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VGP: building against the wind

Industrial real estate developer VGP - industriální stavby’s two-thirds cut of the capital expected to be raised in its initial public offering (IPO) prompted questions last week about the purchase mood of local investors and whether the share price—set up by Patria Finance, which is advising VGP through its IPO, together with the Belgium-based KBC Securities and ING Group—was appropriate.

Firm VGP announced on November 19 that it intends to raise up to €57.5 million (1.5 billion Czech koruna) on the Prague Stock Exchange (PSE) and on Euronext in Brussels through a new share issue of up to €50 million and an eventual supplement of 15% from the number of new shares.

The company initially planned to raise up to €150 million, but it adjusted its expectations given the volatility of the global capital markets and the commitment of existing shareholders to supply the company’s expansion plans from their own capital. „As the global markets are shaking, this definitely isn’t an easy time for an IPO,” said Milan Vaníček, an analyst with brokerage Atlantik finanční trhy.

„Companies from real estate and banking have been hit hard in the last few months, so it’s difficult to find investors willing to look at real estate. That’s why the company had to adjust its expectations,” he said. „At this point, it isn’t realistic to believe that any big investor would be interested in buying shares in any kind of real estate company.”

Is the price too high?
The moment selected by VGP to launch its IPO had some industry experts calling the move courageous and others debating the share price. VGP’s share price range has been set at a minimum of €15.25 and a maximum of €16.75 per share. „The price is too expensive, based on our calculations,” Vaníček said. „It depends on how you look at the company,” said Petr Formánek, executive director of Patria Finance.

„VGP is a specific title, so it is difficult to compare because when one looks at developers focusing on logistics such as [the UK-based] ProLogistics, the price of VGP’s shares might look like a discount,” he said. „We are aware the market is difficult. It is not an easy time to introduce a new company on the capital market right now,” he said. Michal Burian, VGP’s public relations manager said that the company is carefully following the latest developments in the world and on the Prague market.

Despite the tumble, no changes in the conditions for the public issuing are being considered. „The reasons for our optimism aren’t just the good results of the first day of share offering to buyers but also the promising perspectives on the logistic market and semi-industrial parks,” he said. „Its specific profile [as an industrial real estate developer focused on logistics] differentiates VGP from other real estate companies traded on the PSE,” he said.

Real estate companies traded on the PSE have been seeing dramatic drops in share prices this year. Real estate developer ECM Real Estate Investments saw its share price go down from more than 2,065 koruna in April 2007 to record lows of 1,210 koruna on November 21, 2007. Another developer, the Orco Property Group, saw its prices slipping from 3,730 koruna at the end of January 2007 to some 2,290 koruna in November this year.

Not only real estate developers have been hit by the subprime mortgage crisis in the US Erste Bank has also gone down from some 1,750 koruna in June 2007 to 1,180 koruna in November 2007. „The VGP IPO valued at some €50 million places the company among the small emissions on the PSE,” said David Jukl, an analyst with brokerage Profi Jet Financial Services, adding that when he compares the VGP IPO to the last share issue of the used car seller AAA Auto, he expects „a higher interest for the VGP shares, mainly from retail investors.”

Retail investors will get up to 40 of the new shares issued. „These investors will welcome a wider opportunity to enlarge their portfolio and diversify their investment risk,” he said. „We are skeptical about any significant increase in the sector of real estate developers,” Jukl said, adding that the IPO will certainly help finance VGP debts and its further expansion, but the question remains on how much it will satisfy the Czech investors.

„It is just a pity the company went for a €50 million issue and not for the €150 million as previously planned. This would have been a strong incentive to attract more investors, also from the institutional range,” he said. „In our opinion, we are still waiting for the most interesting share issue of this year—the issue of shares of [Netherlands-based holding group] New World Resources, owner of the Czech coal mining company OKD. This issue could change the negative mood on the Czech market and grab the interest mainly of large investors,” Jukl said.

Financing growth at any price
Market experts said the company’s move to step on the stock exchange despite the volatility caused by the subprime mortgage crisis in the US is a courageous approach. The company, which had, as of June 30, 2007, a portfolio spread among four countries, with 79% in the Czech Republic, 11% in Slovakia, 6% in Hungary and 4% in Latvia, is planning to expand into further markets. The main markets targeted by VGP are Germany, Hungary, the Baltic countries, Romania and Slovakia.

Jan Van Geet, VGP’s managing director, told CBW that the foreign markets with the most promising potential are Germany and Romania. In 2008, VGP is planning to purchase the same area of land in Romania as it currently holds in the Czech Republic—about 2.3 million square meters. „We would assist in Romania to the beginning of the market evolution, just as we have in the Czech Republic. This country still suffers from a poor image, but its potential is huge, as the population is large and the infrastructure is developing,” Van Geet said.

The company’s major challenge, both in the Czech Republic and abroad, is to purchase land that has already obtained all construction permits for industrial buildings. Geet said that his company faced a situation this year in the north of the Czech Republic where it purchased land, but couldn’t build the project. „We’d like to avoid that in the future,” he said, adding that the company has a very conservative risk profile.

Even if the Czech Republic’s official strategy is to focus more on brownfield rather than on greenfield projects, Van Geet said that the majority of brownfields are in the middle of cities and most of them should be completely demolished in order to build something new. „This doesn’t correspond with our business profile,” he said.

Currently, the company has rental contacts of 5 to 10 years for 53% of its portfolio, while 37% of industrial buildings are rented for more than 10 years and 10% for less than 5 years. From the company’s total portfolio, 60% is focused on logistics, 25% on production and assembling, 3% on administrative and 12% on retail. The value of the portfolio reaches €202.9 million. (Read more at CBW)