Why Adler’s dark tale raises concerns about real estate

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Adler Group SA, one of Germany’s largest property owners, has grown rapidly over the past decade on the back of a property boom, a series of aggressive acquisitions and a debt buildup that at one point amounted to around €8 billion ($8.5 billion). A 61-page report in October by short seller Fraser Perring’s Viceroy Research alleged that Adler was “built on systematic deception,” sending its stocks and bonds down even as the company denied the charges. Since then, a forensic investigation by KPMG has failed to refute many of the allegations. Market moves led to a sell-off in Adler peer bonds as well, as investors began to question more broadly about the increase in property values ​​that fueled empire building in an era of ultra-low interest rates.

1. Why focus on Adler?

There has been a whirlwind of intrigue centering on Cevdet Caner, a wealthy Austrian businessman whose family owns a large stake in Adler, a 142-year-old company that makes bikes, cars and typewriters before building a real estate portfolio. Viceroy’s report alleged that the company was being run for the benefit of a handful of friends and colleagues with Caner in the center. KPMG has neither confirmed nor refuted the claim because it sifted through thousands of letters from Caner that it said contained evidence of him scheduling meetings, influencing employee decisions and extracting millions of euros in loosely defined consulting contracts. German authorities are now investigating the company. Perring was an early critic of Wirecard AG, the German payment company that collapsed in 2020.

2. Is Adler a sign of broader problems in real estate?

This is not clear. German apartment prices more than doubled from 2012 to 2021, according to Savills Plc’s analysis of Value Marktdaten data. This, combined with low interest rates, has helped support about €65 billion in bond sales in the five years starting in 2016. Adler wasn’t alone in riding the wave of easy money, which means there’s a chance he’s just a canary in Coal mine german real estate.

3. What are the allegations against Adler?

It was brought into focus by a complex, three-way merger that brought in current Adler in late 2019. What was then called Adler Real Estate acquired an Israeli firm that owns a large stake in another German real estate firm, ADO Properties. Five days later, ADO Properties announced that it was buying Adler and a stake in a third company, Consus Real Estate. The name of the merged company was changed to Adler Group. ADO’s dissatisfied minority shareholders say they appear to have billed a deal to fix Adler and Consus’ balance sheet. The merger was one of several deals struck by KPMG, which also found transactions involving real estate bought and sold to members of the Kanner family. Late payments related to historic property sales owed to Adler have also raised concern, and KPMG has recommended that the owner start writing them down due to the risk that they will never be realized.

4. What is Kanner Connection?

Local media have noted that it appears to be related to both companies that were acquired by ADO in the deal. The Kanner family trust has amassed a significant stake in Adler Real Estate as of 2012; That was before the company began its debt-driven expansion, sending its stock price soaring. Kanner was an informal advisor to Aggregate Holdings SA, which controlled Consus and was Adler’s largest investor. The former Caner real estate company was involved in a company called Level One Group, which collapsed in the wake of the 2008 financial crisis with debts of around 1.2 billion euros.

5. What do Adler and Caner say?

Adler has widely dismissed the allegations and appointed KPMG to conduct an investigation. The report failed to prove or refute many of the allegations after Adler withheld thousands of documents from investigators under the pretext of legal privilege. Investors came to their conclusion of a fresh sell-off of Adler stocks and bonds. The owner has also sold about 40% of his real estate portfolio since October at prices he says prove the accuracy of his valuations. Kanner denies he is the authority behind the throne and has filed a criminal complaint against Bering. German regulators are also investigating Adler.

6. How do investors react?

Adler’s short sale jumped in September 2021, reaching about 22% of the company’s stock on loan in early October when Viceroy’s report was published. Among the short sellers were dealers at JPMorgan Chase & Co. and Goldman Sachs Group Inc. , two of the banks that were instrumental in the growth of Adler. Demand among distressed debt investors has prompted both lenders to market financial products that allow bettors how much money Adler’s creditors will recover if the company defaults. Vonovia SE, Germany’s largest property owner, acquired a 20% stake in Adler after refinancing and then imposing a loan to Aggregate secured against its stake. Investors had hoped this was a precursor to a takeover but Vonovia’s management indicated they were not interested in bidding. Since then, KPMG’s findings have sent both Adler stocks and bonds to record lows.

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