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Being ready is good, knowing how to wait is better, but knowing the

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Table of Contents
Being ready is good, knowing how to wait is better,
but knowing the right time to act is everything.
Arthur Schnitzler (1862 – 1931)
Table of Contents
To Our Shareholders
Foreword by the Board of Management
Report of the Supervisory Board
Corporate Governance Report
Colonia Real Estate AG Stock
Highlights 2007
Interview with Members of the Board of Management
CRE Profile
Real Estate Portfolio of Colonia Real Estate Group
Management Report
Business and Economic Environment
Net Assets, Financial Position, and Results of Operations
Disclosures under Sec. 289 (4) and Sec. 315 (4) German Commercial Code, and Explanatory Report
Basics of the Compensation System
Risk and Opportunity Report
Report on Relations with Affiliated Entities
Events after the Reporting Date
Report on Expected Developments
Consolidated Financial Statements
Consolidated Balance Sheet
Consolidated Income Statement
Consolidated Cash Flow Statement
Statement of Changes in Consolidated Equity
Notes to the 2007 Consolidated Financial Statements
2
2
4
7
12
16
18
22
30
57
58
61
64
66
66
70
70
71
73
74
76
77
78
79
Responsibility Statement
136
Audit Opinion
137
To Our Shareholders
1
2
To Our Shareholders
Foreword by the Board of Management
Foreword by the Board of Management
Ladies and Gentlemen, dear Shareholders,
Even given the year’s turbulent second half, in fiscal 2007
Colonia Real Estate had another record year in revenues and profits. It was a year of profitable growth, combined with a substantial expansion in our real estate portfolio and our service operations for third parties. By contrast, the overall economic picture
was dominated by the growing crisis triggered in the financial
markets by the troubled American subprime mortgage market –
in terms of interest rates and financing options, but also in terms
of market sentiment among many participants. As one of Germany’s largest listed real estate companies, we also saw investors’ increasing reluctance reflected in our stock. However, the
effects on the real estate market generally remained within
bounds. At any rate, with solid equity capitalization and a longterm financing structure, our Group is excellently positioned to
take advantage of opportunities in the current market environment, and to continue our success story in 2008. All of our units
will contribute toward this result.
In 2007, consolidated revenues rose from EUR 128.5 million to
EUR 155.9 million. The consolidated profit more than doubled,
from EUR 31.2 million to EUR 67.1 million. Total assets climbed
from EUR 420.2 million to breach the one-billion euro barrier,
while equity rose to EUR 321.6 million (prior year: EUR 100.1 million). Thus, the Group was able to show a solid equity ratio of
31 %, compared to 23.8 % for the prior year. Despite the vigorous
rise in equity, the Group generated a return on equity of 20.9 %,
well above the long-term target of 15% per annum.
Stephan Rind (CEO)
portfolios at a very moderate level compared to the sector as a
whole. It is not a part of our long-term philosophy to take maximum advantage of valuation leeway. The result is that we can
be all the more at ease amid challenging markets.
In our Asset and Fund Management business, last year we doubled our property assets under management to EUR 3 billion.
Revenues from this line of business more than quadrupled, from
EUR 3 million the year before to as much as EUR 12.3 million – a
clear sign that growth remains dynamic in this still-young market
segment. We acquired major-name international clients for the
long term, including JPMorgan, Merrill Lynch and Strategic Value
Partners.
For that reason, at the upcoming shareholders’ meeting the
Board of Management and Supervisory Board will propose the
Company’s first dividend, of EUR 0.25 per share. For the future,
management plans to distribute up to 60 % of operating profits
as a dividend.
Healthy capital structure
Solid growth in all segments
In our core business of Residential Real Estate, at the beginning
of the year we had set ourselves a target of about 20,000 units.
We achieved that target ahead of schedule. These holdings raised
Colonia Real Estate AG to the third-largest listed residential property corporation in Germany. Our rental income increased accordingly, to EUR 47.5 million, compared to EUR 16.2 million the year
before. Active portfolio management reduced vacancies by 24 %,
after adjustment for acquisitions and disposals, to 11.7 %. At the
same time, the adjusted average rent rose 2.7 %, to EUR 4.71 per m2.
These impressive results amid a stagnating overall environment
underscore Colonia Real Estate AG’s outstanding position as an
asset manager in realizing potential for added value. Nevertheless,
we have kept the on-balance-sheet valuation of our real estate
Colonia Real Estate AG
The successful placement of a capital increase of about EUR 179 million in May 2007 enabled Colonia Real Estate to lay a solid foundation for future growth. But when the U.S. mortgage crisis began
in August of last year, our Company was no more able than any
other to escape the adverse consequences in the financial and
capital markets. Despite outstanding operating performance,
Colonia Real Estate stock dropped 54 % during the year. Unfortunately, we have little control over general economic factors and
the negative tendencies in European financial and real estate
stocks. We are nevertheless convinced that the CRE Group’s solid
business model, its conservative balance-sheet ratios, and its
excellent positioning will be reflected in above-average price
performance over the long term.
Annual Report 2007
Foreword by the Board of Management
On the financing side, Colonia Real Estate’s conservative financing
policies have placed it in a very sound position. Our long-term
liabilities, primarily in the form of mortgage loans, have an average term of 6.2 years, at an average annual interest cost of 4.8 %.
All loans are fully hedged against fluctuations in interest rates.
Thus, in the current financial market environment, we have established a reassuring base position for long-term planning and prudent expansion.
The vigorous growth of business, especially in services, has led
to a steady increase in our staff. With some 100 employees at the
end of 2007, we more than doubled our workforce. Staying creative
and innovative in a market that changes daily poses immense
challenges to management and employees. It is only the motivation and performance orientation of every member of the staff
that allows us to achieve so much – as we impressively proved
last year, and intend to prove again in the years to come. I want
to thank all of our employees for their hard work.
An intrinsic part of our corporate philosophy and sense of corporate responsibility is an active knowledge exchange with academic
and research institutions. We maintain close, supportive cooperative arrangements with the European Business School (EBS) at
Schloss Reichartshausen, at which we support a center of competence in terms of both content and financing, and where each year
we assist doctoral students and upcoming graduates specializing
in real estate. We also support Akademie der Immobilienwirtschaft
(ADI) GmbH, in Stuttgart, as one of its founding members and
main sponsors. We expand this depth of knowledge by actively
working to organize and conduct national and international conferences, putting out written publications, and cooperating closely
with municipal and other local governments in Germany.
To Our Shareholders
3
The real estate industry continues unabatedly to grow more professional, with new expectations about asset management, and
the German real estate market is becoming more and more internationalized, with a tendency toward indirect, managed products.
We will benefit here in the long term, since Colonia Real Estate
has a high-performance business model and a clear strategy.
Our main priorities for the current year will be to grow our capital-intensive investment units prudently while dynamically
expanding our service business in asset and fund management.
As Germany’s third-largest listed residential real estate group,
we are in an excellent position to assume a leading role in the
impending consolidation of the residential real estate market.
With our nationwide network of branches, we are already one of
the market leaders in the increasingly important asset management business. Here we will profit from lasting demand among
international investors with a long-term orientation. The largest
solar power project in the German residential industry, announced
this March, has once again proved our innovative strength. And
we will continue to give top priority to rigorous discipline in
risk management, capital structure and savings on costs. Thanks
to our Company’s very good positioning, we expect further growth
in fiscal 2008. We expect the consolidated profit to rise from the
2007 figure of EUR 67.1 million to some EUR 72 – 75 million, with a
steadily growing element of recurring rental income and income
from asset and fund management.
We will remain on track to generate added value for our shareholders, our clients, and our employees. We extend our thanks to
all of you for your confidence and your extraordinary commitment. Colonia Real Estate has successfully positioned itself as
one of the leading firms in the New Generation of real estate companies. And we intend to maintain that position – no ifs or buts.
Outlook
Given the country’s robust economy, the environment for the German real estate market remains positive. In contrast to countries
like the United Kingdom, Spain and the United States, the German
real estate market has predominantly not undergone any irrational
appreciation over the past few years. For that reason, we expect
only in some segments real estate prices to recede only moderately.
Unquestionably, the current crisis in the financial markets makes it
more difficult to borrow funds or raise equity. Many highly leveraged opportunistic investors have abandoned the market. On the
other hand, more and more investors with strong equity capitalization and long-term orientations are showing up as buyers in the
market. The long-term trends that shape our environment remain
intact.
Sincerely,
Stephan Rind
CEO
Cologne, April 2008
4
To Our Shareholders
Report of the Supervisory Board
Report of the Supervisory Board
Report of the Supervisory Board of Colonia Real Estate AG,
Cologne (the “Company”) to the Company’s shareholders’
meeting, for fiscal year 2007
1. Oversight of management and cooperation
with the Board of Management
The Supervisory Board constantly supervised and advised the
Board of Management and other Group management in their
management activities. The standard for this supervision was
that management of the Company and the Group should be carried out in compliance with the laws, in good order, appropriately
to corporate aims, and cost-effectively. The supervisory duties
prescribed by law were conducted primarily on the basis of written and oral reporting from the Board of Management. The
Board of Management informed the Supervisory Board regularly,
promptly and in detail, including between regular meetings, and
particularly about corporate planning, business performance, pending investment projects, investments in equity interests, and measures affecting the corporate capital. Additionally, at each meeting
of the Supervisory Board, management reported on and explained
all major current business events. The Board of Management fully
complied with its obligations to inform the Supervisory Board.
The reports of the Board of Management complied in terms of
both subject matter and scope with the requirements for reporting by the Board of Management to the Supervisory Board as
established by law and recommended under the German Corporate Governance Code. There were no conflicts of interest.
The rules of procedure for the Board of Management include a
list of transactions and measures that are of fundamental importance to the Company, and for which the Board of Management
must therefore obtain the consent of the Supervisory Board. The
Supervisory Board discussed with the Board of Management the
transactions and measures submitted by the Board of Management to the Supervisory Board under these rules, and reviewed
them in depth. The Supervisory Board approved all transactions
and measures submitted for its approval.
2. Methods of supervision and review
The Supervisory Board based its reviews and audits primarily on:
Гџ The regular reports from the Board of Management, as
required by law and the rules of procedure of the Board of
Management;
Гџ the separate reports provided by the Board of Management
on occasion; and
Гџ the supplementary explanations provided by the Board of
Management and the independent auditors.
The reports were always submitted to the full Supervisory Board.
If the Board of Management submitted business measures to the
Supervisory Board for approval, the materials submitted to the
Supervisory Board always included a presentation of the material
aspects to be taken into account in the decision. In no case during the period under review did the Supervisory Board see any
occasion for individual members of the Supervisory Board or
special experts to examine or audit the books or records of the
Company.
3. Supervisory Board and meetings
During fiscal year 2007, the Supervisory Board held twelve meetings at which it discussed the current situation of the Company
and the Group, ongoing projects, strategic measures, the expansion of the Board of Management (see Item 6), the Group’s risk
situation, and plans for the coming fiscal year.
The Supervisory Board has no committees. The Supervisory Board
has three members, and therefore performs all functions at its
meetings, whose number therefore considerably exceeds the
minimum required by law.
All members of the Supervisory Board participated at all meetings.
Between meetings of the Supervisory Board, the Supervisory
Board, and particularly the Chairman of the Supervisory Board,
was informed regularly by the Board of Management as to significant business events.
Colonia Real Estate AG
Annual Report 2007
Report of the Supervisory Board
4. Deliberations and resolutions
Each meeting included agenda items for the Company’s current
business performance and financial situation, as well as major
investment projects such as the acquisition of real estate companies
with some 10,800 residential units, the acquisition of Accentro
GmbH, the increase in the Group’s stake in CRE Resolution GmbH,
and the acquisition of an interest in Deutsche Wohnen AG.
The March 2007 meeting concerned the report of the independent
auditors to the Supervisory Board regarding the audit of the
2006 financial statements. The 2006 financial statements were
then adopted.
At the April 2007 meeting, the Supervisory Board consented to the
capital increase of 6,281,600 new shares of Colonia Real Estate AG.
The capital increase was successfully carried out in May 2007, and
increased the Company’s equity by approximately EUR 180 million net.
At the May 2007 meeting, the agenda for the shareholders’
meeting on July 4, 2007, was discussed and adopted.
In July 2007, the Board of Management decided, with the consent of the Supervisory Board, to carry out a stock buy-back
program under the authorization granted by the shareholders’
meeting. The acquired stock was used to increase the Group’s
stake in CRE Resolution GmbH.
In November 2007, the Supervisory Board consented to the acquisition of a minority interest in a commercial real estate portfolio,
jointly with the Oaktree Group. It also consented to the signing
of a master agreement with a bank for step-up equity financing
under which the Company can increase its share capital by up to
2.2 million new shares over 24 months.
To Our Shareholders
5
At the December 2007 meeting, the Supervisory Board accepted
the report of the independent auditors on their November 2007
preliminary audit of the 2007 financial statements.
5. Corporate governance
The Supervisory Board and Board of Management act in the
awareness that good corporate governance is in the best interest
of the Company’s shareholders and the capital markets, and is an
important foundation for corporate success. On February 22, 2008,
the Board of Management and Supervisory Board issued the
annual declaration of conformity with the Corporate Governance
Code. The declaration of conformity was made permanently available to shareholders on the Company’s Web site, and is also
included in the Corporate Governance Report, which is a part of
this 2007 Annual Report.
6. Members of the Board of Management
Effective August 14, 2007, the Supervisory Board appointed
Christoph Wittkop as an additional member of the Board of Management. He will be in charge of the Group’s Real Estate Asset
Management. He will additionally continue to perform his
previous duties as the spokesman for the management of
CRE Resolution GmbH.
6
To Our Shareholders
7. 2007 Financial statements
The annual financial statements of the Company and the Group
as of December 31, 2007, and the report on the condition of the
Company and Group in fiscal year 2007, as prepared by the Board
of Management, were audited by the Cologne office of Ernst &
Young AG, WirtschaftsprГјfungsgesellschaft, Steuerberatungsgesellschaft, Stuttgart, as the independent auditors. The Supervisory
Board had engaged the auditors in compliance with the resolution
of the shareholders’ meeting of July 4, 2007. The annual financial
statements for the Company were prepared in accordance with the
rules of the German Commercial Code (HGB), and the consolidated
financial statements were prepared in accordance with IFRS and
the supplemental provisions of Sec. 315a (1) of the German Commercial Code. All members of the Supervisory Board received the
auditors’ report on their audit.
The independent auditors issued an unqualified audit opinion
on the Company financial statements and consolidated financial
statements as of December 31, 2007, and on the report of the condition of the Company and the Group. The Supervisory Board has
duly noted the results of the audit of the financial statements.
The independent auditors furthermore audited the early risk
detection system used at the Company. The audit showed that
the system is capable of detecting at an early stage any risks that
may pose a threat to the Company’s continuing existence.
The Supervisory Board audited the examined Company financial
statements and consolidated financial statements, as well as the
associated report of the Board of Management on the condition
of the Company and the Group. For this purpose, each member
of the Supervisory Board had access not only to these documents,
but to the auditors’ audit report. The audit of the Supervisory
Board, which also extended to the suitability of management
actions taken by the Board of Management, showed no cause for
objection. Representatives of the independent auditors attended
the meeting of the Supervisory Board deliberating on the Com-
Colonia Real Estate AG
Report of the Supervisory Board
pany financial statements and consolidated financial statements,
on April 9, 2008. In particular, they reported to the members of
the Supervisory Board on the audit procedure and results, and
offered to provide any supplemental information.
At its meeting of April 25, 2008, the Supervisory Board approved
the Company financial statements and consolidated financial
statements prepared by the Board of Management; the annual
financial statements have therefore been adopted in accordance
with Sec. 172 of the German Stock Corporations Act (AktG).
We concur in the Board of Management’s proposed allocation of
the distributable profit for the year.
8. 2007 Report on transactions with affiliated companies
The Board of Management has informed the Supervisory Board
that no report on transactions with affiliated companies is required
for fiscal year 2007. The Board of Management did not receive
any notification during the year that any major shareholder held
a majority of the stock of Colonia Real Estate AG. Thus, the Company
was not an associated company within the meaning of Sec. 312
of the German Stock Corporations Act.
The Supervisory Board wishes to thank the members of the
Board of Management and every employee for their dedicated
work in fiscal year 2007.
Cologne, April 25, 2008
For the Supervisory Board
Prof. (RF) em. Dr. phil. h.c. (RF) Klaus B. Steiger
Chairman
Annual Report 2007
Corporate Governance Report of the
To Our Shareholders
7
Supervisory Board and Board of Management of Colonia Real Estate AG
Corporate Governance Report of the
Supervisory Board and Board of Management of Colonia Real Estate AG
The Supervisory Board and Board of Management of Colonia
Real Estate AG feel an obligation to uphold the principles of conscientious management and oversight of the Group, with an
orientation to adding value for the long term, and they attach a
high priority to these principles in their actions. Good corporate
governance is a part of the corporate philosophy at Colonia Real
Estate AG. It means clear and consistent communication with our
shareholders, analysts, shareholder associations, the media and
the interested public; transparent reporting; performance-based
compensation for both management and staff; and productive,
efficient cooperation between the Board of Management and
Supervisory Board. To ensure good, transparent corporate governance, the Supervisory Board and Board of Management of
Colonia Real Estate AG take their lead from the requirements of
law and the suggestions and recommendations of the Government Commission on the German Corporate Governance Code.
The suggestions and recommendations of the German Corporate
Governance Code are based on internationally and nationally recognized standards of good, responsible management.
bution of duties and forms of cooperation within the Board of
Management, and the procedures and events that require the
Supervisory Board’s consent. Since the Supervisory Board consists of three members, it has decided not to form committees.
Further details on the work of the Supervisory Board can be found
in the Report of the Supervisory Board on pages 4 to 6 of this
Annual Report.
Conflicts of interest on the part of members of the Board of
Management or Supervisory Board must be reported to the
Supervisory Board without delay. No conflicts of this kind arose
in fiscal year 2007.
The three members of the Board of Management are concomitantly also the managing directors of various subsidiaries of
Colonia Real Estate AG. Other than that, they do not hold any
other positions on the managing or supervisory bodies of other
entities. The other positions held by members of the Supervisory Board are listed in the annual financial statements of
Colonia Real Estate AG.
Corporate management and oversight
In keeping with the provisions of the German Stock Corporations
Act, Colonia Real Estate AG has a dual management and oversight structure with two boards, the Board of Management and
the Supervisory Board.
The Board of Management has three members who share responsibility for managing the Company. The Supervisory Board, which
also has three members, appoints, supervises and advises the
Board of Management. Certain significant steps to be taken by the
Board of Management are subject to the consent of the Supervisory Board, as specified in the Board of Management’s rules of
procedure. The Company’s strategic focus is developed by the
Board of Management and decided in consultation with the
Supervisory Board.
The Board of Management and Supervisory Board work closely
together for the Company’s benefit. The Chairman of the Supervisory Board coordinates work within that Board, and chairs its
meetings. He also maintains regular contact with the Board of
Management, especially its Chairman, between regular meetings
of the Supervisory Board. In the rules of procedure of the Board
of Management, the Supervisory Board has set down the Board
of Management’s disclosure and reporting obligations, the distri-
Shareholders and shareholders’ meeting
The shareholders of Colonia Real Estate AG may exercise their
rights at the annual shareholders’ meeting. The shareholders’
meeting makes binding decisions on all matters referred to its
jurisdiction by law, particularly the allocation of distributable
profits, ratification of the actions of the Board of Management
and Supervisory Board, appointment of the independent auditor,
inter-company agreements, measures affecting the Company’s
capital, and other amendments to the articles of incorporation.
Each share of stock confers one vote in the shareholders’ meeting of Colonia Real Estate AG. Shareholders may exercise their
voting rights themselves, or arrange for them to be exercised by
a proxy of their choice, appointed in writing. To make it easier
for shareholders to exercise their voting rights, the Board of
Management of Colonia Real Estate AG appoints a proxy to vote
on shareholders’ behalf in accordance with their instructions.
The reports and documents to be presented for examination in
connection with the shareholders’ meeting are also posted at the
Web site of Colonia Real Estate AG. The shareholders’ meeting is
chaired by the Chairman of the Supervisory Board.
8
To Our Shareholders
Corporate Governance Report of the
Supervisory Board and Board of Management of Colonia Real Estate AG
Transparency and communication
Audit of financial statements
Good corporate governance is also characterized by open,
transparent, up-to-date communication. Colonia Real Estate AG
provides this by reporting promptly on its Web site and by
releasing the appropriate information for publication without
delay to the entities appointed for the purpose (the Business
Register, Deutsche Börse, a periodical approved by the stock
exchanges for the publication of mandatory financial disclosures, publication throughout Europe).
The consolidated financial statements of Colonia Real Estate AG
were prepared by the Board of Management in compliance with
International Financial Reporting Standards and the standards of
the European Public Real Estate Association (EPRA). In accordance
with the vote of the shareholders’ meeting, the Supervisory Board
engaged the Cologne office of Ernst & Young AG WirtschaftsprГјfungsgesellschaft to audit the single financial statements and
consolidated financial statements of Colonia Real Estate AG. The
Supervisory Board and Ernst & Young AG agreed that the independent auditors would immediately report to the Chairman of
the Supervisory Board about all findings and events material to
the duties of the Supervisory Board that were found during the
audit of the financial statements. Additionally, the independent
auditors are to inform the Supervisory Board, or note in the
audit report, if during the audit of the financial statements they
find facts that are not compatible with the declaration of conformity issued by the Board of Management and Supervisory Board
under Sec. 161 of the Stock Corporations Act. However, the audit
revealed no such facts. Concerning the Supervisory Board’s final
audit of the single financial statements and consolidated financial statements, we refer the reader to the Report of the Supervisory Board on pages 4 to 6.
All ad hoc disclosures, notices under Sec. 15a of Germany’s Securities Trading Act (WpHG), press releases, financial reports, information about shareholders’ meetings, and corporate governance
information are kept available to the public at the Company’s
Web site. A financial calendar, likewise published on the Web
site, provides information on future release dates for financial
reports and upcoming Company presentations. At all events and
meetings, Colonia Real Estate AG takes care to show no preference in releasing information to any single investor, and to treat
all shareholders equally. Such information as ad hoc disclosures,
press releases, quarterly reports and annual financial reports are
also made available in English.
Colonia Real Estate AG reports regularly and promptly about
business developments and about the Group’s assets and liabilities, financial position, and profit or loss. The individual quarterly
financial reports are released within 45 days after the end of the
quarter; the consolidated financial report is normally released
within 90 days after the end of the fiscal year. The consolidated
financial report for 2007 was not available until the end of April
of this year.
For more information about transparency and communications
see our section on investor relations on pages 13 to 15 of this
Annual Report.
Risk management
Good corporate governance also includes the conscientious handling of corporate risks. Colonia Real Estate has a systematic risk
management system that enables the Board of Management to
respond quickly to relevant changes in the risk profile and to identify market trends at an early date. Details on the risk management
system implemented at Colonia Real Estate AG are available in
the Risk Report on pages 66 to 69 of this Annual Report.
Colonia Real Estate AG
Compensation of Board of Management
and Supervisory Board
The structure and amount of the total compensation paid to the
members of the Board of Management are decided and regularly
reviewed by the Supervisory Board. The compensation of the
members of the Board of Management includes a fixed annual
component, a variable bonus, long-term performance-based
components in the form of stock options, and perquisites in the
form of taxable noncash benefits, as well as contributions toward
insurance coverage. As required by law, the compensation of the
members of the Board of Management is shown individually in
the notes to the consolidated financial statements, divided into
non-performance-based and performance-based components,
as well as components with a long-term incentive effect. See the
section on Related-Party Transactions on page 70 of this Annual
Report. The consolidated management report also contains details
on the structure of the compensation paid to the Board of Management in the section on Fundamentals of the Compensation
System on page 66 of this Annual Report.
Annual Report 2007
Corporate Governance Report of the
9
To Our Shareholders
Supervisory Board and Board of Management of Colonia Real Estate AG
The compensation of the Supervisory Board is laid down in the
articles of incorporation of Colonia Real Estate AG. Under the
articles, members of the Supervisory Board receive a base compensation in addition to reimbursement of their expenses. The
Chairman of the Supervisory Board received twice the base compensation, and the Vice-Chairman received one-and-a-half
times the base compensation. In accordance with the recommendations of the German Corporate Governance Code, plans
call for recommending to the upcoming shareholders’ meeting
that the members of the Supervisory Board should also be paid
a performance-based component of compensation beginning
with fiscal year 2008. However, the performance-based component will be limited to an agreed fixed amount. The performancebased component will take a long-term perspective and be oriented to objectives that still have to be achieved, and will not
take effect until a certain minimum dividend is paid. The members of the Supervisory Board received no compensation or benefits for personal services, particularly consulting or agency services during fiscal year 2007. Further information about the
compensation of the Supervisory Board is included in the section
on Related-Party Transactions in the Notes to the consolidated
financial statements, on pages 132 to 134 of this Annual Report.
Stock transactions and stock owned by the
Board of Management and Supervisory Board
Members of the Board of Management and Supervisory Board,
as well as parties related to them, are required under Sec. 15a of
the German Securities Trading Act to report the acquisition or sale
of Colonia Real Estate AG stock if the value of the transactions
reaches or exceeds EUR 5,000 during the calendar year. The transactions carried out by the members of the Board of Management
and Supervisory Board in 2007 were reported promptly to the
Company and the German Federal Financial Supervisory Authority, and were promptly disclosed by Colonia Real Estate AG on its
Web site. Colonia Real Estate AG also informed the Federal Financial Supervisory Authority about these transactions.
Securities-based incentive systems
Colonia Real Estate AG has set up stock option plans as compensation components carrying risk and providing long-term
incentives. The stock option plans approved by the shareholders’ meeting of Colonia Real Estate AG provide for options for
the acquisition of Colonia Real Estate AG stock to be issued to
members of the Board of Management and to other employees.
The Stock Options sections of the Notes to the consolidated
financial statements, on pages 110 to 112, describe the specific
design of these programs and the options issued under them
so far. The section on Related-Party Transactions on pages 132
to 134 of the Notes to the consolidated financial statements
also contains information on the value of the options granted
to the members of the Board of Management.
Declaration of Conformity
under Sec. 161 Stock Corporations Act
Under Sec. 161 of the German Stock Corporations Act (AktG), the
Board of Management and Supervisory Board of any German
stock corporation listed on a stock exchange must declare annually to what extent the Company has complied and will comply
with the recommendations of the Government Commission on
the German Corporate Governance Code. At the meeting of the
Supervisory Board on February 22, 2008, the Supervisory Board
and the Board of Management of Colonia Real Estate AG jointly
issued an updated declaration of conformity under Sec. 161 of the
Stock Corporations Act, and then made it permanently available
to shareholders on the Company’s Web site. The current Declaration of Conformity is reproduced at the end of this report.
Cologne, April 2008
The Board of Management of Colonia Real Estate AG
Stephan Rind
Klaus Reichert
Christoph Wittkop
For the Supervisory Board of Colonia Real Estate AG
Вґ
Prof. (RF) em. Dr. phil. h.c. (RF) Dr. Klaus B. Steiger
10
To Our Shareholders
2007 Declaration of Conformity with the German Corporate Governance Code
by the Board of Management and Supervisory Board of Colonia Real Estate AG,
Cologne, Pursuant to Sec. 161 of the German Stock Corporations Act
2007 Declaration of Conformity with the German Corporate Governance Code
by the Board of Management and Supervisory Board of Colonia Real Estate AG,
Cologne, Pursuant to Sec. 161 of the German Stock Corporations Act
The Board of Management and the Supervisory Board of
Colonia Real Estate AG declare that, with the following exceptions,
the Company has complied and will comply with the recommendations of the Government Commission on the Corporate Governance Code in the versions of June 12, 2006, and June 14, 2007,
as applicable, promulgated by the German Federal Ministry of
Justice in the official portion of the electronic version of the
Bundesanzeiger:
1. Item 2.3.2 of the Corporate Governance Code
The company should inform all financial service providers, shareholders and shareholder associations, in Germany and in other
countries, of the convocation of the shareholders’ meeting, together with the convocation documents, by electronic means if
the requirements for consent have been met.
The shareholders’ meeting has not consented for the convocation of the shareholders’ meeting, together with the convocation
documents, to be communicated electronically. Moreover, since
the Company has issued only bearer shares, not all its shareholders are known to the Company. The Company is therefore
unable to comply with this recommendation.
2. Item 5.1.2 of the Corporate Governance Code
An age limit should be set for members of the Board of
Management.
We believe that the critical criteria for membership in the Board
of Management are the members’ skills and ability to perform,
and the quality of their work. Since we do not believe increasing
age has any correlation with a deterioration in regard to these
criteria, we do not think it necessary to set an inflexible age limit.
Moreover, by declining to set an age limit for members of the
Board of Management, the Company complies with Germany’s
General Non-Discrimination Act (AGG).
Colonia Real Estate AG
3. Items 5.3.1 and 5.3.2 of the Corporate Governance Code
The Supervisory Board should form qualified committees, depending on the specific circumstances of the entity and the number of members of the Supervisory Board. These committees
serve to enhance the efficiency of the Supervisory Board’s work
and the handling of complex matters. The Supervisory Board
should establish an Audit Committee to deal particularly with
matters of accounting, risk management and compliance, the
requisite independence of the auditors of the financial statements, the engagement of the auditors to audit the financial
statements, the definition of points of focus for audits, and agreements on fees. The Chairman of the Audit Committee should
have particular knowledge and experience in applying reporting
principles and internal controlling procedures.
The Supervisory Board of Colonia Real Estate AG has three members. Forming committees would not enhance the Board’s efficiency or its handling of complex matters, so that for that reason
the Company has not complied with this recommendation.
4. Item 5.4.1 of the Corporate Governance Code
In nominations for the Supervisory Board, care should be taken
that at all times the Supervisory Board includes members who
have the necessary knowledge, skills and professional experience
to perform their duties properly. These nominations should take
account of the entity’s international activity, any potential conflicts of interest, and an age limit to be set for members of the
Supervisory Board.
For the reasons explained under item 2 above, we do not think
it necessary to set an age limit for members of the Supervisory
Board.
Annual Report 2007
2007 Declaration of Conformity with the German Corporate Governance Code
11
To Our Shareholders
by the Board of Management and Supervisory Board of Colonia Real Estate AG,
Cologne, Pursuant to Sec. 161 of the German Stock Corporations Act
5. Item 5.4.7 of the Corporate Governance Code
The members of the Supervisory Board should receive a performance-based component of compensation in addition to a fixed
component.
Under Sec. 111 of the Stock Corporations Act, it is the duty of the
Supervisory Board to supervise the Board of Management. We
believe that the independence of the members of the Supervisory
Board needed for effective supervision of the Board of Management is supported by a fixed compensation that is not coupled
to the results achieved by the Board of Management responsible
for managing the Company. The current compensation system
keeps corporate management from adopting a one-sided focus
on individual parameters relevant to their compensation, so that
we believe that the current system provides a better assurance
of the Company’s long-term success. For that reason, we have
not complied with this recommendation.
Colonia Real Estate AG considers itself bound by an obligation of
transparency, for the benefit of its shareholders and the public,
and always endeavors as promptly as possible to provide a readily understandable and complete picture of the Company and its
activities. For that reason, Colonia Real Estate AG immediately
discloses reported transactions of management personnel in
Company stock (“Directors’ Dealings”) pursuant to Sec. 15a of the
German Securities Trading Act. The Board of Management and the
Supervisory Board do not believe that repeating this information
in a corporate governance report would accomplish any significant increase in transparency for shareholders and the general
public. We therefore do not provide such a report.
Cologne, February 22, 2008
The Board of Management of Colonia Real Estate AG
6. Item 6.6 of the Corporate Governance Code
Above and beyond the statutory obligation to immediately report
and disclose transactions in the company’s stock, the ownership
of company stock or financial instruments relating thereto by
members of the Board of Management and Supervisory Board
should be disclosed if any of these holdings are directly or indirectly greater than 1 % of the shares issued by the company. If
the holdings of all members of the Board of Management and
Supervisory Board combined exceed 1 % of the shares issued by
the company, the combined holdings should be disclosed separately for the Board of Management and Supervisory Board. The
above disclosures should be included in the corporate governance report.
Stephan Rind
Klaus Reichert
Christoph Wittkop
For the Supervisory Board of Colonia Real Estate AG
Prof. (RF) em. Dr. phil. h.c. (RF) Dr. Klaus B. Steiger
12
To Our Shareholders
Colonia Real Estate AG Stock
Colonia Real Estate AG Stock
Subprime lending crisis affects banks and stocks
Focus on the capital markets and further growth
Despite its very strong business fundamentals, ultimately
Colonia Real Estate AG stock was unable to escape the adverse
atmosphere for real estate stocks in 2007. In a highly volatile
environment, the stock trended downward, despite the Company’s strong operating performance. After starting out the year at
EUR 37 and rising to a welcome EUR 46 in the first quarter, the
stock spent the remainder of the year losing ground down to the
EUR 14 range, and closed out the year at EUR 17. On an annualized
basis, this is equivalent to a 54 % drop. The stock’s average daily
trading volume on all German stock exchanges was around
200,000 shares: Xetra, with 94 percent of this volume, was the
most liquid marketplace. The stock’s designated sponsors were
Commerzbank AG and Close Brothers Seydler AG.
A successful capital increase further strengthened the equity base
in May 2007. The Company placed 6.4 million shares, at a value
of EUR 179 million, with both existing and new global investors.
The issued capital thus rose to 21.98 million shares, each with a
notional value of EUR 1. The ownership structure diversified substantially, and the free float grew to about 74 %. As in past years,
by far the largest portion of this capital was invested in buying
additional properties. The Company first exercised its option to
acquire another 49 % of a residential portfolio of about 10,000 units
from Babcock & Brown, thus following up on the 51 % percent
that had been acquired in March. The acquisition of another portfolio of 1,000 units in Central Berlin and neighboring districts
enabled Colonia Real Estate to achieve its announced total portfolio target of 20,000 residential units ahead of time, in September. Colonia Real Estate has thus risen to become Germany’s thirdlargest listed residential real estate corporation.
CRE Stock Performance
125 %
100 %
75 %
Increase of net profit
guidance
Acquisition of
residential portfolio
Acquisition of
office portfolio
Joint venture
50 %
Acquisition of
residential portfolio
Capital increase
Increase of net profit
guidance
25 %
01 / 07
03 / 07
Colonia Real Estate
05 / 07
SDAX (indexed)
07 / 07
09 / 07
Prime All Share (indexed)
Colonia Real Estate AG
Annual Report 2007
11 / 07
01 / 08
03 / 08
05 / 08
Colonia Real Estate AG Stock
To Our Shareholders
13
Stock buy-back and asset management
Investor relations
During the summer, the Company expanded its stake in its asset
manager subsidiary, CRE Resolution GmbH, from 56 % to 75.1 %.
It additionally pursued a stock buy-back program, acquiring about
290,000 of its own shares on the market. These shares were used
as currency to acquire Resolution. Also in 2008, Colonia Real
Estate AG will again ask the shareholders’ meeting to approve a
renewal of the stock buy-back program.
The capital increase, as well as general market trends, produced
a further significant diversification in the ownership structure of
Colonia Real Estate AG. Companies like Atticus, the Abu Dhabi
Investment Authority, William Blair and Wellington were attracted
as major new shareholders. The distribution of shareholders by
country is now about 45 % in German-speaking countries, 30 %
in the United States, and 25 % in the United Kingdom and continental Europe. Apart from road shows and analysts’ events in
Frankfurt, London, Amsterdam, ZГјrich and New York, last year
management also contacted investors in Canada, Ireland and
Scandinavia. During the year, Colonia Real Estate was analyzed
by six banks and research firms: Bankhaus Lampe, Commerzbank,
Sal. Oppenheim, UBS, Unicredit and West LB. Additionally, two
more banks – Dresdner Kleinwort Wasserstein and Silvia Quandt
Research – initiated their coverage early in 2008, so that Colonia
Real Estate is now covered by eight institutions. All studies resulted
in the strongest available buy recommendation – either “Buy”
or “Strong Buy”, depending on the bank – with price targets
between EUR 16.00 and EUR 26.50.
February 20
Acquisition of 51 % of two real estate companies
March 13
Joint venture with Merrill Lynch
May 10
Capital increase of EUR 179 million
May 29
Increase of 2007 net profit guidance to EUR 62 – 65 million
September 10
Acquisition of 950 high-end residential appartments in Berlin
November 12
Increase of 2007 net profit guidance to EUR 67 – 70 million
November 16
Acquisition of EUR 600 million office real estate portfolio
together with Oaktree
13
14
To Our Shareholders
Colonia Real Estate AG Stock
Transparency and participation in corporate success
Transparency is a fundamental principle at Colonia Real Estate.
Open communications with both institutional and private investors, as well as the press and the general public, were steadily
optimized further in 2007. Among the changes, Colonia Real Estate
is the only company in the German real estate industry to prepare
and make available to the public a complete five-year plan for its
real estate operations. The range of information is further supported by making corporate presentations and business figures
available online. Colonia Real Estate is included in the SDAX,
GPR250, MSCI Germany Small Cap Index, FTSE EPRA / NAREIT and
E&G DIMAX, and is thus represented in all major German and
international indexes.
The Company’s declared goal is to share its success with its
shareholders and allow them to benefit from its economic
strength. Accordingly, the topic of dividend payments will play
an increasingly important role over the years to come.
Shareholder Structure March 2008 in %
28.29 SWISS Real Estate AG
71.71 Free Float
28.29
6.07
3.56
3.39
3.01
2.93
2.92
2.77
2.48
0.61
71.71
Colonia Real Estate AG
William Blair & Company
Wedge International B.V.
Atticus
UBS
Cominvest
ADIA
DWS
Wellington Management
Fortman Cline
Annual Report 2007
Colonia Real Estate AG Stock
To Our Shareholders
15
Price addendum
Key figures
Average trading volume per month
2,500,000
Market capitalization
EUR 382,000,000.00
Free float
71.71 %
52 week high
EUR 46
52 week low
EUR 14
Earnings per share
Volatility 30 days
77 %
Price-earnings ratio
Volatility 250 days
46 %
Last dividend
EUR 3.31
6
EUR 0.25*
* Proposal from the Board of Management and the Supervisory Board
Basic information
Information about the stock
Name
Colonia Real Estate AG
Reuters Code
KBUG.DE
ISIN
DE0006338007
Bloomberg Code
KBU GY EQUITY
WKN
633800
Instrument
Bearer shares of no-par stock
Market symbol
KBU
Capital admitted for trading
EUR 22,465,600
Prime segment
Financial service provider
Shares admitted for trading
22,465,600
Industry group
Real estate
Share capital
EUR 22,465,600
Transparency level
Prime Standard / regulated market
Share capital admitted for trading
EUR 22,465,600
16
To Our Shareholders
Highlights 2007
Highlights 2007
January
July
05/10/2007
02/16/2007
Colonia Real Estate AG raises approx.
EUR 179 million of new capital //
07/02/2007
Successful completion of rights of-
Colonia Real Estate AG prematurely
CRE Fonds Management GmbH places
fering as basis for further expansion
exercises call option on two real
first institutional fund product over
// Take-up quota of new shares at
estate companies holding 9,857
EUR 57 million // Open-end real estate
99.71 %
residential units
05/29/2007
07/18/2007
02/20/2007
Record first quarter 2007 with
Colonia Real Estate AG and Strategic
EUR 5.18 million of net earnings //
Value Partners purchase in joint
Colonia Real Estate AG acquires 51 %
Strong increase in rental income and
venture the “Serail”- commercial
of two real estate companies hold-
Asset and Fund Management fees //
real estate portfolio from Berliner
ing 9,857 residential units
Increase of 2007 net profit guidance
Verkehrsbetriebe
special fund acquires assets // Further
placements expected in 2007
to EUR 62 – 65 million
03/13/2007
Colonia Real Estate signs memoran-
06/29/2007
07/24/2007
Colonia Real Estate AG decides on
dum of understanding with Merrill
Colonia Real Estate AG signs
share buy-back // Use of these sha-
Lynch as coinvestor in a commercial
purchase contract for 70 % of
res primarily as acquisition currency
and residential real estate portfolio
accentro real estate GmbH //
for future strategic acquisitions of
Strategic addition to residential
further real estate portfolios and
real estate asset management and
target companies
privatization
Colonia Real Estate AG
Annual Report 2007
Highlights 2007
August
To Our Shareholders
December
08/03/2007
11/12/2007
Colonia Real Estate AG founds joint
CRE confirms net profit after three
venture with a fund advised by
quarters with EUR 54.4 million //
Portfolio target size of at least
09/05/2007
EUR 250 million with a focus on
Colonia Real Estate AG holds 3.59 %
logistics and light industrial facilities
of Deutsche Wohnen AG // Strategic
// First two investments completed
talks between the boards of man-
JPMorgan Asset Management //
agement planned // Attractive valu-
08/14/2007
Colonia Real Estate AG increases
stake in Asset Management
subsidiary Resolution GmbH from
17
Increase of 2007 net profit guidance
to EUR 67 – 70 million
11/16/2007
ation of Deutsche Wohnen AG with
Colonia Real Estate signs step-up
high synergy potential
equity financing agreement // High
flexibility if attractive opportunities
09/10/2007
arise // No immediate funding needs
11/16/2007
56 % to 75.1 % // Supervisory Board
Colonia Real Estate AG acquires 950
appoints Christoph Wittkop as
high-end residential appartments in
additional member of the Board of
Berlin // Selective expansion of hold-
Colonia Real Estate AG acquires
Management
ings in the western part of Berlin
together with Oaktree a EUR 600
million office real estate portfolio //
08/15/2007
Colonia Real Estate AG again with
record result in the first half of 2007
// Net profit increases from EUR 8.9
million to EUR 47.3 million // Revenues from rental income and Asset
and Fund Management fees jump to
EUR 33.1 million
Strategic development of joint
platform “German Acorn Real Estate”
18
To Our Shareholders
Interview with Members of the Board of Management
An Interview with Stephan Rind and Christoph Wittkop,
Members of the Board of Management of Colonia Real Estate AG
Q: In spite of the real estate crisis, 2007 was another record
year for Colonia Real Estate AG. What were the reasons for its
success?
Rind: We outperformed our operating goals in Residential Real
Estate particularly. We cut the vacancy rate substantially to 11.7 %.
At the same time, we achieved another increase in adjusted
rental income. That, combined with the fact that we again made
some bargain acquisitions in 2007, helped us increase value substantially by about EUR 60 million. Good performance in active
portfolio management, together with the vigorous expansion of
our residential portfolio, tripled our rental income against the
year before. Plus, now that we’re the third-largest listed resi-
dential real estate group in Germany, we were able to take advantage of considerable economies of scale in terms of costs. It
let us cut the cost of outside building management, for example, from EUR 18 per unit to EUR 15 per unit per month. And our
services sector was another success story.
Wittkop: In fact, in real estate asset management our assets
under management doubled to EUR 3 billion. On that basis, we
were able to treble our revenues from business with third parties
to about EUR 9 billion. We acquired three major-name new clients
last year – Merrill Lynch, JPMorgan, and Strategic Value Partners.
International investors are still generating high demand in the
German real estate market. Apart from the EUR 1.5 billion in new
assets we added, last year we reviewed real estate portfolios worth
about EUR 6.5 billion for acquisition. Although we would gladly
have expanded our management portfolio by that much, now
we’re glad we didn’t go through with it.
Q: Can you explain more?
Wittkop: Some of the prices paid in the large, multi-billion-euro
auctions in the first half of 2007 were really excessive. You could
easily get practically any amount of financing. International investors had large cash resources that they had to invest. Investment
pressure and easy credit led to peak prices that wouldn’t be achievable in today’s market. The result would be write-downs.
Colonia Real Estate AG
Annual Report 2007
Interview with Members of the Board of Management
To Our Shareholders
19
The ongoing strong demand for professional asset management and
the trend toward indirect – meaning managed – real estate products
lead us to expect revenues in this area to grow about 50 % in the next
two years.
Q: Now that it’s much more difficult to borrow, isn’t that what has
caused stock prices in the real estate sector to drop sharply?
Rind: The picture isn’t just black and white. First of all, the sharp
correction in the overheated American housing market caused
extensive defaults on mortgages – those U.S. mortgages that had
been sold all over the world as lucrative structured investment
products. The increasing defaults and price losses on those mortgages were exported all over the world, and led in turn to writedowns and write-offs throughout the international banking sector. And that led to foreclosures and further price drops, and not
just on securitized mortgages but other bonds – and on and on.
A downward spiral whose negative effects spread to almost every
segment of the financial market. And the shortage of liquidity and
of mortgages in general naturally hit the banking and real estate
sectors hardest. Real estate stocks with the highest levels of leveraging and short-term refinancing needs were the hardest hit of
all. Ultimately, the whole real estate sector wound up being penalized. Colonia Real Estate wasn’t able to keep out of it.
20
To Our Shareholders
Q: But your equity ratio rose substantially last year.
Is Colonia Real Estate exposed to refinancing risks?
Rind: Absolutely not. The average term on our loans is more than
six years, at average interest rates of 4.8 %. And we’ve fully hedged
those rates for the life of the loans. Last year, we increased our
equity ratio – in part through our roughly EUR 180 million capital increase in May – to about 32 %. That’s equivalent to a Group
equity of EUR 321 million, compared to EUR 100 million at the end
of 2006. Our operations have performed beautifully. There’s no
justification at all for the decline in the price of our stock. By now,
it’s trading at a discount from book, without even remotely reflecting our rapid, profitable growth in Asset and Fund Management.
Interview with Members of the Board of Management
Q: In this year’s financial statements, you officially calculate the
Company’s net asset value (NAV) for the first time. What does that
value consist of ? What would you say constitutes the fair value of
your Company?
Rind: Our NAV as of year’s end was EUR 16.30 per share. The calculation was based on outside appraisals of our properties using
moderate valuation principles. Additionally, our NAV includes only
the value of our properties plus cash on hand, less liabilities. We
estimate that the market value of our Asset and Fund Management
business is at least EUR 140 million – only 10 times our expected
pre-tax profit for 2008. Calculated out, that yields an intrinsic value
of about EUR 22 per share.
Wittkop: The ongoing strong demand for professional asset
management and the trend toward indirect – meaning managed –
real estate products lead us to expect revenues in this area to
grow about 50 % in the next two years. And that business hasn’t
been priced into our stock price at all yet.
Colonia Real Estate AG
Annual Report 2007
Interview with Members of the Board of Management
To Our Shareholders
21
Good performance in active
portfolio management, together
with the vigorous expansion of
our residential portfolio, tripled
our rental income against the
year before.
Q: Where do you expect the German real estate sector to go in the
next few years? Will the market be valued lower? Will real estate
prices drop sharply, as some analysts expect?
Wittkop: In office properties, it still makes sense to talk of a very
robust market. Vacancies in the major office locations decreased
an average of 9 % in 2007. And peak rents continued to climb.
We expect the same trend to continue this year. The very positive
job market is creating lasting demand for high-quality office
space. The same goes for logistics properties. In retail properties,
we’ll have to see whether the new higher wage agreements will
lead to a rise in consumer spending.
Rind: I see a slight but clear uptrend in residential real estate.
People will continue the trend toward relocating into cities. We’ll
profit from that, since more than 80 % of our residential properties are in urban locations. The historic low in building permits
for apartments and apartment houses over the past few years is
slowly having an effect. In some cities, we’re already seeing a
shortage of small and medium-sized apartments. Even though
the population isn’t increasing, the number of households in
Germany will grow until 2020. All of this will have a positive effect
on average rents, vacancies and housing prices. And let’s not forget that in contrast to the UK, Spain and Scandinavia, there’s been
no boom in the real estate market in Germany, especially in residential real estate. So there’s no bubble here, either.
22
To Our Shareholders
CRE Profile
CRE Profile
Colonia Real Estate AG is one of the leading exchange-listed real
estate investment and asset management groups in Germany,
with more than EUR 3 billion in real estate assets under management. The synergistic business model of the integrated real estate
investment and service company rests on three pillars: Investments,
Asset Management and Fund Management.
Colonia Real Estate AG
Investments
Asset
Management
Residential Real Estate
Commercial Real Estate
Гџ Market screening
Гџ Long-term net buyer
Гџ Co-investments
Opportunistic, Value
Add, Core +
Гџ Transaction
management
Гџ Active portfolio
management
Гџ Strong recurring cash
flows
Гџ Asset management
with key focus on
office- / logistic
properties
Гџ Joint ventures a.o. with
Merrill Lynch, Oaktree,
UBS, JPMorgan Fund
Colonia Real Estate AG
Annual Report 2007
Fund
Management
Гџ Creating and structuring tailor-made
concepts
Гџ Placement
Гџ Active portfolio
management
Гџ Privatization
Гџ Project development,
refurbishment and
redevelopment
Гџ Portfolio management
CRE Profile
To Our Shareholders
23
Investments
The Investments unit focuses on high-yield, opportunistic residential properties for the company’s own
portfolio and coinvestments in commercial properties with prestigious partners.
Asset Management
The Asset Management unit represents the interests of individual and institutional investors in their
role of property owners. CRE Resolution GmbH specializes in the servicing of complex, transregional
real estate portfolios, mainly for international investors, and assists its clients with their transactions.
This unit focuses on return optimization and on realizing capital appreciation potential. CRE Accentro
GmbH is the CRE Group’s specialist for asset management services related to the privatization of apartment buildings and individual residential properties. Moreover, the CRE Group uses the services of
CRE Resolution and CRE Accentro for developing its own properties and for purposes of effective exit
management.
Fund Management
The core business of Colonia Fonds Management GmbH comprises the design, marketing and management of structured investment products. The CRE Group offers institutional and individual investors the chance to invest in closed-end real estate funds, as a complement to stock investments. As
theme funds, they are designed to mobilize the specific opportunities of identified market niches.
Jacopo Mingazzini, Managing Director
of CRE Accentro GmbH
Colonia Real Estate AG
Annual Report 2007
“CRE Accentro enjoyed two business highlights
last year. First, it began a cooperative arrangement with GSW, the largest single client on our
list, with a portfolio of 1,300 units. In the second half of 2007, we were already able to sell
120 units from GSW’s portfolio. An interesting
point is that out of the properties we sold to
investors, 70 % were sold to international investors – which goes to show how strong the
interest is out there in owning residential property in Berlin. The year’s second highlight was
unquestionably being joined by CRE.
In 2008, we’ll emphasize expanding our range of services further. CRE Accentro will also
apply its know-how in privatization to analyze the Group’s portfolio for appropriate holdings.
On top of that, we’ll start including potential exit strategies as a more important factor in
the early phases of planning and acquisition.”
CRE Accentro GmbH
Sigrid Maas, Managing
Director of Colonia Fonds
Management GmbH
Colonia Real Estate AG
Annual Report 2007
In its first full fiscal year, Colonia Fonds Management further expanded its expertise in German “social real estate” (assisted-living facilities), and has implemented that expertise for
the first time with a successful product placement. To February 2007, the company had
acquired a total of six nursing homes for its Careinvest 1 and 2 fund companies, for a total
of about EUR 55 million. Some 99.88 % of the two fund companies was sold to a German
special real estate fund in a share deal.
After the successful placement, the fund company founded its next care fund, HGA / COLONIA
CareConcept 1. By September 2007, it had acquired five nursing homes in:
Гџ
Гџ
Гџ
Гџ
Гџ
Dortmund
Hannoversch MГјnden
Malente
Monheim
Reichertshausen
The total came to about EUR 56 million.
To safeguard advance equity financing and to build its selling force further, in the first quarter of 2008 Colonia Fonds Management formed a joint venture with HGA Capital, an affiliate
of HSH Nordbank.
In the second quarter of 2008, the partners will sell HGA / COLONIA CareConcept 1, supplemented with an additional nursing home in Bavaria, as a closed-end real estate fund to private clients, under the “CareConcept” label. The total equity to be placed will be approximately EUR 35 million.
Colonia Fonds Management GmbH
Michael Kunz, Managing Director
of CRE Resolution GmbH
Colonia Real Estate AG
Annual Report 2007
CRE Resolution was one of Germany’s first providers of transaction-based asset management services,
and is now a market leader in its field. Its core business is consulting for buyers and sellers about
potential transactions, along with adding value and optimizing returns on properties after acquisition.
It actively manages residential and commercial properties, primarily in the “Value Add” and “Opportunistic” risk categories. Many such properties require reconditioning or have extensive vacancies.
CRE Resolution’s principal clients are major institutional investors from Germany and other countries.
They can benefit from its nationwide network, local expertise, many years of experience and highly
entrepreneurial approach. In August 2007, CRE AG increased its stake in Resolution to 75.1 %. Resolution’s significance to the Group was further emphasized by the appointment of its CEO, Christoph Wittkop,
to the Board of Management of CRE AG.
Michael Kunz, Managing
Director of CRE Resolution
GmbH, discusses the 2007
fiscal year and offers an
idea of upcoming market
risks and opportunities in
2008
CRE Resolution GmbH may have only a short history, but 2007 was an extremely successful year in its
record. Our company benefited from very strong demand for high-quality asset management services
– which was reflected in heavier business volume. As our client portfolio expanded with such companies as Merrill Lynch, UBS, JPMorgan and Strategic Value Partners, CRE Resolution consolidated its
lead in the German asset management market during 2007.
Our company’s chances for growth remain excellent in 2008. In periods of turbulent capital markets
and more difficult financing options, real estate asset management is an especially indispensable
component for successful property investments.
The transactions in regionally diversified properties that have been so common in the past few years
call for asset management capabilities with a nationwide reach.
So as to fit our clients’ high quality expectations and requirement profiles, but also to deal properly
with constantly changing market situations and generate additional growth, we will systematically
keep expanding our range of services, especially in project development and corporate real estate.
Our range of know-how in real estate and in the capital markets, together with our highly entrepreneurial approach, will be the foundation for CRE AG’s further growth as an investment manager in
high-quality services for third parties.
CRE Resolution GmbH
30
To Our Shareholders
Portfolio
Residential Real Estate
Residential Real Estate
Berlin
In Berlin, the Colonia Real Estate Group owns the Helle Aue portfolio of 2,487 residential
units. Total living space is about 148,000 m2. The previous owner extensively rehabilitated
the properties in 2001 and 2002.
Active asset management reduced vacancies by more than half in a single year, from 21 % to
9 %. The original schedule had expected the process to take three years.
Our ambitious goal is now to get below the 5 % level by the third quarter of 2008. Another
goal is to reduce tenant turnover, even as rents keep rising. Additionally, to improve cash
flow, we are implementing a standardized concept for regularly reconditioning vacated
units.
At Helle Aue too, CRE AG will be implementing its rooftop solar initiative.
31
The Signa portfolio comprises 948 residential
units and 80 commercial units spread among
35 properties. Total residential and commercial
space comes to 78,105 m2.
The properties, most of which were built between 1900 and 1910 and have been partially or wholly renovated, are located primarily in the Steglitz, Schöneberg, Central,
Wedding, Pankow and Neukölln districts of Berlin. The buildings’ location and the vintage charm of the apartments make the portfolio especially attractive, yet offer the
potential for appreciation and development with the right kind of additional project
work. In the short time since the portfolio was taken over, residential vacancies
declined from 11.4 % at November 1, 2007, to 10.2 % at March 31, 2008. Planned renovation and updating projects will reduce residential vacancies still further.
In Nauen, in the Greater Berlin area, the Colonia Real Estate Group took over the former
local non-profit housing association and acquired a centrally located residential portfolio that offers an attractive and varied range of housing for various user groups in the
outskirts of Berlin. There are 2,071 units with 114,000 m2 of residential space and 13,000 m2
of commercial space, as well as 1,017 parking spaces. Most of the buildings were extensively restored and renovated by the former owner in past years. Because of their location in the Berlin metropolitan area and their good occupancy – the vacancy rate is less
than 5 % – these properties offer substantial potential for appreciation and higher rents
in the future.
32
To Our Shareholders
Portfolio
Residential Real Estate
Salzgitter
In the districts of Salzgitter Lebenstedt, Fredenberg and Hallendorf, Colonia Real Estate AG
owns 8,723 residential units with a total of 533,057 m2 of living space, and 15 commercial
units with 1,012 m2 of commercial space, through its subsidiary Emersion GrundstГјcksverwaltungsgesellschaft mbH. The Group acquired the company in the second quarter of 2007
from subsidiaries of the Babcock & Brown Group. As part of our active asset management
approach, these units will be modernized to suit the market and its demands. Some will
also undergo reconditioning for energy efficiency, to create a sustainable, attractive rental
portfolio.
In Salzgitter as elsewhere, CRE AG is offering its successful “Blue Living” product (see page 36).
To provide some long-term relief in what is locally a tenant’s market, three old residential
high-rises in the Fredenberg district – which are no longer worth rehabilitating – will be
unbuilt and rebuilt.
33
The aim, through active value management
over the next two years, is to gradually cut in
half the vacancy rate of about 18 % that we
found at the time of acquisition, and to significantly reduce current operating costs. We can
pass on cost reductions of this kind to the tenants, giving us another advantage in the highly
competitive tenant’s market in Salzgitter.
34
To Our Shareholders
Portfolio
Residential Real Estate
Cologne, Kiel, Freiburg, Hamburg
In the second quarter of 2007, another property company was
acquired from the Babcock & Brown Group, in addition to the
properties in Salzgitter. The new company, named DOMUS
GrundstГјcksverwaltungsgesellschaft mbH, owns about 1,000
residential units in six locations in western Germany. The
buildings are in good neighborhoods and offer thoroughly
attractive living conditions.
Cologne
Cologne
35
The portfolio is most heavily concentrated in Cologne,
OsnabrГјck and Freiburg im Breisgau. Other properties
are located in Aachen, Hamburg (Buxtehude) and Kiel.
The portfolio has good occupancy. We also expect that
vacancies will refill quickly as they become available,
and thus that the portfolio will appreciate further. In
Freiburg, with its sunny weather, we are currently investigating whether our solar program would be technically feasible.
Hamburg
Hamburg
Kiel
Kiel
The Domus houses are located in an idyllic neighborhood of Kiel, the capital of the
state of Schleswig-Holstein. Surrounded by a small forest area and not far from the Kiel
Canal, the small residential complex – away from the bustle of the city, yet still centrally
located – is in high demand among young families.
The Domus portfolio, with 464 apartments and 40 commercial units, has almost half of
its apartments in Freiburg im Breisgau. The neighborhood together with a small shopping center is quite popular. Only five apartments are currently vacant.
Freiburg
36
To Our Shareholders
Portfolio
Residential Real Estate
Colonia Real Estate AG’s
“Blue Living” project – Energy-Efficient
Renovation of Residential Buildings
With extensive energy-saving renovation programs, Colonia Real Estate AG offers its residential tenants a new quality of living behind “blue façades”. The programs draw additional financing from low-interest loans provided by the Reconstruction Loan Corporation,
or other forms of financing drawn from the capital markets.
Buildings are upgraded to the latest energy-aware standards, sustainably saving energy
and thus significantly reducing CO2 pollution as well. One pleasant side effect for tenants is
that their incidental expenses are lower because of lower heating costs.
Photographs from a thermographic camera show that the buildings – formerly bright yellow and red because of their deficient thermal insulation – have suddenly become blue
because they no longer radiate heat to the outside. The only energy loss is a slight one at
the forced ventilators above the windows, where outside air is brought inside to prevent
mold from forming in the interior – a necessary precaution because the insulation is so
effective. These areas are easily visible above the windows (see picture in right bottom corner: upper window row in the middle versus open windows in the lower window row).
With the “Blue Living” concept, Colonia Real Estate AG has established a new brand for
energy-aware, contemporary, economical living – and set another new standard in the
market.
37
Elmshorn residential property before renovation
Elmshorn residential property after renovation
38
To Our Shareholders
Portfolio
Residential Real Estate
Blue Living
At the Elmshorn and Itzehoe sites, the Colonia Real Estate Group
has a total of 1,575 units, some of which were in need of substantial rehabilitation and upgrading at the time of acquisition.
In cooperation with the state of Schleswig-Holstein, Investitionsbank Schleswig-Holstein and the Reconstruction Loan Corporation, we put together an attractive rehabilitation package for a
total of about EUR 40 million.
Additionally, we signed cooperation agreements with the two
municipal governments and the financing public banks, whose
terms reflect the cities’ goals for urban planning and housing
promotion in balance with CRE AG’s business objectives.
The first construction phase was completed in 2007 and the
entire project is to be finished in 2008. Once rehabilitation –
which primarily involved energy-saving upgrades – is complete,
tenants will enjoy energy savings on the order of 30 – 40 %. With
their new paint design, the three residential areas have recovered an attractive, lively appearance.
Though the construction phase is not yet over, the residential
facilities are already experiencing a lively increase in demand.
39
In Kolkwitz, Klingenberg and Bad
Frankenhausen, the Colonia
Real Estate Group has acquired a
total of 791 units.
As stipulated by the purchasing agreement,
the seller is performing energy-saving
upgrades on the properties. We are supervising the work, which is scheduled for
completion in the second quarter of 2008.
CRE Wohnen Service GmbH took over
management of the properties on the
Group’s behalf.
The next steps are to refill the
vacancies caused by the construction work, reduce tenant turnover,
and implement CRE AG’s solar initiative, while keeping rents on the
rise. Additionally, to improve cash
flow, we are implementing a standardized concept for regularly
reconditioning vacated units.
40
To Our Shareholders
Portfolio
Locations of Residential Real Estate
Kiel
Sande
Wittmund
Itzehoe
Wilhelmshaven Elmshorn
Nordenham
Emden
Brake Hamburg (Buxtehude)
Ganderkesee
Lingen
Delmenhorst
Nauen
OsnabrГјck
Berlin
Salzgitter
Geilenkirchen
Kolkwitz
Bad Frankenhausen
Cologne
Klingenberg
Aachen
Landshut
Freiburg
41
Commercial Real Estate
Overview Joint Ventures
Share CRE
Number of
objects
Lettable
space
Herkules / Homer
4.8 %
61
790,976 mВІ
Merrill Lynch
Argo
10 %
13
179,920 mВІ
Merrill Lynch
Pepper *
10 %
28
69,040 mВІ
UBS Global Asset Management
DISCH-HAUS
2.75 %
1
10,700 mВІ
Strategic Value Partners
Serail *
10 %
4
92,388 mВІ
JPMorgan Asset Management
Marl / WГјrselen
15 %
2
69,180 mВІ
Partner
Portfolio
Oaktree Capital Management
* Transaction signed in 2007, closed in 2008
Services Asset Management
Market screening
and acquisitions
Transaction
management
Investment
management
Project management
Exit management
Гџ Deal sourcing
according to
investment profile
Гџ Due diligence (DD)
Гџ Calculation and
business plan
Гџ Contract
negotiation
Гџ Financial DD
Гџ Coordination technical, legal and
environmental DD
Гџ Financial funding
Гџ Implementing
business plan
Гџ Controlling and
monitoring of
property and facility management
Гџ Marketing
Гџ Letting activities
Гџ Tenant servicing
Гџ Reporting
Гџ Concepts for refurbishment and
redevelopment
Гџ Project management and
controlling
Гџ Identifying
potential buyer
Гџ Contract
negotiation
Гџ Coordination of
sales process
42
To Our Shareholders
Portfolio
Commercial Real Estate / Co-I nvestments
“Serail” Portfolio, Berlin
As part of a restructuring program, Berlin’s BVG public transport system has sold portions of its real estate portfolio, including the former
headquarters. In a joint venture with an opportunistic fund set up by
Strategic Value Partners, in July 2007 Colonia Real Estate AG acquired
five properties from the BVG portfolio. The aim is to optimize the acquisitions with active asset management, to refurbish and redevelop
them, and then to reduce vacancies and thus reap the potential for
appreciation.
The properties, located in the Central and
Schöneberg districts, have been entirely
leased back to BVG until October 31, 2008.
After that, a portion will remain leased back
to BVG under a long term lease.
43
Marl and WГјrselen
In summer 2007, Company formed a joint venture for logistical and
production properties with JPMorgan Asset Management, under
which a Core Plus Fund from JPMorgan Asset Management and
CRE AG act as the joint investors. The properties will be acquired
with support from CRE Resolution GmbH, and CRE’s asset management service will manage them. The joint venture has targeted a
size of EUR 250 million within the next two years. For the purpose,
CRE Resolution has hired skilled employees specializing in logistics.
A single sale and a portfolio sale strategy are both possibilities for
the joint venture. As of December 31, 2007, the total rental space
came to about 70,300 m2, and was made up of about 14,700 m2 of
office space and about 55,600 m2 of shed and service space. Further
acquisitions of at least EUR 200 million are planned for 2008.
44
To Our Shareholders
Portfolio
Commercial Real Estate / Coinvestments
Pelikanviertel, Hanover
The Pelikanviertel in Hanover is one of twelve properties from the
ARGO portfolio that Merrill Lynch acquired in spring 2007 under a joint
venture with CRE AG. CRE Resolution GmbH supported Merrill Lynch
with due diligence during the purchase process, and took over asset
management for the properties as of May 2007. Besides repairing and
renovating the buildings, some of which are protected as historical
monuments, the venture has now leased out some 3,210 m2 of office
space to new tenants.
45
Additional leases are under negotiation to reduce the
current vacancy of about 12,800 m2 and fill the Pelikanviertel with new life.
The Pelikanviertel is a complex of buildings constructed
in 1904 as a management and production facility for the
Pelikan plant, and was extensively restored since 1994.
Parts of the complex were classified as protected monuments in 1991, and are now in beautifully restored condition. The former production floors, thanks to their exceptional ceiling height and excellent light, now provide
office space far above the norm. Other parts of the area,
which totals about 45,000 m2, will serve for hotel, exhibition and service uses.
The courtyard area, as well as the diversity of tenants in
the service industry – from architects, advertising, law
and finance through a four-star hotel, extended-stay
hotel, fitness facilities, restaurants and a famed beauty
clinic – offer potential for inspiration, interesting contacts
and business success.
46
To Our Shareholders
Portfolio
Commercial Real Estate / Coinvestments
Schanzenstrasse, DГјsseldorf
Virtual view
Schanzenstrasse property
Here, 66 residential units are under construction, ranging in size from 70 to 210 m2, as well
as 115 parking spaces.
The existing façade has already been completely unbuilt and rebuilt. The new, partially multicolored stucco façade, with its extensive windows, is structured with continuous horizontal
balcony bands.
The building boasts well-lit rooms more than 3 meters high, high-quality appointments,
and spacious layouts.
Another highlight is the two planned penthouse units, with their extensive roof terraces.
The renovation will be completed in fall 2008. The property already enjoys lively demand.
47
The Schanzenstrasse project, in one of the best residential locations in
DГјsseldorf-Oberkassel, is currently under reconstruction. The former
office building is being converted to a high quality residential building
with about 7,300 m2 of living space. CRE Resolution GmbH pinpointed
the property, advised on its acquisition, and is taking care of project
management and asset management.
Schanzenstrasse property before renovation, August 2006
Current view, April 2008
48
To Our Shareholders
Portfolio
Commercial Real Estate / Coinvestments
“Kastor”, Frankfurt a. M.
“Kastor”, at the Frankfurter Messe, is one of 49
properties in the Herkules portfolio that was
acquired in December 2006 by opportunistic
real estate funds advised by Oaktree Capital
Management LLC, in a joint venture with
Colonia Real Estate AG.
49
As for the entire portfolio, cash flow and value at “Kastor” are to be enhanced sustainably
through re-leases and new leases.
Its location near downtown, directly between the Frankfurter Messe grounds and the financial district, its very good accessibility from the airport and railroad station, and its flexible
unit layout will keep the property very interesting to the Frankfurt office market over the
next few years.
The building, constructed in 1997, has total rental space of approx. 30,741 m2 on 23 floors.
An underground garage offers 343 parking spaces.
50
To Our Shareholders
Portfolio
Commercial Real Estate / Coinvestments
Pan German “Herkules” Portfolio
Colonia Real Estate AG, as a coinvestor, holds 4.80 % of this commercial real estate portfolio acquired by funds advised by Oaktree
Capital Management LLC. The joint venture, known on the market
as “Herkules”, is made up of 49 properties throughout Germany,
and was established in 2006.
51
Investments emphasize the Frankfurt am Main, DГјsseldorf, Rhine / Ruhr and Berlin areas,
and the properties cover a large portion of Germany’s principal business regions.
The portfolio has total rental space of approx. 522,000 m2, with the largest share (318,000 m2,
or 60 %) consisting of office space.
The joint venture’s strategy is primarily to make the properties appreciate through releases
and new leases, and to optimize rental income and property quality. Extensive revitalization
is needed on only a few properties.
The CRE Resolution GmbH is the Asset Manager for Oaktree / German Acorn.
52
“DISCH-HAUS”, Cologne
Cologne’s “DISCH-HAUS” was built by Bruno Paul in the “New Objectivity” style in the late
1920s.
Over the past 12 months, it has undergone extensive revitalization, so that today it combines
the charm of a historic, protected structure with the technical standards of a high-quality
office and business building.
.
Portfolio
Commercial Real Estate / Coinvestments
As of April 2008, a total of more than 7,700 m2 of up-to-date office space and more than
2,800 m 2 of retail space will be available in this prestigious downtown property, along
with 14 parking lots.
The Manufactum department store has already been signed as a long-term tenant for
more than half of the retail space. Publicis Vital PR, a communications agency for the
medical sector, will move into a contiguous space of about 1,400 m2 in the upper stories
this May.
The building was a joint acquisition of the UBS (Lux) Euro Value Added Real Estate Fund,
Colonia Real Estate AG, and Redos Real Estate GmbH. CRE AG’s asset management service
is responsible for the overall project – i.e., revitalization and re-leasing – and served as an
advisor during the purchase from the city of Cologne.
To Our Shareholders
53
54
To Our Shareholders
Portfolio
Commercial Real Estate / Coinvestments
City High-rise, Leipzig
The City High-rise is one of Leipzig’s bestknown properties, and one of the city’s
landmarks. In-depth, customer-oriented attention to the building has made it possible
to lease 3,400 m2 back out within the last
few months. The largest tenant is the MDR
broadcasting corporation.
The City High-rise in Leipzig is one of twelve properties from the ARGO portfolio that
Merrill Lynch and Colonia Real Estate AG acquired in spring 2007. It is central Germany’s
tallest high-rise, with 29 floors. The top floor has the Panorama Restaurant, and the roof
has an observation platform with spectacular views of Leipzig and the surrounding area.
The building, completed in 1972 as part of Leipzig City University and converted to an office
building in 2001, offers 26,115 m2 of rental space. CRE AG’s asset management service, which
is responsible for the entire portfolio, increased occupancy from 46 % at the sale in May 2007
to 59 % within nine months.
55
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