Merlin aims to conjure up €1.5bn in Magic IPO

Former DB duo set for largest Spanish flotation since 2011, reports Robin Marriott

Last month, Merlin Properties’ chairman and CEO Ismael Clemente undertook a hectic investor roadshow ahead of the initial public offering of the Spanish REIT, for which he is trying to raise €1.5bn. At his side was chief investment officer David Brush, the former head of Brookfield Asset Management’s European opportunistic real estate business – a familiar figure in the private equity real estate industry, who used to work with Clemente at Bankers Trust and then Deutsche Bank’s RREEF.

Clemente left DB, where he was managing director of its Iberia and North Africa business, to form spin-off company Magic Real Estate, in 2012. Now he is gearing up for the largest flotation in Spain since July 2011 and the third largest in Europe in the past 12 months. The flotation comes at a time of huge interest in Spanish real estate; for the past few months the global real estate industry has been debating the opportunity in Spain.

Clemente used the road show to address the question of why private company Magic, which already has almost €5bn of assets, was organising a flotation. “First, there is the question of the speed to market,” he says, referring to opportunities to buy in Spain and the difference in time it takes to raise €1.5bn in the capital markets, as opposed to months raising a private equity real estate fund.

“Also, it is a personal wish. I have been doing private equity for 20 years and am a bit tired of buying assets, managing them, then when I fall in love with them, selling them. Now we will only rotate them if it makes sense from a portfolio construction stand point. We won’t be forced to do it. I want to keep assets, maximize their cash flows, to be able to fall in love with assets and not be condemned to rotate them too fast.” The timing is also noteworthy. Even if Magic hits its €1.5bn target for Merlin, the Spanish listed property sector’s market capitalisation will remain only around one tenth of the €44bn figure it stood at prior to the 2008 global financial crash.

Driving change in the sector

Says Clemente: “Our aspiration is to become the dominant REIT in Spain and be the driver of generational change in the real estate sector. As an investor said to me, replacing a system where an octogenarian runs a company as if it were their own, when they only hold 10% of the shares.”
Unlike the two other Spanish property IPOs earlier this year, Hispania and Lar España, Merlin will be internally managed.

Magic is moving all of its staff to work for Merlin, giving the company what Clemente says will be “incredible cost efficiency”. He adds: “We have tried to mirror what we believe is the standard for REITs, which is the US model. We have set up a very efficient cost structure and we are starting up the company 50% seeded.”

Merlin is targeting long-dated assets with good cash flow. The portfolio includes 898 BBVA bank branches and five additional buildings, in 52 provinces, which were bought and leased back to the bank for an initial 30-year period in 2009 and 2010, before Deutsche Bank spun off Magic.

The deal was struck by Deutsche Bank’s RREEF division for DB’s third-party investors, mainly private banking clients, plus co-investors Europa Capital Partners and Area Property Partners, which are both exiting the investment. “In the case of the Spanish private individuals that have always backed us, they are massively re-investing at the property company level,” Clemente says.

The new public company will invest only in commercial real estate because SOCIMIs (Spanish REIT vehicles) do not generally invest in housing or land, as they are rent/ income driven. “For a REIT, buying rental homes would give us a 3% or maybe 4% passing yield and our target dividend yield is in the region of 4-6%,” he says.

Speaking about the weight of capital chasing Spanish property, Clemente describes many investors as having a “high cost of capital” and it is likely that Merlin will provide an exit for them. “Our capital is permanent, whereas they have to buy, manage and sell, which is what we have done in many cases in the past. There are high-cost-of-capital people flying around who, in the end, have a natural break in how low they can push the yields.”