where we were previously.

Fromwald: We were all shocked by the suddenness of the collapse, particularly among public property companies. The property market appeared to be holding up well and many people expected that the Austrian property market, in particular, would be able grow independently of the financial markets.

Question: How deep will the crisis in the property sector still bite; has it already hit rock bottom?

Fromwald: It is very difficult to make predictions of this kind at the moment. European property prices have lost between 15 and 25 % over the past twelve months but not many transactions have taken place either. Further developments will depend strongly on the economic situation in the individual countries. The question of rents is also still open. In this area, we have not yet been negatively affected but the subject could still become a challenge as a result of the delayed effects of the crisis on the real economy.

Question: Are you being forced, like others, to undertake emergency sales of properties simply to ensure liquidity?

Ettenauer: No, we normally dispose of between 10 and 15 % of our portfolio per year. We have managed this even under the difficult conditions of 2008. High quality still continues to find buyers at reasonable prices.
We have sold large properties in Frankfurt, Munich and Warsaw and at the valuations that we had
originally posted for them in the books! But in overall terms, there is no doubt that the market has become much more difficult.

Question: A period like this must surely be a good time to buy cheaply?

Ettenauer: Yes in principle, but at the moment we have to budget our resources carefully. What is important today is that we generate revenues from our income producing properties that are as high as possible and concentrate the funds we have available on development projects which have already started.

Question: But your share price has also gone through the floor ...

Fromwald: Until the crisis started, our net asset value was € 23; today it is just under € 19. But the share price today – in mid-March – is under € 3, so that the largest part of our assets, whether they be cash or real estate, is not reflected in this price ...

Ettenauer: And in addition there is the fact that our equity capitalisation is over 40 % and that our funding is secured on a very long-term basis. This provides us with stability. If you compare the share price of about € 2.5 with the net asset value of € 19, the opportunity/risk profile reveals a far greater potential for profit than for loss.

Question: Then wouldn’t it be worthwhile to buy up property shares like yours now when the price is low?

Fromwald: I believe that stabilisation of the economy as a whole is what is required for a significant recovery in CA Immo share prices. With this in mind, I tend to be sceptical about short-term, sustainable recovery. The current phase may indeed last quite a bit longer. But once the wheels of the economy start to turn again things may move very fast and at that point there is a good chance of the price moving back up into double figures again at least.

Ettenauer: I wouldn’t like to predict at what point things will start to improve again. But one thing I do know is that we will manage this difficult period because we are in a very solid position. We have an equity ratio of over 40 %, we have sufficient liquidity, we are focusing on our core business, of which we really have a very good understanding, and, don’t forget, we have sufficient income from our ongoing, operational business. All of this means that our starting position is comparatively very good.

Question: All well and good, but what about your liquidity, which is so essential in a market situation like this?

Ettenauer: Since November 2008 we have set up financing deals totalling € 850 million, of which € 350 million were refinancing arrangements. As anyone who knows the industry will confirm, this is a very good achievement in a period like the present.

Question: What is happening to returns on the property markets at the moment?

Fromwald: In eastern Europe, where returns were recently at 6 %, they have risen to between 7 % (Poland) and 9.25 % (Bulgaria). The situation in Russia is even more extreme, where an increase of 8.5 % in the first six months of 2008 was followed by a rise that is currently between 10 and 11 %. These increases in returns have simultaneously led to a significant downward adjustment of property values.

Ettenauer: The situation in Germany is not as striking. Returns there rose from 4.5 to a good 5 %.

Question: Talking of eastern Europe – hasn’t this region transformed from a promising market to a perilous time bomb?

Ettenauer: Developments are not uniform and you need to look at each country individually. We have invested € 300 million equity capital in this region and a few problems may arise from this in the short term, but from the medium and long-term view we continue to see major potential.

Fromwald: When CA Immo International was floated on the stock exchange two and a half years ago, our aim was to ensure growth and also to achieve a better spread of risk in project development business with our special fund, CA Immo New Europe. Our involvement in eastern Europe was a good investment opportunity for institutional investors in particular. The risk of our eastern European activities is a relative one from the perspective of the Group because only just under 20 % of our investment outlay is in the east. The majority of our real estate is in Germany and Austria.

Question: But you will have to post a loss this time?

Fromwald: This year’s result is badly negative but in operational business it was actually possible to expand rental income. The loss is based on negative changes in market values in our property assets and these are a reflection of the overall poor development of the property markets and at least have no detrimental effect on cash flow and liquidity.

Question: But you won’t be paying out any dividends?

Fromwald: In view of the 2008 results, no dividend is possible at present. In addition, after twenty years of reinvestment, this year, in the midst of the vast financial crisis, would be completely the wrong time to start paying out dividends – liquidity takes precedence at the moment!

Question: And how will things progress in the CA Immo Group as 2009 continues?

Ettenauer: We are concentrating on securing our ongoing revenues, on active management of our properties and on taking great care in selecting our tenants. We are also focusing on financing negotiations and the sale of selected real estate. We have already been continuing to make good progress with this in 2009. This year, another issue will be in the forefront is the concentrated realisation of strategically important investments. Ultimately, even this crisis has a positive side. As a result of falling construction costs, we are doing better than we had planned in terms of the production costs of new projects! And one final word on the dividend question: as soon as the market situation changes and we are once more able to post positive results, we will immediately be returning to the subject of dividends.

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