Shape-shifting Griffin

Echo Investment and Redefine, one of the largest REIT funds in South Africa and listed on the Johannesburg Stock Exchange, for the latter to buy a 75 pct stake in the company that holds all the commercial assets of the Echo Investment group.

According to Griffin and Echo, the aim of the transaction is to establish the first property investment fund with a REIT-style format for properties located in Poland. On the basis of the agreement, Echo Investment will sell a 75 pct stake in Echo Prime Properties, which owns all its office buildings and shopping centres. The remaining 25 pct will remain with Echo Investment. The contract is to come into force subject to consent of the European Commission.

The agreed transaction value for the assets amounts to EUR 1.188 bln. (The total value of all its properties, as published in Echo’s Q3 2015 report, comes to PLN 4.48 bln.) According to information disclosed by Redefine, it will be investing EUR 362 mln in the purchase of the 75 pct stake in Echo Prime Properties.

Large slice of cake

Upon the closure of the transaction, Echo Prime Properties’ portfolio will include: the A4 Business Park in Katowice (stages one and two), Astra Park in Kielce, Malta Office Park in Poznań, Oxygen in Szczecin, Park Rozwoju in Warsaw (stages one and two), West Gate in Wrocław, Amber in Kalisz, Galaxy in Szczecin, Galeria Echo in Kielce, Galeria Olimpia in Bełchatów, Outlet Park Szczecin in Szczecin, Pasaż Grunwaldzki in Wrocław, Centrum Handlowe Echo in Przemyśl, Galeria Sudecka in Jelenia Góra, Galeria Veneda in Łomża and Centrum Handlowe Echo in Bełchatów.

According to the contract, over the next three years Echo Prime Properties will have the first purchase rights for some of the office and retail facilities currently being developed or designed by Echo Investment. In this way the value of its assets could increase to over EUR 1.7 bln. The company will also have first purchase rights for the following properties: Gdańsk Tryton, Katowice A4 (stage three), Katowice Kościuszki, Kraków Opolska I, Kraków Opolska II, Kraków Opolska III, Łódź Symetris I, Łódź Symetris II, Wrocław Nobilis and Wrocław Sagitarius.

The strategic aim of Echo Prime Properties will be the further extension of its portfolio through the purchase of commercial properties. The company is also to invest in real estate abroad. It will be managed by Griffin Real Estate. Furthermore, the share capital of Echo Prime Properties will be increased by EUR 9.775 mln, of which Echo and Redefine will acquire 25 pct and 75 pct of the new shares respectively. EUR 9.775 mln is to be paid to Echo as a privileged dividend.

“We are planning to be a long-term investor in the Polish fund. We can see a great deal of potential for further growth and we are sure of good cooperation with our partners, Echo and Griffin,” declared Marc Wainer, the president and managing director of Redefine.

Przemysław Krych, the CEO of Griffin Real Estate and Maciej Dyjas, the co-CEO of Griffin Real Estate

Condohotels are also an investment

Tomasz Szpyt: How close to a REIT is Echo Prime Properties supposed to be?

MD: Echo Prime Properties only owns real estate that generates profits and the contract with Redefine states that the vast majority of the profit is to be paid out. So we will fulfil the two most important parameters of a REIT. Investment in the development industry will also be limited and the level of debt will be less than 60 pct. Only the legislation that could provide the specific tax structure for REITs is missing. If the act on REITs soon comes into effect in Poland, the entity could go public and then would be a full-scale REIT.

Is the Warsaw Stock Exchange large enough to absorb such a large entity?

PK: First the right legislation has to be in place, so it is difficult to answer this question. Warsaw is worth considering, but only with the appropriate regulations, otherwise there is no point.

MD: There is also the option of making the entity public on an international stock exchange and then, when the required legislation is put in place in Poland, to introduce it to the Warsaw trading floor on the basis of a parallel listing.

PK: We want Echo Prime Properties to be the first-choice entity for investors who want to be exposed to the Polish real estate market.

How did the transaction proceed?

MD: Let’s start with why it was Redefine. We were looking for a partner that would be ideal for matching the concept of founding a REIT. And we were thinking about this even before we bought Echo Investment together with Pimco.

PK: Two years ago, at a conference I said that there is only one company that has the property portfolio sufficient to build a REIT. I meant Echo Investment.

MD: Even at the beginning of our involvement in the process of purchasing Echo Investment, we thought that it would be worth separating the assets that generate profits from the company. So we assessed and evaluated the company from this angle. As soon as we purchased Echo, we started to sort out its structure in order to place the profit-generating properties in a suitable package. We started to look for partners in autumn 2015.

PK: However, at first we invited tenders, as a result of which we chose an investment bank and a consultant – UBS and JLL. Next we drew up a memorandum and went around half the world with our proposals. Almost twenty interested parties from across the globe came forward – from the USA, Canada, Europe and South Africa. We of course wanted to obtain a suitable price, but that wasn’t all we were looking for. We were seeking a partner who shared our vision.

Only from Echo?

PK: Not only from Echo. The Kielce-based company will be able to sell properties to this entity, but if the market offers better conditions Echo will be able to choose more attractive proposals.

MD: We have shaped this to avoid misunderstandings. Over the next two years Echo is due to complete the development of quite a few properties. Some could be attractive for this platform. When the developer is ready, Echo Prime Properties will have the right to make the first offer. However, the developer can decide freely, i.e. it can choose a different offer from the market if it is a better one. This works both ways.

When will Echo Prime Properties go public?

PK: An IPO is planned and we will be saying more on the process on an ongoing basis. It is difficult to say at this point when it will happen.

MD: Echo Prime Properties being a public company forms part of the logic of the platform’s creation and development, which apart from paying out dividends is also meant to grow and buy other properties. You need to have the money for that and going public is one way of acquiring this capital.

What about the residential division of Echo Investment?

PK: We are not planning to sell this business, but rather to buy some more. We are looking at various options that offer development possibilities – at the market and the players that operate on it. So all options are currently open.

What are Griffin’s plans for the next few months?

PK: We want to finish the process for Echo Prime Properties. We will also be focusing on the right way to organise Echo Investment’s development division – both for commercial and residential properties. We will be very active on the residential market as far as choosing from the various options that will enable us to grow in this sector are concerned. Griffin itself will remain what it has been for the last few years – an opportunistic investor looking at all the various portfolios and individual assets. We have many options and purchasing plans for this year. So far we have managed to buy 80–90 pct of what we had planned. What will it be like this year? We shall see. However, we have become pickier – which does not mean that were not like that before. We were also quite ‘selective’ about our investments and only bought what was worth its price. This is reflected in the expected and obtained returns from the portfolio. Our current market position allows us to be choosier because we have a better view of the market through our asset base, while our opportunities, if only in terms of development, are incomparably greater. Besides, by joining the sections of our portfolio with other portfolios we can expect synergy or scale effects.

How much does Griffin have to spend?

PK: Our appetite will be close to last year’s. However, taking into consideration our base of investors, our options in this respect are virtually unlimited. We will soon extend this base to another large international investor who will entrust us with the management of its funds.