In the crisis-ridden real estate sector, Deutsche Konsum Reit-AG is emerging as the next problem. The company, which is specialized in retail properties for local supply, needs to redeem or refinance bonds and promissory notes totaling over 100 million euros in the current year. The problem: Major shareholder Obotritia Capital has not repaid a loan, thus, contributing to a tight liquidity situation. Consequently, external capital providers may need to make concessions.

A notable figure in this scenario is the well-known investor and former CEO Rolf Elgeti. The former analyst, stock strategist, and ex-CEO of TAG Immobilien was at the helm of Deutsche Konsum until July of the previous year. Subsequently, he chaired the supervisory board until November and currently serves as a member of the board. Simultaneously, he is a General Partner at Obotritia, which holds almost 30% of Deutsche Konsum shares and received the loan from Deutsche Konsum – raising questions about corporate governance.

The soaring interest rates and construction costs, coupled with sluggish transaction markets, are posing challenges to the entire real estate sector. Several companies have already had to restructure debts, including residential landlord Adler Group, office and hotel real estate group Vivion, investment manager Corestate, housing privatizer Accentro, and office rental company Preos. Project developers have also faced bankruptcy. Recently, the insolvencies in the Signa Group of Austrian real estate and department store tycoon René Benko were making headlines.

As of the end of September, Deutsche Konsum owned 184 properties valued at 989 million euros on its books. This stands against a current market value of around 120 million euros. The properties are leased to grocery stores, pharmacies, drugstores, hardware stores, and other retailers. The primary tenants are the Schwarz Group (Lidl, Kaufland) and Edeka.

In the spring of 2023, Deutsche Konsum decided to terminate the loan framework agreement with Obotritia, as explained by the board in the report on the fiscal year 2022/23, which concluded on September 30. The due amount of 62.5 million euros, however, which was due in September, was not settled. In December, an agreement was reached with Obotritia, deferring the repayment until at least June 2025. Obotritia has committed to staggered partial repayments and provided a security package covering the loans "to a large extent." Nevertheless, Deutsche Konsum has depreciated 70% of the claim in the annual financial statements. The write-down even exceeds the previously announced 55%, as the current amount of the claim was stated to be 65.7 million euros a few weeks earlier.

"The board expects a full and relatively timely repayment of the outstanding amount, at the very latest by June 30, 2025," assures CFO Christian Hellmuth in response to inquiries from Börsen-Zeitung. A loan framework agreement with Obotritia has existed since 2015. Deutsche Konsum was able to borrow from Obotritia or invest unsecured liquidity at a short-term interest rate of 8% ("during times of zero interest rates"). The real estate company utilized this arrangement like a cash pooling until spring 2023. This situation is included in the annual and quarterly reports and has been the subject of questions at annual general meetings. "I am not aware that legal proceedings have been initiated," Hellmuth adds.

In April and May 2024, two bonds with a total volume of just under 106 million euros will mature, posing a "significant liquidity risk," as acknowledged by Deutsche Konsum in the annual report. The 70 million euro bond due on April 5 is unsecured, while the bond with a volume of 35.9 million euros, which is due at the end of May, is secured by 13 properties and is intended to be replaced by bank financing for the underlying assets.

As CFO Hellmuth explains, both bonds are in the hands of a bondholder, "with whom we are in ongoing constructive discussions, making negotiations relatively straightforward." Therefore, no bondholder meeting is required. Although the bonds are listed, they have not been traded to date.

For the secured real estate loans of 21 million euros expiring in 2024, the company expects an extension. Additionally, 10 million euros in promissory notes will mature in November.

If the plans for the redemption or extension of bonds and refinancing of secured debt instruments do not materialize, a "significant liquidity shortfall may occur," as per the annual report. This may lead to "considerable uncertainty regarding the continuity of the company". Nonetheless, given the "solid equity base," the inventory of unsecured real estate, and a pool of potential external capital providers, the company is confident of finding a refinancing solution soon.

The challenging financial situation is evident in the drastic downgrade by the rating agency Scope. The credit watchdogs lowered the issuer rating from the previous "BB " to "B" at the end of November. Such a downgrade by four notches is rare. Scope thereby indicates insufficient creditworthiness for Deutsche Konsum.

The agency justifies the move with the sharp increase in the leverage ratio, primarily due to portfolio value losses, the reduced interest coverage, and the outstanding maturities that have not been addressed. Another argument cited by Scope is the negative assessment of governance. The agency perceives the loan to Obotritia and Elgeti's roles as an officeholder of Deutsche Konsum and a partner of Obotritia as a conflict of interest.

The leverage ratio (loan-to-value) jumped by 11.9 percentage points to 61.6% of real estate assets in the past fiscal year, thus, surpassing the critical threshold of 60%, which is considered significant for real estate bonds. Simultaneously, the average interest rate on loans and bonds increased from 1.98 to 2.81%.

In the past fiscal year, Deutsche Konsum depreciated the real estate portfolio by 9% on a comparable basis. This resulted in a valuation loss of 114 million euros. Tax authorities also pose challenges. The tax authorities in Brandenburg are questioning the Real Estate Investment Trust (REIT) status. This issue is now being resolved in legal proceedings. Deutsche Konsum has already recorded 50.2 million euros in tax expenses in the fiscal year 2022/23.