Introduction
The objective of this paper is to give my view on real estate company Adler Group and its listed subsidiaries. I will place particular focus on egregious behavior by company insiders and how they manage to fool investors to the present day.
Although this paper is based on publicly available information, it provides deep insight into the current situation of the company and should be read by anyone interested in the European real estate sector. The European real estate sector is closely intertwined and similar business practices to those conducted by Adler Group might be run by other real estate companies in the region. This paper provides readers with a understanding of these business practices so they are alerted when encountering similar schemes at other companies in the sector.
I am an undergraduate student, studying business administration at the University of St. Gallen and currently spending my exchange semester at Harvard University. Therefore, the reader should not take any of what is written here as conclusive or authoritative and should rather see it as a pretext for further discussion. If you have any thoughts or reactions, feel free to send me an email and give me feedback. I will include your feedback with attribution: [email protected]
1 Adler Group – An Overview
Adler Group S.A. (“Adler Group”) is a publicly listed real estate company with most of its portfolio in Germany. The company is listed on the London and Frankfurt stock exchanges (ISIN: LU125015413) and has three publicly listed subsidiaries, Adler Real Estate, Consus Real Estate and Brack Capital Properties. Adler Real Estate AG (“Adler Real Estate”) is 96.72% owned by Adler Group and listed on the Xetra stock exchange (ISIN: DE0005008007). The company holds most of the group’s cash and real estate assets, which is why Adler Group, the parent company recently announced a squeeze out of the company’s minority shareholders and a subsequent delisting of the entity in order to transfer assets to the parent. Adler Group’s second listed subsidiary, Consus Real Estate AG (“Consus Real Estate”) is also listed on Xetra stock exchange (ISIN: DE000A2DA414). The company is a property developer and 93.86% owned by Adler Group. Consus Real Estate was formed through a merger of CG Gruppe and SSN Group in 2017. Adler Group’s third listed subsidiary is Brack Capital Properties N.V. (“Brack Capital Properties”) a Netherland based company listed on the Tel Aviv stock exchange (ISIN: NL0010763611). The company owns and develops commercial and residential property in Germany and is 63% owned by Adler Group.1Adler Group came under heavy criticism in 2021, when insiders and short sellers accused the company of false business practices. On October 6, 2021, Viceroy Research published a report on the company, stating that “The Adler Group is a hotbed of fraud, deception and financial misrepresentation designed to hide its true financial position, which is bleak. The Adler Group exists as a conduit for its shadow directors and associates to systematically enrich themselves to the detriment of bondholders, shareholders, and minority holders of various listed investments.” 2 Since publishing its first report, Viceroy Research has been the driving force behind uncovering the business practices at Adler Group
Before Viceroy Research got involved in the company, there had been rumors about potential governance issues and accounting irregularities at the company. This made the stock drop from EUR 48.47 on August 31, 2018 to EUR 13.50 on October 5, 2021. On October 6, 2021, the day the Viceroy Research report was published, the stock dropped by about 26%, closing at EUR 10.00. Adler Group’s stock is currently trading at EUR 2.69 with a market capitalization of about EUR 310m , having wiped out about EUR 6.1b in value over the past years.3
Adler Group tried to refute the allegations posed by Viceroy Research by hiring its auditor KPMG to do a special investigation. However, the report published by the KPMG Forensic team, which summarized the findings of the special investigation, failed to refute the allegations and lead KPMG to place a disclaimer of opinion on Adler Group’s 2021 annual financial report. In addition, KPMG announced that it will no longer work as an auditor for the company. After a change of the management team and the sale of the majority of the company’s real estate portfolio, Adler Group is still struggling to refute the accusations posed by its critics. In addition, German, Luxemburg and Israeli authorities are currently investigating the company.4
Most of the allegations against Adler Group are tied to Austrian businessman Cevdet Caner and his network, who allegedly secretly run the company and systematically strip it of its prime assets in
1 Bloomberg Finance L.P., Bloomberg Terminal, 2022.
2 Viceroy Research, Adler Group – Bond Villains, 2021.
3 Bloomberg Finance L.P., Bloomberg Terminal, 2022.
4 Bloomberg News, Why Adler’s Murky Tale Fuels Fear About Real Estate, 2022.
uncommercial, undisclosed related party transactions to the detriment of minority shareholders, bondholders and banks. Cevdet Caner’s family trust had assembled a large stake in Adler Real Estate, which later became Adler Group after a controversial tree way merger, starting in 2012. Shortly after Cevdet Caner invested in the company, it started its debt fueled expansion which sent its share price soaring up to EUR 48.48 in 2018. Before getting involved in the real estate sector in 1999, Adler Real Estate had a 152 year old history of manufacturing bicycles, automotives and typewriters. The following chapter will focus on the people operating Adler Group.5
5 Bloomberg News, Why Adler’s Murky Tale Fuels Fear About Real Estate, 2022.
2. People operating Adler Group
In order to understand how Adler Group operates, it is essential to know Cevdet Caner’s network of people, who secretly run the company. This is because most of the accusation against the company are connected to transactions conducted by undisclosed related parties. These undisclosed related party transactions result in stripping the company of its prime assets, marking up its balance sheet in order to lever up and take over new asset rich companies which can then be looted again. Most of the related parties are linked to Cevdet Caner, who is said to operate the company in the background despite holding an official position at the company. Cevdet Caner and Adler Group claim, that he holds no official position at the company and is only involved as a consultant. Cevdet Caner’s relationship with Adler Group has been under investigation by Austrian, German, Luxembourg and Israeli authorities, which have come up with significant evidence that show that Cevdet Caner is the man who calls the shots at the company.6
The most helpful publicly available information about Cevdet Caner’s relationship with Adler Group is a report published by the Austrian Takeover Commission back in 2016. The report investigated Adler Real Estate’s attempt to merge with Austrian real estate company Conwert Immobilien Invest SE (“Conwert”) in regards to breaching laws that demanded parties acting in concert with various other shareholders to launch a mandatory tender offer for Conwert, finding Cevdet Cander and the other parties acting in concert guilty. In an appeal against the Austrian Takeover Commission, the European Takeover Commission decided that its Austrian counterpart had overreached its decision and found that Cevdet Caner and the other related parties acted in accordance with European takeover rules. Despite the European Takeover Commission overruling the Austrian Takeover Commission, the findings in the report are an important and reliable document, showing Cevdet Caner’s involvement in Adler Real Estate.7
There are numerous passages in the Austrian Takeover Commission report, which display Cevdet Caner’s role at Adler Real Estate showing his involvement and economic interest in the company through his various trusts, profit sharing agreements, intercompany loans, family members and associates. Among others, the report states that “discussions mostly took place in the presence of Cevdet Caner, who, according to the management of Conwert, appears as the ‘undercover boss’ of Adler.” 8
The Austrian Takeover Commission report also found that Cevdet Caner has an economic interest in Adler Real Estate due to his substantial profit sharing agreement with Bassan S.A.M (“Bassan”) a company officially owned by his wife, Gerda Caner, Richard Bunning and Wolfgang Hahn. Additionally, the report found that, Meridien Capital Management, a company officially owned by Richard Bunning and the company, through which Cevdet Caner interacted with Adler Real Estate, has consulting contracts with Adler Real Estate and provides services to the company in various areas. The first consulting agreement with the company that KPMG Forensic found was signed on July 1, 2015, for an indefinite period by an unknown Adler employee and Richard Bunning for EUR 22k per month plus additional performance related fees. The second consulting agreement found during the investigation was signed on July 1, 2017, for an indefinite period by two senior Adler Real Estate employees for EUR
6 Viceroy Research, Adler Group – Bond Villains, 2021.
7 Austrian Takeover Commission, Report, 2016.
8 Austrian Takeover Commission, Report, 2016.
10k per month plus performance related fees.
In total in the period under review by KPMG Forensic, Adler Real Estate and later Adler Group paid Meridien Capital Management EUR 6.4m in monthly consulting and performance related fees. The Austrian Takeover Commission also found out that Meridien Capital Management sends all its profits to Bassan in the form of intercompany loans. As Bassan has a profit sharing agreement with Cevdet Caner, it can be said that Meridien Capital Management is a vehicle through which Cevdet Caner directs cash out of Adler Group.9
Furthermore, the Austrian Takeover Commission found that Cevdet Caner initiated the attempted acquisition of Conwert, again showing his significant influence at the company. According to the report, Cevdet Caner took part in almost all of the meetings with Conwert management, playing a key role in most of the discussions. Besides joining such meetings, the report also states that Cevdet Caner met with Conwert’s management team to discuss the transaction without Adler Real Estate representatives attending. The Austrian Takeover Commission also states, that there was only one major meeting regarding the Conwert transaction which Cevdet Caner did not attend, it being the first meeting with banks, legal advisors and senior members from Adler Real Estate and Conwert. The reason for Cevdet Caner not attending this meeting was because given his background, he did not want the banks to find out that he was involved in the transaction. The Austrian Takeover Commission also found that Cevdet Caner was often the first point of contact when Conwert management wanted to interact with Adler Real Estate. This was also stated by individuals, who testified that anyone who wanted to do business with Adler Real Estate, had to talk to Cevdet Caner first. The fact that Cevdet Caner plays a major role in coordinating and influencing Adler Group’s M&A strategy was later also confirmed by a special investigation conducted by KPMG Forensic.10
Besides the findings of the Austrian Takeover Commission, also the KPMG Forensic investigation revealed a number of previously undisclosed connections between Cevdet Caner and Adler Group which confirmed that Adler Group’s management and board took their orders directly from him. KPMG Forensic confirmed that Cevdet Caner operates through Meridien Capital Management to organize meetings with the board, dictate acquisitions, approve senior management remuneration and times the release of market sensitive information. The report also found that Cevdet Caner regularly orders personal meetings with Adler Group’s senior management and directors on his yacht and orders their schedule cleared for important calls. The KPMG Forensic report also states that these meetings are characterized by Cevdet Caners unquestionable authority an concern key Adler Group acquisitions and major strategic decisions. This is shown among others by the following email which shows Cevdet Caner’s response to Christoph Gröner stating that he cannot attend one of the ‘mandatory’ meetings scheduled by him. “If you can’t attend these meetings we will still have them and let you know about the outcome. It is unacceptable for you to think that everybody has to accept your timetables. What is the reason that you can’t attend on the 6 th ? What is there more important than such a strategic meeting?!!! We need to come together very urgently as you are acting like an uncontrolled missile and in various and are ongoing breaches of several orally and written agreements, which is not acceptable.” 11
Another email which shows Cevdet Caner’s authority at Adler Group, refers to the content, timing and release of market sensitive information. In the email, Cevdet Caner criticizes Adler Group’s board members for mistiming a market sensitive announcement stating, “Guys, it was agreed to announce
9Austrian Takeover Commission, Report, 2016.
10Austrian Takeover Commission, Report, 2016.
11KPMG Forensic, Report About the Special Investigation at the Adler Group S.A., 2022.
this pre market opening. Can we for once agree and execute on timetables?! After taking 4 months to put [Adler19] in as CFO, this should not be such a big ask!!! I am fed up with how things run in this company.”12
Cevdet Caner’s authority and influence at Adler Group is also shown by him and related entities receiving invoices for services provided, although in many cases there was no contractual basis and no evidence for these services. KPMG Forensic especially highlighted two arrangements made directly with Cevdet Caner, resulting in EUR 12.62m in payments. The first payment was conducted on March 23, 2018 in the amount of EUR 2m for advisory services regarding the Brack Capital Properties acquisition by Adler Group. The payment for these advisory services was disguised as interest income in order to avoid scrutiny by Adler Group’s auditors and the services allegedly provided by Cevdet Caner could not be traced. The second payment to Cevdet Caner highlighted in the KPMG Forensic report was conducted on September 23, 2019 in the amount of EUR 10.62m regarding the acquisition of ADO Group. This payment was split into ten tranches and was therefore not subject to any anti money laundering and know your client procedures. Again, the services allegedly made by Cevdet Caner could not traced. In total, KPMG Forensic discovered that almost EUR 18m were paid to Cevdet Caner and his inner circle with no proof of service. The following chapter gives background information on Cevdet Caner, his inner circle and companies related to him.13
12 KPMG Forensic, Report About the Special Investigation at the Adler Group S.A., 2022.
13KPMG Forensic, Report About the Special Investigation at the Adler Group S.A., 2022.
3. Cevdet Caner
Cevdet Caner is an Austrian businessman living in Monaco and the man secretly running the Adler Group of companies. Cevdet Caner became involved in Adler Group as a founding shareholder by acquiring Mezzanine IX Investors L.P. (“Mezzanine IX Investors”), a U.S. based company, in 2012 through his private foundation, Caner Privatstiftung. In 2013 Caner Privatstiftung transferred its ownership in Mezzanine IX Investors to Bassan, which is based in Monaco and subject to secrecy laws.14
Before getting involved in Adler Real Estate, Cevdet Caner was already responsible for two high profile bankruptcies.15
One of these companies was CLC AG (“CLC”), a German listed telemarketing center. CLC’s expansion strategy was to over lever itself to grow by acquiring larger competitors. In order to finance such acquisitions, the company IPOed in 2001. Instead of using the cash to pay down the huge amount of debt from its previous acquisitions including that of competitor DMB Marketing Beratung GmbH (“DMB”), the company used the proceeds to purchase Camelot Group (“Camelot”). Camelot, a much larger competitor of CLC had a relatively clean balance sheet, with almost no debt outstanding. In the same way, the company had done previously, CLC raised debt against Camelot’s assets until it was levered to the hilt. After the loss of a customer that accounted for about 30% of CLC’s revenues, the company went bankrupt. Before collapsing, Cevdet Caner took huge loans from the insolvent business, sold all his shares and resigned shortly before the bankruptcy. CLC is the first instance of Cevdet Caner’s strategy of acquiring larger, better capitalized companies in order to load them with debt and finance even larger takeovers.16
Cevdet Caner’s second bankruptcy was Level One AG (“Level One”). Level One purchased low cost pre- fabricated housing in Germany and securitize the debt. Credit Suisse, UBS and later Bear Sterns were all lenders to the firm and lost millions in the process. One fact that displays the size of Level One is that according to Cevdet Caner, he at the time was Credit Suisse’s largest single customer outside the US.17
Following the 2008 real estate crisis, the company was placed into receivership and was later declared bankrupt in September 2008. As in his previous venture CLC, Cevdet Caner took out cash from the company before it collapsed. Level One’s bankruptcy went down in history as Germany’s largest real estate collapse since 1994. Cevdet Caner to the day says that he was a victim of the banks involved and argues that the cash outflows of Level One to companies controlled by him were part of the official structure of the company. The following chapter describes the main people in Cevdet Caner’s inner circle.18
14Viceroy Research, The Whistleblower vs. The Lawyer, 2021.
15Bloomberg News, Tycoon Behind Crisis-Era Property Crash Now Sits on a USD 9 Billion Debt Mountain, 2021.
16Viceroy Research, Adler Group – Bond Villains, 2021.
17Der Spiegel, Das Ende einer Heuschrecke, 2009.
18Viceroy Research, Adler Group – Bond Villains, 2021.
3.1 Cevdet Caner’s Network
Cevdet Caner is the center of a network of people involved with insider dealings at Adler Group. It is important to know the main people in Cevdet Caner’s network and the relationship between them, in order to understand how Adler Group conducts business.
Gerda Caner is Cevdet Caner’s wife and Josef Schrattbauer’s sister. She officially owns a stake in Adler Group, through Mezzanine IX Investors and Bassan, but mainly acts as a stand-in for Cevdet Caner, who really controls these investments.19
Josef Schrattbauer is Cevdet Caner’s brother in law, and Gerda Caner’s brother. Josef Schrattbauer also holds an interest in Adler Group through Mezzanine IX Investors and Bondi Beteiligungs GmbH (“Bondi”). Numerous undisclosed related party transactions were conducted with Josef Schrattbauer, and it appears as if he acts as a stand-in for Cevdet Caner, similarly to Gerda Caner.20
Richard Bunning also owns an interest in Adler Group and is part-owner of Mezzanine IX Investors, through Chelmer GmbH (“Chelmer”). Additionally, he is the owner of Meridien Capital Management, a friend of Gerda Caner and former colleague of Cevdet Caner from Level One. The KPMG Forensic report showed that Cevdet Caner interacted and organized meetings with Adler Group’s management via Richard Bunning’s company Meridien Capital Management. It is important to note that Meridien Capital Management sends all its profits to Bassan, owned by Gerda Caner, Richard Bunning and Wolfgang Hahn. Cevdet Caner in turn has a profit sharing agreement with Bassan, which makes him an ultimate beneficial owner of Meridien Capital Management.21
Günther Walcher is owner of Aggregate Holdings, who was previously Adler Group’s largest shareholder. Cevdet Caner was recently appointed as CEO of Aggregate Holdings. Former employees of Aggregate Holdings say that the company followed Cevdet Caner’s orders and often acted in concert with Adler Group and Mezzanine IX Investors, even before Cevdet Caner became CEO of the company.22
Tomas de Vargas Machuca was the former CEO of Adler Real Estate and Brack Capital Properties. He was Cevdet Caner’s former broker at Credit Suisse during the Level One days.23
Christoph Gröner is founder and former owner of CG Gruppe, which was acquired by Consus Real Estate and later by Adler Group. Christoph Gröner has conducted business with both Adler Group and Aggregate Holdings.24
Teddy Sagi is an Israeli billionaire and acted as middle man for Adler Group in various acquisitions, by buying minority interests in companies presumably on Adler Group’s behalf. After acquiring stakes in companies that Adler Group wanted to take over, he quickly flips them to Adler Group for large short term gains. The following chapter focuses on the main companies related to Cevdet Caner and his inner circle.25
19Viceroy Research, Adler Group – Bond Villains, 2021.
20Viceroy Research, Adler Group – Bond Villains, 2021.
21Viceroy Research, Adler Group – Bond Villains, 2021.
22Viceroy Research, Adler Group – Bond Villains, 2021.
23Viceroy Research, Adler Group – Bond Villains, 2021.
24Viceroy Research, Adler Group – Bond Villains, 2021.
25Viceroy Research, Adler Group – Bond Villains, 2021.
3.2 Companies related to Cevdet Caner
There are a number of companies which are indirectly controlled by Cevdet Caner, and through which he is an ultimate beneficial owner of Adler Group. Adler Group has conducted numerous transactions with these companies.
Aggregate Holdings is an investment vehicle majority owned by Günter Walcher which is closely tied to Adler Group and Consus Real Estate. Aggregate Holdings was the majority shareholder of Adler Group, before its stake was pledged by Vonovia SE (“Vonovia”) as collateral for a unpaid loan.26 According to the KPMG Forensic report, Adler Group owns a majority stake in Aggregate Holding’s bonds which was not disclosed to the public.27
Aggregate Holdings was recently also granted a non- interest bearing EUR 22.4m loan from Adler Group subsidiary Consus Real Estate. Before Cevdet Caner became CEO of the company on July 5, 2022, Günter Walcher according to former employees carried out Cevdet Caner’s instructions to the letter. The KPMG Forensic report showed that Adler Group overwhelmingly deals with Aggregate Holdings and does so on terms that are incredibly favorable for the latter.28
Aggregate Holdings has previously also owned stakes in other DACH real estate companies such as Conwert, ADO Properties, Consus Real Estate, CG Gruppe, Corestate, SImmo, and Immofinanz and has previously also considered to buy a large stake in CA Immo.29
Mezzanine IX Investors is a Luxemburg entity which is owned by Gerda Caner, Josef Schrattbauer and Richard Bunning. Cevdet Caner became involved in Adler Real Estate through Mezzanine IX Investors in 2012. At inception of the company, the shareholders of Mezzanine IX Investors were Caner Privatstiftung, Bondi Beteiligungs GmbH, Chelmer GmbH and White Star Investment LLC, owning 25% each. Caner Privatstiftung, later transferred its 25% stake in Mezzanine IX Investors to Bassan owned by Gerda Caner, Richard Bunning and Wolfgang Hahn. According to the Austrian Takeover Commission report, Cevdet Caner has a substantial profit sharing agreement with Bassan, and therefore and economic interest in Adler Group. The 25% stake in Mezzanine IX Investors owned by Bondi is managed by Josef Schrattbauer, Cevdet Caner’s brother in law, who allegedly acts as a stand-in for him. The 25% stake owned by Chelmer GmbH is managed by Richard Bunning, who is the sole beneficial owner of Chelmer and is also owner of Meridien Capital Management, the entity through which Cevdet Caner interacts with Adler Group and the entity that sends all its profits to Bassan through intercompany loans, with which Cevdet Caner has a profit sharing agreement. White Star Investment LLC’s stake is managed by Cevdet Caner’s former associate and former Adler Real Estate supervisory board member John Heikenfeld. Mezzanine IX Investors is a vehicle through which Cevdet Caner indirectly owns Adler Group.30
Brack Capital Properties (BCP) is a Netherland based real estate company listed on the Tel Aviv stock exchange. It owns and develops residential and commercial real estate properties in Germany. The company is majority owned by Adler Group, with LEG Immobilien having recently acquired a minority stake and an option to buy a majority stake in the company. LEG announced that it will not exercise its
26Bloomberg News, Vonovia Pounces on Rival Landlord Adler With Margin Call Trigger, 2022.
27KPMG Forensic, Report About the Special Investigation at the Adler Group S.A., 2022
28KPMG Forensic, Report About the Special Investigation at the Adler Group S.A., 2022
29Bloomberg Finance L.P., Bloomberg Terminal, 2022.
30Viceroy Research, Adler Group – Bond Villains, 2021.
option to buy the majority stake in Brack Capital Properties.31 One reason for this decision is that Brack Capital Properties exists as a shell of its former self, having been stripped of its prime assets. Adler Real Estate gained control over the company by buying out Teddy Sagi, who acted as a middlemen on behalf of Adler Real Estate, and by placing a tender offer for the remaining stake of the company. Teddy Sagi acquired his 44% stake in Brack Capital Properties from its founders Shimon Weintraub and Ronen Peled in May 2017 through his investment vehicle Redzone Empire Holding (“Redzone”) for NIS 1.1b. In February 2018, he sold his stake to Adler Real Estate for NIS 1.4b, netting a quick profit. In April 2018, Adler Group announced that it had acquired 70% of Brack Capital Properties and subsequently started to reshuffle the board, placing Tomas de Vargas Machuca on the board as CEO and Thomas Stienlet, a former analyst at Meridien Capital Management on the board as CFO. 32
In September 2018, after the board reshuffle, Brack Capital Properties announced that it had acquired 4.1% of an unrelated listed German real estate developer for EUR 35m, which was later identified as Consus Real Estate, a company later acquired by Adler Group. The identity of Consus was kept under wraps because the company was largely a shell company, with a previous IPO having failed and with senior secured debt trading at 10.5%. Consus Real Estate was then majority owned by Günter Walcher’s Aggregate Holdings, who profited greatly from this purchase by Brack Capital Properties.33
The example of these tree companies shows the problem of Cevdet Caner being behind these entities, or being closely related to them as well as being the man behind Adler Group. Cevdet Caner is often on both sides of a transaction, with the goal of these transactions mainly being to extract wealth from Adler Group’s investors, minority shareholders and bondholders to Cevdet Caner and his network. The way this is done is explained in the following chapter.34
31Finanzen.net, LEG Immobilien SE: LEG nimmt Abstand vom Erwerb weiterer Aktien der Brack Capital
Properties N.V. (BCP) von der Adler Real Estate AG, 2022.
32Viceroy Research, Adler Group – Bond Villains, 2021.
33Viceroy Research, Adler Group – Bond Villains, 2021.
34Viceroy Research, Adler Group – Bond Villains, 2021.
4 How Adler Group Operates
There has been widespread critique by minority shareholders, bondholders and short-sellers, about how Adler Group conducts business.35 This chapter gives an overview on the modus operandi at Adler Group, and then describes specific coup d’état-, looting- and marking transactions in detail.
If one looks at Adler Group’s transaction history, one can quickly identify a pattern of similar ways they operate. In a first step, Adler Group usually conducts a coup d’état transaction. In such a transaction, Adler Group buys a controlling, or factually controlling stake in a better capitalized, asset rich company. This is generally done by using large amounts of leverage and often by acting in concert with undisclosed related parties. Once Adler Group holds a controlling stake in the target company, they call an EGM, flip the board and attempt to force the target company to do a reverse takeover or a merger with Adler Group at inflated balance sheet values.36
In a second step, value is transferred out of the company by saddling it with debt and then stripping it of its newly acquired assets via uncommercial looting transactions. In these looting transactions, Adler Group either sells assets to undisclosed related parties at deflated prices, or it buys assets from undisclosed related parties at inflated prices. In either way, these transactions are not conducted at arm’s length and they transfer value out of Adler Group into the hands of related parties.37
In a third step, Adler Group marks up the remaining assets in its book at inflated prices through conducting marking transactions, which fix the balance sheet gaps created by the looting transactions. In the process, assets are bought by undisclosed related parties at inflated prices, but the consideration is only partly paid and never intended to be settled in full. Adler Group thereby creates false profits on its income statement and its balance sheet is artificially marked up by unrecoverable receivables. Despite little cash consideration is being paid, the underlying assets change hand and the related parties borrow against the assets (i.e. looting them) in order to enrich themselves and recover the small cash consideration that has been paid for the overpriced assets. When the remaining purchase price is eventually not paid, the transaction is reversed and Adler Group receives its assets back, marked in the books at an inflated price but with a large mortgage attached. This leads to overvalued assets on the balance sheet, disguising a bond default. Because the buyer is able to borrow against the asset that has not yet been paid in full, these marking transactions are closely linked to looting transactions, as money is transferred out on a deal that was never intended to be completed. In the next chapter, two of Adler Group’s coup d’état transactions are discussed in detail.38
35Bloomberg News, German Landlord Merger Draws Fire from Even More Fund Managers, 2020.
36Viceroy Research, Adler Group – Bond Villains, 2021.
37Viceroy Research, Adler Group – Bond Villains, 2021.
38Viceroy Research, Adler Group – Bond Villains, 2021.
4.1 Coup D’état Transactions
In a first step, Adler Group mostly conducts a coup d’état transaction on a better capitalized company with good assets. The transaction is called coup d’état, because similarly to a seizure and removal of a country’s government and its powers, Adler Group takes over a minority, yet factually controlling stake in a company and then flips the company’s board of directors and management and replaces it with its own people in order to take control of the entity.39
4.1.1 Coup D’état Transaction at ADO Properties
Adler Group’s most prominent coup d’état transaction took place in 2019 and lead to the combination of Adler Real Estate, ADO Properties S.A. (“ADO Properties”) and Consus Real Estate to form Adler Group. ADO Properties, which was the main objective of the coup d’état transaction (the Consus Real Estate acquisition was a looting transaction and is discussed in detail in chapter 4.2) was a unrelated, much larger and much better capitalized real estate investment company, which made it the ideal takeover candidate.40
The deal was structured in the following way. On September 23, 2019, Adler Real Estate, LI Lorgen Ltd. (“LI Lorgen”) and ADO Group S.A. (“ADO Group”) entered into an agreement and plan of merger by way of reverse-triangular merger via a private transaction. LI Lorgen was a wholly-owned subsidiary of Adler Real Estate and was acquired solely for purpose of the acquisition. ADO Group, a Israeli company invested in German real estate, whose most substantial asset was a stake in ADO Properties, a real estate investment company listed on the Tel Aviv stock exchange, was the ideal candidate for a coup d’état transaction as it was much larger and was much better capitalized than Adler Real Estate. Adler Real Estate acquired ADO Group for EUR 708m, a 83% premium on its previous closing price via a private transaction financed by a bridge loan. According to the merger agreement, LI Lorgen was then merged into ADO Group as the absorbing entity. As a consequence of the merger, LI Lorgen ceased to exist and ADO Group became a wholly-owned subsidiary of Adler Real Estate.41
As of the date of the merger agreement between Adler Real Estate and ADO Group, ADO Group held a 38.16% stake in ADO Properties. In accordance with a condition for the closing of the merger (the Gerresheim property sale, a marking transaction described in chapter 4.3), which took place on December 10, 2019, ADO Group sold 4.91% of the share capital and voting rights in ADO Properties, thus effectively reducing its stake in ADO Properties to 33.25%.42
Adler Real Estate’s 33.25% stake in publicly listed ADO Properties, did not give it an absolute majority, however it was enough to give it a control in EGM/AGM votes as several minority interests did not vote. Therefore, Adler Real Estate’s 33.25% stake in ADO Properties was effectively a controlling stake, which gave it the ability to reshuffle ADO Properties’ board. This is exactly what Adler Real Estate did at an EGM on December 10, 2019, placing Adler Real Estate’s Head of Legal, Florian Sitta, as well as Ben Irle, Cevdet Caner’s lawyer on ADO Properties’ board.43
39Viceroy Research, Adler Group – Bond Villains, 2021.
40Viceroy Research, Adler Group – Bond Villains, 2021.
41 J.P. Morgan, Deutsche Bank, ADO Properties S.A. Prospectus, 2019.
42 J.P. Morgan, Deutsche Bank, ADO Properties S.A. Prospectus, 2019.
43Viceroy Research, Adler Group – Bond Villains, 2021.
On December 15, 2019, five days after flipping ADO Properties’ board, the company announced its intention to make a voluntary public takeover offer for all shares of Adler Real Estate in the form of an exchange offer and, by entering into a business combination agreement, to combine the business of Adler Real Estate with the business of the ADO Properties. In this reverse-takeover agreement, ADO Properties offered 0.4164 offer shares for every share of Adler Real Estate, representing an implied premium of 17.3% on Adler Real Estate’s closing price the day prior to the announcement of the transaction. The transaction was completed on March 25, 2020 to severe backlash by ADO Properties minority shareholders, with 91.93% of Adler Real Estate shareholders accepting the offer. In addition, ADO Properties announced its intention of a EUR 500m rights offering subsequent to the successful business combination, which was subsequently reduced to EUR 450m following a resolution of the board of directors to recommend to the shareholders of ADO Properties to not distribute any dividend for the 2019 fiscal year.44
In addition to ADO Properties’ takeover offer to Adler Real Estate shareholders, on December 15, 2019, the company simultaneously entered into various purchase price agreements with minority shareholders to acquire 22.18% of the shares of Consus Real Estate for EUR 294m, a 50% premium, which as a result of the successful completion of the business combination, increased to a shareholding of 25.75%. Furthermore, ADO Properties entered into a call/put-option agreement, where a change of control triggered a contract term that forced ADO Properties to buy 69,619,173 shares in Consus Group from Aggregate Holdings, a related party and Adler Real Estate’s largest shareholder. This call/put- option agreement was in essence a poison pill, designed to ensure that no one other than Adler Real Estate could merge with ADO Properties. The Consus Real Estate transaction is one of the prime examples of a looting transaction, designed to transfer assets from newly controlled ADO Group to related parties. The exact details of the transaction are described in chapter 4.2.45
After the completion of the reverse-triangular merger, ADO Properties renamed itself Adler Group. The described coup d’état transaction was designed to ensure that the previous shareholders of Adler Real Estate were in control of a better capitalized entity, which allowed the continuing of looting assets for the benefit of related parties. The following chapter focuses on the attempted coup d’état transaction of Conwert which was stopped by Austrian regulators, but precisely displays Adler Group’s way of operating.46
44Viceroy Research, Adler Group – Bond Villains, 2021.
45J.P. Morgan, Deutsche Bank, ADO Properties S.A. Prospectus, 2019.
46 Viceroy Research, Adler Group – Bond Villains, 2021.
4.1.2 Attempted Coup D’état Transaction at Conwert
The takeover attempt of Conwert Immobilien Invest SE (“Conwert”), an Austrian residential real estate developer with most of its portfolio in Germany, can be seen as the first high profile attempt of Adler Real Estate to execute a coup d’état transaction. The transaction ultimately failed after Austrian authorities intervened.47
The takeover attempt of Conwert by Adler Real Estate, is the subject of a detailed report, published by the Austrian Takeover Commission, which goes into details about the attempted takeover, as well as Cevdet Caner’s role of controlling Adler Real Estate, including his brokering of deals, transactions, structuring, attendance at meetings, suggestions of director appointments and setting of schedules, which was also part of the KPMG special investigation. The view of the Austrian Takeover Commission was that Adler Real Estate was effectively controlled by Cevdet Caner, despite his claims that he was only a consultant. The report also goes into detail about Cevdet Caner’s network of associates involved in the attempted Conwert transaction, some of which appear in later Adler Group transactions. A detailed introduction into Cevdet Caner and his inner circle was provided in chapter 3.48
Conwert was the target of a takeover bid by Adler Real Estate in 2015, during which time, Conwert management was in close contact with Cevdet Caner and Adler Real Estate’s management. The attempted coup d’état transaction was structured as follows. On May 3, 2015, Teddy Sagi purchased 24.79% of Conwert for an undisclosed price. The market price for the stake at the time was EUR 228m. On August 15, 2015, Teddy Sagi sold his stake to Adler Real Estate for EUR 285m.49
The Austrian Takeover Commission later established, that Cevdet Caner associates acted in concert with Adler Real Estate by purchasing innocuous amounts of Conwert stock in anticipation of a transaction. The report by the Austrian Takeover Commission on the situation also implies, that Adler Real Estate attempted to do to Conwert what it later did to ADO Properties, namely flip the board, enforce a reverse takeover and saddle the assets with debt. This can be seen in the following testimonies by members of the former Conwert management team. “Starting point of the discussion was the suggestion that Adler should have two out of five seats in the administrative mode of Conwert and should also provide the chairman.”50
Furthermore, the “possibility of a reverse-takeover was discussed.”51 The Austrian Takeover Commission report also describes how apparently unrelated entities quietly purchased enough shares to collectively own a majority of the better capitalized Conwert and should have acted as one to push through an reverse takeover offer for Adler Real Estate. The acquisition of Conwert ironically ultimately failed due to discrepancies in the valuation of Adler Real Estate’s assets, which Conwert considered to be valued too high. The valuation flaws of Adler Group’s properties is discussed in chapter 5. In addition, Conwert feared that if it was fully consolidated by Adler Real Estate, the investment grade rating of Conwert could be lost. After the transaction failed, Adler Real Estate sold its Conwert stake to competitor Vonovia in September 2019 for 74 Vonovia shares per 149 Conwert shares. Vonovia later launched a successful takeover offer for Conwert, andsqueezed out the remaining shareholders in order to take the company private and integrate it into the parent.52
47Viceroy Research, Adler Group – Bond Villains, 2021.
48Austrian Takeover Commission, Report, 2016.
49 Viceroy Research, Adler Group – Bond Villains, 2021.
50 Austrian Takeover Commission, Report, 2016.
51 Austrian Takeover Commission, Report, 2016.
On November 30, 2016, the Austrian Takeover Commission ruled that Adler Real Estate and other related parties had acted in concert with respect to Conwert and had wrongly failed to make a mandatory takeover offer to the remaining shareholders of Conwert. After an appeal, the ruling by the commission was upheld by the Austrian supreme court, but ultimately ruled against by the European supreme court of justice. It is well possible, that this regulatory scrutiny is what motivated Cevdet Caner to shield his involvement more carefully with Adler Group in future endeavors. The following chapter discusses looting transactions, which are mostly conducted after a successful coup d’état transaction.53
52Viceroy Research, The Whistleblower vs. The Lawyer, 2021.
53Viceroy Research, The Whistleblower vs. The Lawyer, 2021.
4.2 Looting Transactions
After a coup d’état transaction has taken place successfully, the newly acquired company’s asset are usually stripped and transferred out of Adler Group by looting transactions with related parties. The biggest looting transaction in Adler Group’s history is Consus Real Estate, which was briefly mentioned as part of the coup d’état transaction with ADO Properties. Besides the forced acquisition of Consus Real Estate by ADO Properties, which constitutes looting of ADO Properties, also Consus Real Estate itself was thoroughly looted prior to the acquisition. The looting of Consus Real Estate can therefore be split into a period before the ADO Properties takeover, and into a period after the ADO Properties takeover. The following chapter goes into detail about the looting before the ADO Properties takeover.54
4.2.1 Looting at Consus Real Estate
In order to understand the looting of Consus Real Estate before the takeover by ADO Properties, one must understand Consus Real Estate’s history. Consus Real Estate was formed when a shell company acquired a 59% stake in CG Gruppe from Aggregate Holdings, a related party and then largest shareholder of Adler Real Estate, and CG Gruppe founder Christoph Gröner, for EUR 872m in 2017. Of the EUR 872m purchase price, EUR 12.5m was paid in cash, and the remainder was paid in Consus Real Estate shares. Aggregate Holdings had acquired its 50% stake in Consus Real Estate for less than EUR 49m less than a year prior. The KPMG Forensic investigation questions the high purchasing price paid by Consus Real Estate for the CG Gruppe stake, stating “Consus Real Estate AG thus acquired the 50% stake in CG Gruppe AG for a consideration that implied a premium of more than 60% over the finalized valuation of [Berater1]. No explanation or documentation for this premium was provided to KPMG in the special investigation.”55 The purchase price for the Consus Real Estate stake, which is more than 17 fold the price paid by Aggregate Holdings for the same asset a year prior, created a false balance sheet and false equity, from which all other Consus Real Estate looting derives. This is also reflected in the EUR 698m in goodwill recorded on the Consus Real Estate balance sheet after the transaction. As Consus Real Estate had no material assets prior to the acquisitions of CG Gruppe and later SSN Group, it is hereby evident, that essentially assets that were acquired for EUR 49m became Consus Real Estate.56
In addition to creating a balance sheet with inflated asset valuations, Consus Real Estate issued considerable bearer bonds and shares, and convertible debt, both before and after its IPO. Issuing bearer bonds is incredibly unusual in today’s world, as no records are kept of the owner of the bonds and no serious financial institution would accept such bonds of a private company.57
This is because the owner of the bonds is not registered, and whoever physically holds the paper on which the bond is issued is the presumptive owner of the instrument.58 One of these bearer bond was issued on November 8, 2017, where Consus Real Estate issued EUR 150m notes payable to the bearer and ranking pari passu among themselves, at an interest rate of 4.75% p.a. to be redeemed in November 8, 2024. What is interesting with this bearer bond issues is that due to the long maturity of the bond, this debt has since become debt of Adler Group. It is not clear to this day, who the owners of these bonds are.
54 Viceroy Research, Adler Group – Bond Villains, 2021.
55 KPMG Forensic, Report About the Special Investigation at the Adler Group S.A., 2022.56 Viceroy Research, Adler Group – Bond Villains, 2021.
57 Viceroy Research, Adler Group – Bond Villains, 2021.
58 58 Bharathan, The Special Bearer Bonds Scheme, 1980.
4.2.2 Looting at ADO Propertie
Once Adler Real Estate got control of ADO Properties through changing part of the board at the EGM at December 10, 2019, it immediately set about looting it. The main looting was done through purchasing a controlling stake in Consus Real Estate from Aggregate Holdings, a related party and Adler Real Estate’s largest shareholder. In parallel to ADO Properties’ takeover offer to Adler Real Estate shareholders, on December 15, 2019, the company also entered into various purchase price agreements with minority shareholders to acquire 22.18% of the shares of Consus Real Estate for EUR 294m, a 50% premium, which as a result of the successful completion of the business combination, increased to a shareholding of 25.75%. These undisclosed “certain minority shareholders” were the only people who received cash for Consus Real Estate shares. It is unclear, whether these minority shareholders were associated with Aggregate Holdings or Cevdet Caner’s inner circle.60
4.2.3 Looting under the Safety of a Poison Pill
On December 15, 2019, simultaneously to announcing the acquisition of 22.18% of Consus shares from minority shareholders, ADO Properties also entered into a call/put-option agreement, where a change of control triggered a contract term that forced ADO Properties to buy 69,619,173 shares in Consus Real Estate from Aggregate Holdings.61 This call/put-option agreement was in essence a poison pill, designed to ensure that no one other than Adler Real Estate could merge with ADO Properties. In this call/put-option agreement, Aggregate Holdings agreed to sell its controlling stake of Consus Real Estate (69,619,173 shares, a 50.97% stake) for ADO Properties shares at a rate of 0.239 ADO Properties shares per Consus Real Estate shares via a call option issued by ADO Properties. In return, Aggregate Holdings was granted a put option whereby ADO Properties would have to acquire Aggregate Holdings’ Consus Real Estate shares (69,619,173 shares, a 50.97% stake) upon the occurrent of a change of control at ADO Properties, for a consideration of EUR 8.35 in cash, or 0.239 newly issued ADO Properties shares. This put option prevented anyone other than Adler Real Estate to get control of ADO Properties, as any prospective buyer would also have to buy Consus Real Estate at a massively inflated value and more that EUR 698m in goodwill.62
As soon as the poison pill was in place, and it was obvious that ADO Properties would trigger its put option to buy Aggregate Holdings’ Consus Real Estate shares through an exchange offer and conduct a voluntary tender offer to the remaining shares of Consus Real Estate, insiders began to systematically loot Consus Real Estate of remaining value prior to the consolidation with ADO Properties. This is the reason why not only the forced takeover of Consus Real Estate constitute looting of ADO Properties, but Consus Real Estate itself was thoroughly looted prior to its acquisition by ADO Properties. 63
59 J.P. Morgan, Deutsche Bank, ADO Properties S.A. Prospectus, 2019.
60 Viceroy Research, Adler Group – Bond Villains, 2021.
61 Viceroy Research, Adler Group – Bond Villains, 2021.
62 J.P. Morgan, Deutsche Bank, ADO Properties S.A. Prospectus, 2019.
This looting was conducted as followed. On May 8, 2020, Consus Real Estate, under the safety of its poison pill, announced the sale of 17 development projects for an unnamed amount to Consus Real Estate board member and former CG Gruppe CEO Christoph Gröner, as well as the acquisition of Christoph Gröners remaining 25% stake in CG Gruppe. Christoph Gröner did not pay the purchase price for the development projects in cash, but instead, Consus Real Estate recognized a purchase price receivable under trade and other receivables of EUR 339.7m for the development projects. Christoph Gröner states in his website, that “At the same time, we agreed within the shareholder group that I would sell the minority shares held by me to the majority shareholder and would take over 17 project developments with my new company Gröner Group GmbH as economic consideration. This transaction took place in November 2020 on the basis of a valuation prepared by me, which was approximately 50% of the valuation published by the majority shareholders.”64
This statement implicates that the purchase price for the 17 development projects was never intended to be paid, but that the development projects were rather given away in exchange for Christoph Gröner’s remaining 25% stake in CG Gruppe. The reason why Consus nevertheless recognized a purchase price receivable of EUR 339.7m on its balance sheet for the sale, was probably to inflate its balance sheet with unrecoverable receivables. This theory is also underlined by the KPMG Forensic report, which implies that the properties sold to Christoph Gröner were somewhat of a buyout for his remaining 25% in CG Gruppe, which would lead to his exit (nicknamed “Grexit”) of the company. In addition to the 17 development projects transferred to him, Christoph Gröner also received EUR 27.5m in cash and 24.75m Consus Real Estate for his 25% stake in CG Gruppe on July 9, 2020. Prior to the transaction, it was also announced, that Christoph Gröner had resigned from the supervisory board of Consus Real Estate and as CEO of CG Gruppe, which meant that he no longer qualified as a related party. In an extract from Adler Group’s Q2 2021 presentation, an outstanding amount of EUR 84m is still outstanding from the sale of the 17 development projects.65
Besides the sale of the 17 development properties to Christoph Gröner, Consus Real Estate was also looted after the installment of the poison pill, by selling 8 development projects to Partners Immobilien Capital Management (“Partners Immobilien”) for EUR 220m, on May 6, 2020. Six of the eight development projects were part of the top 25 projects claimed by Consus Real Estate in a previous press release. Similarly to the sale of the 17 development projects to Christoph Gröner, the 8 properties were given away for negligible upfront cash consideration.66
This can be seen in Adler Group’s Q2 2021 presentation, which shows that there is an amount of EUR 189m outstanding from the sale of 7 development projects sold to Partners Immobilien.67
According to the KPMG Forensic report, out of the EUR 313m purchase price, only EUR 122.8 had been paid, financed primarily through loans from unnamed parties. The KPMG Forensic report also states, that the allegations that the real estate portfolio was sold on unfavorable terms cannot be refuted on the basis of the documents submitted and the supplementary information provided in this regard. The report also confirmed, that the transfer of the ownership of the 8 development project companies, took place irrespective of the purchase price paid in full and without collateral for the purchase price payments. The KPMG Forensic report also confirms, that as of June 30, 2021 the purchase price has not yet been paid in full.68
63 Viceroy Research, Adler Group – Bond Villains, 2021.
64 CG Gruppe, Website, 2022.
65 Viceroy Research, Adler – KPMG Investigation Review, 2022.
66 Viceroy Research, Adler – KPMG Investigation Review, 2022.
67 Viceroy Research, Adler Group – Bond Villains, 2021.
In addition to these findings, KPMG Forensic also found that Partners Immobilien mortgaged properties purchased from Consus Real Estate despite never having paid for the properties. This is evident because Consus Real Estate reacquired one of the 8 properties at the end of 2021, resulting in Adler Group paying EUR 43m to Corestate, a company where Aggregate Holdings was the largest shareholder at the time, to settle existing debts and shareholder loans.69 From this situation it is evident that Adler Group transferred full titles of properties to Partners Immobilien without collecting payment or taking any collateral.70 In addition, according to the KPMG Forensic report, no due diligence was done on the transaction. While investigating the details of t his transaction, KPMG Forensic also found out, that not only Natig Ganjiev was the owner of Partners Immobilien, but that Josef Schrattbauer and Gunther Walcher were also associated with the company, with Josef Schrattbauer holding an interest in Partners Immobilien.71
In Adler Group’s Q1 2022 report, the company states that the transaction of the remaining 7 development properties sold to Partners Immobilien was reversed, because the company was still owing Adler Group money for a EUR 313m deal conducted in May 2020. It is well possible that Partners Immobilien, similarly to the development project transaction that was reversed earlier, had settled assets with debt, which Adler Group now has to repay.72
Because of the two looting transactions described above, which were conducted under the safety of the poison pill, assets comprising 33% of Consus Real Estate’s gross development value (GDV) were transferred out of the company. After this looting was finalized, ADO Properties acquired Consus Real Estate at the price according to the call/put-option agreement which was agreed upon before Consus Real Estate was looted. According to KPMG Forensic, little or no due diligence was completed in respect to the acquisition of Consus Real Estate. After Consus Real Estate was acquired by ADO Properties, the credit rating of ADO Properties, substantially dropped to Baa3 and then later to Ba1 (junk) and Ba2. After the completion of the Consus Real Estate acquisition, ADO Properties was renamed to Adler Group. The following chapter describes marking transactions which are closely connected to the looting transactions73
68 KPMG Forensic, Report About the Special Investigation at the Adler Group S.A., 2022.
69 Bloomberg News, Corestate Slashes Earnings, Lowers Asset Values After Audit, 2022.
70 Viceroy Research, Adler – KPMG Investigation Review, 2022.71 KPMG Forensic, Report About the Special Investigation at the Adler Group S.A., 2022.
72 Viceroy Research, Adler – KPMG Investigation Review, 2022.
73 Viceroy Research, Adler Group – Bond Villains, 2021.
4.3 Marking Transactions
After premium assets were stripped from a company in looting transactions, the holes in the balance sheet are filled through conducting marking transactions. These marking transactions are conducted in order to markup Adler Group’s assets and inflate its balance sheet in order to mask a default event of its bonds. The following chapter goes into detail about the Gerresheim transaction, Adler Group’s largest marking transaction.74
4.3.1 Marking Transaction at Gerresheim Property
Adler Group’s most prominent marking transaction is the sale and reversal of the Gerresheim property. The Gerresheim property is a development project on the site of a defunct glass factory in Düsseldorf, Germany, which was decommissioned in 2005 and is still substantially untouched today. After selling the site to property developers, the development project was expected to be completed in 2015. Brack Capital Properties, at the time not owned by Adler Group, purchased the Gerresheim Property in December 2017 from listed developer Patrizia AG (“Patrizia”) for EUR 142m. On September 22, 2019, after becoming a subsidiary of Adler Real Estate, Brack Capital Properties entered into a sale and purchase agreement, pursuant to which it sold its 75% interest in special purpose vehicle (SPA), Glasmacherviertel GmbH & Co. KG (“Glasmacherviertel”) to an undisclosed related party for a implied valuation of EUR 375m, payable in four installments. Israeli regulators later forced the disclosure of the undisclosed related party, which was identified as Spree Erste Beteilingungs GmbH (“Spree”), a company owned by Josef Schrattbauer.75
This finding was also confirmed by the KPMG Forensic report which additionally included, that Josef Schrattbauer held an indirect interest in Adler Real Estate at the time through Mezzanine IX Investors. The KPMG Forensic report also found that a member of the supervisory board of Adler Real Estate agreed on the sale on the specific condition that the Gerresheim property was not be sold to Spree, implying that he was aware of both Cevdet Caner’s influence and his connection to Josef Schrattbauer. The reason for the marking transaction of the Gerresheim property was to carry Adler Real Estate over the line to acquire ADO Properties, as the sale of the Gerresheim property at a certain valuation was one of the conditions for the closing of the merger.76
After the sale, the SPA carried debt equaling EUR 90m, resulting in an equity value of EUR 285m and EUR 214m (75%) in consideration should have been received. This resulted in a net fair value gain of EUR 233m on Brack Capital Properties’ and hence Adler Group’s books. In December 26, 2019, Brack Capital Properties singed an amendment to the Gerresheim deal, whereby the Gerresheim SPV took out a EUR 132m (now accrued to EUR 145m) loan against the property. This loan was guaranteed by Adler Real Estate, even though the property was substantially owned by Josef Schrattbauer. This new loan was partially used to refinance the EUR 90m existing mortgage and the remainder was paid to Adler Real Estate as part of the first installment of the sale proceeds, in essence to pay the down payment.77
74 Viceroy Research, Adler Group – Bond Villains, 2021.
75 Viceroy Research, Adler Group – Bond Villains, 2021.
76 Viceroy Research, Adler – KPMG Investigation Review, 2022.
77 Viceroy Research, Adler Group – Bond Villains, 2021.
Brack Capital Properties later announced that it had transferred the 75% ownership of the Gerresheim SPV to Josef Schrattbauer who at the time had only paid a consideration of EUR 36m. This was done despite the consideration not being paid in full and without taking adequate collateral. In addition to the EUR 132m loan taken out previously, the SPV took out a further EUR 75m loan from Adler Real Estate which also remains unpaid. Looking at the numbers, it seems likely, that this additional EUR 75m loan was used to pay the installments on the purchase price of the SPV and it is likely, that Adler Real Estate received no net money on the sale of the Gerresheim property. It can therefore be said that Josef Schrattbauer in essence got a free option on the Gerresheim property by paying a deposit of less than 10% to Adler Real Estate based on no equity invested, as he financed the option payment through a loan that was secured against the property. If permitting was unsuccessful, he could cancel the deal and leave Adler Real Estate with an undeveloped lot.78
As of 2020 there is a total of EUR 249m in liabilities on the SPV (EUR 145m mortgage from unnamed lender, EUR 75m loan to SPV from Adler Group, EUR 29m of other undisclosed liabilities). Given the SPV operating loss in 2020 was only EUR 1.1m and the idle asset could accumulate no Capex, it is very hard to see where or why the SPV accumulated the additional liabilities and retained so little cash. According to the management, there is currently substantially no cash left in the SPV.79
In Q2 2021 the sale of the Gerresheim project was reversed due to continued planning delays. At the time, out of the EUR 214mio purchase price due, EUR 134.5m remained booked as receivables. Currently the projects development proposal is on hold. Adler Group will receive back its asset with more debt attached which is a unjustified markup. The cash loaned to the SPV has also largely disappeared. Because of this, there is insufficient cash in the SPV to pay back the mortgage taken out against the property. It can therefore be assumed that cash has been taken out of the SPV, which is essentially a looting transaction as described in chapter 4.2. Josef Schrattbauer also appears to have never had much capital at risk. This was also confirmed by Adler Group Co-CEO Beaudemoulin, after the reversion of the transaction, who stated that Josef Schrattbauer would be getting out of the deal effectively for free and that Adler Group would be taking back the debt attached to the Gerresheim property.80
Despite the transaction having been reversed, the markup on Adler Group’s balance sheet has not been reversed. The Gerresheim transaction, displays Adler Group’s method of mismarking its books. Looking back at the transaction, it can be assumed, that the consideration was never meant to be paid in full. The sale created fake paper profits on Brack Capital Properties’ and hence Adler Group’s balance sheet, which allowed it to borrow more money and disguised a bond default due to a breach in the company’s loan to value (LTV) ratio.81
The KPMG Forensic report, also found that the transaction of the Gerresheim property, was conducted with insufficient due diligence by either party. It also states that no documentation was provide to the purchaser in order to conduct proper due diligence. Josef Schrattbauer therefore purchased the Gerresheim property without having conducted any due diligence82
KPMG Forensic also doubts the valuation at which the Gerresheim development project was sold to Josef Schrattbauer, stating that it was too high. KPMG Forensic’s ballpark valuation puts the property’s value at EUR 180m in June 2019.83 This view is also shared by German regulator BaFin, who conducted an investigation, and estimated the value of the Gerresheim property at the time at EUR 142m, ordering Adler Group to make an impairment on the current value of the asset on its balance sheet.84
The KPMG Forensic report also found that the Gerresheim transaction saved Adler Real Estate from surpassing the 60% LTV ratio as stated in the company’s bond covenants, saying that “Based on the info obtained in the special investigation, it is doubtful in the overall assessment of the transaction process whether the valuation of EUR 375m underlying the transaction represents a fair value according to IFRS 13 in the same amount.”85 Instead, in KPMG’s view, “there is no sufficient evidence that the fair value significantly exceeds the value of EUR 205m recognized as of June 30 2019. The income resulting from the transaction and the balance sheet reclassification to “Investment held for sale” in accordance to IFRS 5 thus also led to a significant, and in KPMG’s view inappropriate, relief of the LTV as of September 30, 2019. Accordingly, the LTV threshold of 60% stipulated in the bond terms and conditions would have been exceeded as of September 30, 2019 if the LTV calculation scheme derived by KPMG had been used and the balance sheet assets of Adler Real Estate had been (simultaneously) reduced by the assets attributed to the Gerresheim transaction.”86
Overall, the Gerresheim sale and reversal is the prime example for a marking transaction conducted by Adler Group. The property was sold at an inflated price, with minimal down payment and was never intended to be settled in full. The main goal of this transaction was to artificially markup Adler Group’s assets in order to disguise a bond default. The following chapter focuses on the valuation of Adler Group’s real estate assets and their implication on the loan to value ratio (LTV)
78 Viceroy Research, The Whistleblower vs. The Lawyer, 2021.
79 Viceroy Research, Adler Group – Bond Villains, 2021.
80 Viceroy Research, Adler Group – Bond Villains, 2021.
81 Viceroy Research, Adler Group – Bond Villains, 2021.
82 KPMG Forensic, Report About the Special Investigation at the Adler Group S.A., 2022.
5 Valuation of Real Estate Assets
In contrast to companies in other industries where the book value of the company’s assets is not as relevant and often artificially kept low, real estate companies rely on a high book value of their assets. This is among others due to the loan to value (LTV) ratio in the covenants of most real estate bonds. The loan to value ratio calculates the amount of debt that is held in relation to a company’s assets. Marking real estate assets at a higher price, therefore allows to reduce the LTV ratio, making the company appear to be more conservatively financed, hence reducing the cost of capital. In addition, it also allows the company to use the increased value of the property to take on further debt and expand its operation. 87
The usual assumption held by investors in property bonds is that even where there cashflow or solvency issues, the companies assets are tangible and due to the LTV ratio in the bonds covenants being significantly below 100%, usually 60%, even in a worst case scenario, recovery from liquidating the real estate portfolio will largely cover any losses.88
The major reason, why the debate about the book value of Adler Group’s assets is so important, is because the bonds that are issued by Adler Group and Adler Real Estate have certain covenants that need to be met, among others they demand a LTV ratio below 60%. If the LTV ratio goes beyond the 60% that the covenants demand, this constitutes a default event under the bond terms, which in turn means the bonds become immediately due and payable. Adler Group has insufficient liquidity to repay its bonds in such a default scenario, because it has most of its capital tied up in real estate which cannot be liquidated or pledged immediately, or if so, only at a significant discount to book value. This in turn would again lead to an under coverage of the bonds, and would result in an immediate insolvency of the company.89
Due to Adler Group’s looting-, and marking transactions with undisclosed related parties, it can also be argued that Adler Group’s assets are artificially inflated, and therefore Adler Group’s true leverage is concealed and masks a default event. In order to dive deeper into the valuation of Adler Group’s property, it is necessary to differentiate between the company’s residential property portfolio and its development portfolio. The following chapter will cover Adler Group’s valuation of its residential real estate portfolio.90
83 KPMG Forensic, Report About the Special Investigation at the Adler Group S.A., 2022.
84 Neue Zürcher Zeitung, Skandal um Immobilienkonzern: Deutsche Finanzaufsicht wirft der Adler Group massiven Bilanzierungsfehler vor, 2022.
85 KPMG Forensic, Report About the Special Investigation at the Adler Group S.A., 2022.
86 KPMG Forensic, Report About the Special Investigation at the Adler Group S.A., 2022.
5.1 Residential Property
In order to understand the valuation flaws of Adler Group’s residential property portfolio, one needs to understand the way it is valued. Adler Group’s residential real estate portfolio is valued on a discounted cash flow (DCF) basis via a desktop valuation, where appraisers do not visit the properties but instead conduct their valuation purely remotely. Using a DCF approach, means that besides the rental growth assumptions and the connected prediction of the future cashflows received through rent, also the capitalization rates (cap rates) of its portfolio are vital assumptions which dramatically affect the residual value of the portfolio and hence the outcome of the property’s value on Adler Group’s balance sheet.91
87 Xun Bian, House Price, Loan-To-Value Ratio and Credit Risk, 2018.
88 Viceroy Research, Adler Group – Bond Villains, 2021.
89 Viceroy Research, Adler Group – Bond Villains, 2021.
90 Viceroy Research, Adler Group – Bond Villains, 2021.
In Adler Group’s case, the company applies capitalization rates to its portfolio, which lie around 100 basis points below those of its competitors, despite Adler Group owning an inferior portfolio, focused on B and C properties. The capitalization rate is calculated by dividing the rental income of the property by its market value. These low capitalization rates lead to lower discount factors and hence inflated values of their residential property portfolios. Adler Group’s capitalization rate across its entire portfolio is comparable with that of competitor portfolios that only hold properties in high end district in Berlin, which is incompatible with Adler Group’s strategy of owning B and C properties in cities across Germany. Adler Group’s comparatively low capitalization rates can also be seen when looking at the rental income of its properties. Adler Group’s residential portfolio commands some of the lowest rent per square meter, significantly lower than the baseline average rent against its peers in all major cities. Dependent on the location, Adler Group’s rent ranges between 17% and up to 38% below those of its competitors. In order to adequately value Adler Group’s residential property portfolio, the company should therefore use capitalization rates similar to other competitors with similar portfolios which offer low cost housing such as LEG, TAG and Grand City Properties.92
Another flawed component in Adler Group’s DCF valuation of its residential real estate portfolio is its assumed growth rate. Adler Group assumes rent growth which is about three to five time as high as those of its competitors with similar portfolios. Adler Group assumes these higher growth rates by comparing the rents it charges to those of the CBRE rent average. This is a flawed argumentation, because it implies that because Adler Group charges below average rents in comparison to its peers, it can use a higher expected growth rate than its peers in order to catch up. The assumption that Adler Group’s rent can catch up to that of its peers is however flawed, as Adler Group owns properties in B and C locations which produce less rental income than the average of its competitors which also own properties in prime locations. Therefore it can be said, that Adler Group values its portfolio as if it would be able to catch up to the portfolio of peers with portfolios in better locations, without acknowledging that its portfolio is fundamentally inferior to that of its competitors.93
Another question to think about, is whether a DCF valuation is the correct method of valuation of Adler Group’s residential real estate portfolio. In order to value the portfolio on a DCF basis, one must assume, that Adler Group has the intention of investing and holding on to its property in the long run with the intention to generate income by renting out the property. This assumption might be appropriate for some of Adler Group’s competitors, however the vast amount of divestments of Adler Group’s property in the recent past, suggests that a valuation based on market values might be more appropriate.94 The fact that the market value of Adler Group’s properties is below its DCF valuation as stated in its books is evident in its most recent transactions. For example, Adler Group sold its Waypoint portfolio, a portfolio of residential real estate assets on June 30, 2022 for a discount of 2% to its book value. In addition, it also sold 15,400 apartment units and 185 commercial property units to LEG on October 11, 2021 for a discount to its book value.95
91 Viceroy Research, Adler Group – Bond Villains, 2021.
92 Viceroy Research, Adler Group – Bond Villains, 2021.
93 Viceroy Research, Adler Group – Bond Villains, 2021.
Despite this, the KPMG Forensic report states that they believe that a DCF method is an appropriate method of valuing Adler Group’s residential properties, because “Adler states that it holds the properties for the purpose of generating income.”96 Adler Group’s most recent developments however disproves this statement. Besides the recent sales conducted, Adler Group on September 8, 2022 also announced that it wants the approval of shareholders of its listed subsidiary Adler Real Estate to divest all of the company’s 23’475 properties. This means that at least for 22’301 of these properties, the assumption that they are held for generating income is false and that they must therefore be valued at market values instead of DCF values, which should result in lower valuations of the properties, as can be seen with the most recent divestments which were sold below the values as reported in Adler Group’s balance sheet. The next chapter describes the valuation methods used in Adler Group’s development property portfolio97
5.2 Development Property
In order to understand the valuation flaws in Adler Group’s development properties portfolio, one needs to understand the valuation method and the assumption that go with it. Adler Group’s development pipeline, is according to its financial statement, booked on the residual value method. “For investment properties under construction (project development), which will be held in the long term to generate gross rental income and capital appreciation after completion, the residual value method is applied.”98
This method is common for valuing unfinished development projects in the real estate industry. The residual value method is commonly used to calculate the value of incomplete projects. In a first step, the discounted residual value of the development after completion is calculated. In a second step, the initial cost of the property, the cost to develop the project and the cost to sell the project are subtracted. These costs of completing the project are also discounted to the present. The net of the values derived from step one and step two is the residual value placed on the balance sheet. It therefore assumes future values upfront and places them on the balance sheet.99
The discounted residual value of the development after completion, as described in step one, is calculated via a DCF valuation. This DCF valuation in Adler Group’s development project pipeline is therefore subject to the same flaws as the DCF valuation in its residential real estate portfolio, as it uses the same, assumptions. The fact that the cost to develop and sell the project, as described in step two, is also discounted at a lower rate, and hence results in a higher present value being subtracted does not offset the high valuation of the discounted value after completion. This is because, as usually with DCF models, the largest part of the property value is based on the terminal value of the project which is more sensitive to the low capitalization rate used.100
94 Viceroy Research, Adler Group – Bond Villains, 2021.
95 Finanzen.net, Adler Group S.A. sells stake in portfolio in Berlin, 2022.
96 KPMG Forensic, Report About the Special Investigation at the Adler Group S.A., 2022.
97 Adler Group, Ad-hoc News Nr.2, 2021.
98 Adler Group, 2020 Financial Report, 2020.
99 Viceroy Research, Adler Group – Bond Villains, 2021.
Besides the same valuation flaws in the DCF valuation of the development project portfolio, as in that of the DCF valuation of the residential real estate portfolio, there are a number of other flaws that impact the outcome of the valuation. This is because the residual value method relies on a number of assumptions.101
The first flawed assumption is the following. The valuation via residual value method assumes that the projects can be completed at estimated cost. The currently high construction costs in Germany, due to high input costs for contractors, lead to this assumption being wrong. This is also highlighted in the KPMG Forensic report. KPMG states that, “Actual construction costs differ significantly between the documents provided to KPMG and cannot be reconciled.”102. In addition, KPMG Forensic states that, “For project developments whose implementation is carried out by the general contractor from the Adler Group, no detailed planning of the construction and ancillary construction cost is available. A detailed plausibility check of the construction and ancillary construction costs was therefore not possible for KPMG.”103 Due to Adler Group’s reported low construction costs in comparison to German industry averages, which upon request could not be explained by the company, KPMG disclaimed its valuation of Adler Group’s development portfolio stating that “Due to unauditable documentation of actual cost as of June 30, 2021, a final assessment of outstanding project costs is not possible.”104
The second flawed assumption in Adler Group’s residual value method is that the development projects can be finished on time. If development projects are not finished on time, future cashflows from rental income are pushed into the future, resulting in a significantly lower discounted residual value of the development project and hence a lower valuation in Adler Group’s books. In Adler Group’s case, a large amount of projects have not been completed, or are planned to be completed way after time.105 In additionally, almost all of Adler Group’s development sites have halted construction due to disputes with contractors, and have failed to maintain basic administrative activities. This is also confirmed by the KPMG Forensic report, which states that, “For the majority of projects, a construction stop was in place as of June 30, 2021. In principle this results in an extension of the construction period compared with the original Consus planning.”106 None of the delays and contract disputes have been accompanies by Adler Group revising residual values on its balance sheet. The third flawed assumption in Adler Group’s residual value method is that the company assumes project completion of its development project pipeline despite its inability to finance and complete these projects. Adler Group is thinly capitalized and is likely not to receive further funding from banks and lenders, therefore relying on divesting parts of its portfolio in order to ensure it has enough liquidity to resume construction. This is not a long term financing strategy. The fact that Adler Group likely neither has the capital nor the cash required to complete their project is also evident in the fact,that Adler Group has outstanding invoices from numerous contractors dating as far back as to 2019.107
100 Viceroy Research, Adler Group – Bond Villains, 2021.
101 Viceroy Research, Adler Group – Bond Villains, 2021.
102 KPMG Forensic, Report About the Special Investigation at the Adler Group S.A., 2022.
103 KPMG Forensic, Report About the Special Investigation at the Adler Group S.A., 2022.
104 KPMG Forensic, Report About the Special Investigation at the Adler Group S.A., 2022.
105 Viceroy Research, Adler – KPMG Investigation Review, 2022.
106 KPMG Forensic, Report About the Special Investigation at the Adler Group S.A., 2022.
According to Wirtschafts Woche only taking Consus Real Estate into account, Adler Group has almost 5000 receipts from the suppliers of its development projects, totaling EUR 80m outstanding for one year or more.108 This does not appear to be reflected in Adler Group’s annual financial reports. Not being able to complete certain development projects is especially problematic, if these development projects have been forward sold and are subject to claw backs, possibly amounting to hundreds of millions of Euros. Recently, there have been numerous instances of cash receipts being reversed and deposits being reimbursed. A further escalation of this would place a further financial burden on Adler Group and enhance its inability to finance the completion of its development projects.109
The fact that Adler Group is currently not able to receive funding from banks or other lenders is also apparent at its subsidiary Brack Capital Properties. Following the question of an Analyst at a conference call, earlier this year on why Brack Capital Properties required Adler Group, as a shareholder of Brack Capital Properties, to put a credit facility in place in order to fulfill liquidity needs and whether it was not possible to get a third party lender or bank to put that facility in place, CEO Stefan Kirsten answered that currently it is “not the best business relation to be associated with Adler in the Banking and Financial facility area”110, showing Adler Group’s difficulty to receive funding from third parties. In addition, also the KPMG Forensic report came to the conclusion that, “The allegations that Adler does not have the financial resources to implement the project developments cannot be refuted”111 showing that residual value at some of the projects might never be achieved. In addition, KPMG Forensic stated, that “it is not possible to conclusively assess the financial performance of the Adler Group and possible influenced of the liquidity situation on, among other things, the realization periods of the project developments under consideration.”112
The KPMG Forensic report also states, that “The allegations that the fair values derived by [externer Bewerter1] using the residual value method are not appropriate cannot be refuted on the basis of the documents submitted, the additional information provided in this regard and the indicative valuation carried out by KPMG.”113 Therefore, “The approach of [externer Bewerter 1] in implementing the residual value method cannot be understood on the basis of the documents provided. Against this background, KPMG has carried out its own indicative market value calculation for a sample of the basis of the residual value method and compared its valuation results with the market values of [externer Bewerter 1] as of the reporting date June 30 2021.”114
Given this, KPMG derived its own valuation for the development property portfolio, with a value that it deems appropriate. “For the valuation sample which represents around 66% of Adler’s portfolio value for project developments, the market value determined by KPMG (1,934.0 million) is around 411.8 million or around 17% below the market value determined by [ externer Bewerter 1] (2,345.8 million).”115 The reason for this significantly lower valuation was that “For the majority of projects a
construction stop was in place as of June 30, 2021”116 and because “actual construction costs differ significantly between the documents provided to KPMG and cannot be reconciled. Despite repeated requests, Adler did not clarify the differences.”117 KPMG also infers some construction costs are non- recoverable.
107 Viceroy Research, Adler – KPMG Investigation Review, 2022.
108 Wirtschafts Woche, Bau im Schneckentempo: Diese Immobilienprojekte sind im Verzug, 2021.
109 Viceroy Research, Adler – KPMG Investigation Review, 2022.
110 Adler Group, Investor Relations – Corporate Governance Update Webcast 17.05.2022, 2022.
111 KPMG Forensic, Report About the Special Investigation at the Adler Group S.A., 2022.
112 KPMG Forensic, Report About the Special Investigation at the Adler Group S.A., 2022.
113 KPMG Forensic, Report About the Special Investigation at the Adler Group S.A., 2022.
114 KPMG Forensic, Report About the Special Investigation at the Adler Group S.A., 2022.
115 KPMG Forensic, Report About the Special Investigation at the Adler Group S.A., 2022.
Given this, it can be argued that Adler Group should either impair and revalue its development project portfolio in order to assess the fair value of its development projects, preferably by using fair market prices, instead of a flawed and inappropriate residual value method. This would presumably lead to Adler Group reporting a LTV ratio above 60%, resulting in a breach of their bond covenants and would therefore be in immediate default, as stated earlier. The exact implications of Adler Group’s valuation on its LTV ratio is discussed in the following chapter.118
5.3 Loan to Value Ratio (LTV)Closely connected to the valuation of Adler Group’s real estate assets is the loan to value (LTV) ratio, which was briefly touched upon in the previous chapters. The loan to value ratio calculates the amount of debt that is held in relation toa company’s assets. Therefore, if the assets are overvalued on Adler Group’s balance sheet, the LTV ratio is artificially kept low and masks a default event.119
In order to carry out the coup d’état transactions, as well as the looting that follows, it is necessary for Adler Group to saddle every asset with debt. This is limited by the LTV ratio, which is a key covenant in all of Adler Group’s and Adler Real Estate’s listed bonds. Other bond covenants include a 40% secured loan to cost ratio (LTC), a 1.8:1.0 interest coverage, and standard reporting requirements.120
Adler Group’s bond covenants dictate, that an event of default occurs if the company’s LTV ratio surpasses 60%. Because the LTV ratio in Adler Group’s bond covenants is not an IFRS measure and is therefore not audited, it can be manipulated to the benefit of the company. This loophole was used by Adler Group’s management, which has quietly redefined how they calculate the LTV ratio from Q4 2020 onwards. By redefining the calculation methodology, Adler Group insured that its LTV ratio was artificially placed below the 60% default event threshold.121
The main changes that Adler Group made in order to artificially reduce its LTV ratio, was to include different sorts of assets as cash-equivalents. For example, the total borrowings were offset by calculating contract assets, selected financial assets including purchase price receivables and loans to undisclosed related parties, and investments in associated companies even when the valuation of those investments resulted from marking transactions, against the total borrowings. Also, Adler Group counted properties held for sale under cash even though no contract was signed or transaction closed, which again artificially pushed the LTV ratio lower.122
116 KPMG Forensic, Report About the Special Investigation at the Adler Group S.A., 2022.
117 KPMG Forensic, Report About the Special Investigation at the Adler Group S.A., 2022.
118 Viceroy Research, Adler Group – Bond Villains, 2021.
119 Viceroy Research, Adler Group – Bond Villains, 2021.
120 Viceroy Research, Adler Group – Bond Villains, 2021.
121 Viceroy Research, Adler Group – Bond Villains, 2021.
122 Viceroy Research, Adler Group – Bond Villains, 2021.
This was also confirmed by the KPMG Forensic report which stated that the company’s LTV calculation is inconsistent with the prospectus requirements of its bonds. The report also states that if the value of the Gerresheim property was impaired by the amount that KPMG Forensic deems necessary, this would lead to the LTV ratio exceeding the 60% LTV threshold in all of Adler Real Estate’s bonds as of September 30, 2019. Even though, the impairment of the Gerresheim property would only trigger a default event at Adler Real Estate’s bonds, and not on Adler Group’s bonds, bonds in the amount of EUR 1.67b would immediately become due and payable resulting in a liquidity crisis at the entire company. The following chapter discusses the findings of the KPMG Forensic report.123
123 KPMG Forensic, Report About the Special Investigation at the Adler Group S.A., 2022.
6 KPMG Forensic Report Adler Group announced that it will hire KPMG Forensic to conduct a special investigation regarding the allegations of the Viceroy report. The findings of the special investigations were finally published on April 22, 2022. Adler Group portrayed the report as disproving Viceroy Research’s allegations due to the lack of KPMG Forensic’s findings, which is misleading giving Adler Group’s unwillingness to cooperate.124 One has to also note, that part of the KPMG Forensic report was blacked out by Adler Group, and that the report was published and deleted 3 times on the company’s website without disclosing the changes that were made to the report.125The lack of Adler Group’s cooperation is apparent in numerous sections of the report. First of all, Adler Group withheld about 800 000 documents to KPMG Forensic, claiming the documents fall u nder attorney client privilege and later stating that they withheld the documents as a measure to prevent disclosure in legal proceedings.126
Of the documents provided by KPMG Forensic, the first batch of 3 million emails was received on February 18, 2022, leaving them 2 months to complete their investigation. Due to the lack of time, KPMG Forensic restricted its investigation to review only the email accounts of three individuals. By March 25, 2022, out of 922k emails, KPMG Forensic was only able to review about 501k emails, out of which 51k were deemed as part of a “privilege log”, not made accessible to KPMG Forensic. Part of the withheld documents in the “privilege log”, included emails from Cevdet Caner to Adler Group’s management, which according to KPMG Forensic were significant to its investigations. Additionally, out of the documents received, KPMG Forensic was requested to delete and cease a total of 981 documents.127
KPMG Forensic also found out that several contracts for key transactions either did not exist or were spurious. Out of the contracts that were provided, there were several occasions where the documents were either undated or dated long after they should have been. Throughout the report, KPMG Forensic also points out that Adler Group ignored numerous requests for providing explanations and supplementary documents.128
Part of the 800k documents withheld by Adler Group, also contained all documents relating to transactions with Adler Real Estate. Additionally, bank account statements for an unnamed number of accounts was not made available to KPMG Forensic, including the original statements for the accounts used to pay Cevdet Caner and accounts relating to the Gerresheim transaction.129
Despite the limited information made available to KPMG Forensic, the investigation confirmed that Cevdet Caner pulls the strings behind Adler Group. According to the report, Cevdet Caner operates through Meridien Capital Management’s structures to interact with Adler Group and to organizemeetings with the board, dictate acquisitions, approve senior management remuneration and time the release of market sensible information.130
124 Bloomberg News, Adler Is Another Fine Mess for German Capital Markets, 2022.
125 Viceroy Research, Adler – KPMG Investigation Review, 2022.
126 KPMG Forensic, Report About the Special Investigation at the Adler Group S.A., 2022.
127 Viceroy Research, Adler – KPMG Investigation Review, 2022.
128 KPMG Forensic, Report About the Special Investigation at the Adler Group S.A., 2022.
129 KPMG Forensic, Report About the Special Investigation at the Adler Group S.A., 2022.
In addition, the report also found, that Cevdet Caner held various formal and informal consulting agreements with Adler Group and its subsidiaries. Cevdet Caner was among others paid fees for transactions, despite some consulting contracts being signed after the acquisition had taken place. During the time reviewed by KPMG Forensic, Cevdet Caner, Meridien Capital Management and Mezzanine IX Investors received tens of millions of euros in commissions and monthly payments. KPMG Forensic found no proof of performance for any of these payments.131
The report also stated that a mong the payments conducted to Cevdet Caner, there were several transactions that were made without proper invoice controls and among others the dates and currencies in the transaction documentations were wrong. Part of the payments to Cevdet Caner were also paid out in partial payments and to various uninvolved intermediaries such as his wife Gerda Caner. According to KPMG Forensic, this was after an attempted payment made directly to Cevdet Caner was blocked by a Turkish bank’s compliance office. Again, KPMG Forensic was also not provided with any proof of performance for these payments.132
In Addition, KPMG Forensic found out that little or no due diligence was completed in respect to various acquisitions that were driven by Cevdet Caner, including those of ADO Group and Consus Real Estate. The lack of due diligence also applies to transactions with undisclosed related parties, including the Gerresheim property.133
Regarding related parties, KPMG Forensic also confirmed that Aggregate Holding is a related party of Adler Group, and also found out that Adler Group holds an unnamed amount of Aggregate Holdings’ bonds, which were acquired without informing the market.134 Following the publication of the KPMG Forensic report, KPMG, who was also Adler Group’s auditor, decided to disclaim Adler Group’s 2021 annual financial statement. The implications of this disclaimer of opinion are discussed in the following chapter.
130 Viceroy Research, Adler – KPMG Investigation Review, 2022.
131 KPMG Forensic, Report About the Special Investigation at the Adler Group S.A., 2022.
132 Viceroy Research, Adler – KPMG Investigation Review, 2022.
133 KPMG Forensic, Report About the Special Investigation at the Adler Group S.A., 2022.
134 Bloomberg News, Adler Shareholder Aggregate Says Review Cleared It of Allegations, 2022.
135 Viceroy Research, Adler – KPMG Investigation Review, 2022.
7 Disclaimer of Opinion on 2021 Annual Financial Statement
Besides the 60% LTV threshold, also basic reporting requirements are part of Adler Group’s and Adler Real Estate’s bond covenants. Among others, the company is required to lodge audited financial reports, in accordance with IFRS, within 120 days of the financial year end. This opens the debate about the definition of an audited financial statement.136
On January 28, 2022, Adler Group announced that it was informed by its auditor, KPMG, that the annual financial report will not be published before March 31, 2022 due to the special investigation conducted by KPMG Forensic.137 This delay occurred because KPMG refused to give an opinion on the accounts of Adler Group.138 Adler Group had EUR 4.4b of bonds outstanding that required it to file audited reports by the end of April.139 On April 30, 2022 (a Saturday!), only 5 hours before the bonds would have defaulted and the company would have been removed from the SDAX, Adler Group published the annual financial report with a disclaimer of opinion by KPMG.140 At the same time, the entire board of directors from 2021 offered to resign.141 Adler Group’s management to this day insists that by publishing the annual financial report with a disclaimer of opinion, it fulfilled all the reporting obligations in the covenants of its bonds and continuously tells investors that its 2021 annual financial report has been audited.142 This contradicts a statement posted on KPMG’s website that said the lack of an audit opinion meant it was unable to complete the audit.143
There are a number of legal reasons, why issuing an annual financial report with a disclaimer of opinion is a violation of Adler Group’s bond covenants, resulting in the company technically triggering a default event on its issued bonds and likely its secured debt. The reason for this is that an audit report is not an audit. A disclaimer of opinion, within the framework of IFRS and ISA is specifically not an audit. According to IFRS and ISA, the auditor in the case of a disclaimer of opinion is required to remove from their report that the company has been audited and state only that they were engaged for an audit, which is what KPMG did. Additionally, according to ISA 705, a disclaimer of opinion is equivalent to an auditor’s resignation and is provided only where a resignation is not practicable. Another interesting fact is that according to IAS 705, KPMG was not required to disclaim the opinion on every page of the report, which is what they did, but instead could have limited their disclaimer to specific parts of the report. Given these reasons, Adler Group to this day has failed to publish an audited financial report for 2021 and has therefore violated the obligations in its bond covenants, leading the company to technically default on its bonds which if enacted would mean a liquidity crisis and likely the bankruptcy of the company. The following chapter discussed a number of recent developments at Adler Group.144
59 136 Bloomberg News, Adler Loan Spurs Bondholders to Seek Ways to get Paid Back, 2022.
59 137 Finanzen.net, Immobilienkonzern Adler muss Jahresbericht verschieben – Aktie bricht ein, 2022.
59 138 Bloomberg News, Adler Directors Offer Resignation After Disclaimer Opinion, 2022.
59 139 Bloomberg News, Adler Says It Plans to Repay Euro bonds Due in April on Time, 2022.
59 140 Finanzen.net, Adler Group S.A.: Veräusserung im Verwaltungsrat nach Erteilung eines ‘Disclaimer of Opinion’durch KPMG zum Konzernabschluss der Adler-Gruppe, 2022.
59 141 Bloomberg News, Adler Board Members Quit After Auditor Refuses to Sign Off on Huge Loss, 2022.
59 142 Bloomberg News, Adler Says Vindicated By Auditing Showing Murky Fees, Opaque Values, 2022.
59 143 Bloomberg News, A USD 2 Billion Reminder to Doubt Your Audit Client, 2022.
59 144 Viceroy Research, Conference Questions – Pretext, 2022.
8 Recent DevelopmentsThis section intends to give a brief overview on the most recent developments at Adler Group and its subsidiaries. New developments, news and ad-hoc releases are issued on a daily basis, so more recent information might be available by the time you are reading this report.
8.1 Adler Group’s new CEO Stefan KirstenOn February 16, 2022, Stefan Kirsten was announced as the new chairman of the board of directors at Adler Group.145 On June 29, 2022, his role as chairman for the following three years was confirmed at the company’s AGM. Stefan Kirsten was supposed to stand for transparency and a new regime at Adler Group, however given his background, this is everything but certain.146
Among others, Stefan Kirsten was previously employed by Amir Dian’s VIVIAN Investment SARL (“VIVIAN”), and resigned from the advisory board of the Luxembourg company before taking the role at Adler Group. It is important to know that VIVIAN was one of the parties, hat sold ADO Group to Adler Real Estate in 2019 and also sold property to Aggregate Holdings, previously Adler Group’s largest shareholder and a company in which Adler Group ownes bonds in. Given these connections, it is clear, that Stefan Kirsten stands for everything but a new regime at Adler Group.147
What is further problematic is that the this relationship between Stefan Kirsten and VIVIAN was not disclosed when he was introduced as new chairman of the board of directors at Adler Group. At the date of the announcement of his new position, the company issued a list of multiple entities Stefan Kirsten previously worked for, which specifically did not included his position at VIVIAN. Given this, it can be argued, that Stefan Kirsten is here to protect the old system at Adler Group.148
8.2 Aggregate Holding’s new CEO Cevdet CanerOn July 5, 2022, Aggregate Holdings, formerly Adler Group’s largest shareholder, announced Cevdet Caner as their new CEO. This is an interesting development, given the close connection between Aggregate Holdings and Adler Group, as well as the previous allegations that Cevdet Caner secretly controlled Aggregate Holdings.149
145 Finanzen.net, Adler Group S.A.: Prof. Dr. A. Stefan Kirsten neues Mitglied und neuer Vorsitzende des Verwaltungsrats der Adler Group S.A., 2022.
146 Finanzen.net, Planmässige Umsetzung: Hauptversammlung der Adler Group S.A. bestätigt Verwaltungsrat und nimmt alle Beschlussvorschläge an, 2022.
147 Finanzen.net, Adler Group S.A.: Prof. Dr. A. Stefan Kirsten neues Mitglied und neuer Vorsitzende des Verwaltungsrats der Adler Group S.A., 2022.
148 Finanzen.net, Adler Group S.A.: Prof. Dr. A. Stefan Kirsten neues Mitglied und neuer Vorsitzende des Verwaltungsrats der Adler Group S.A., 2022.
149 Finanzen.net, Linzer Caner wird Chef des Adler-Investors Aggregate, 2022.
8.3 Major Property SalesOn January 31, 2022, Adler Group announced the sale of 14’400 apartments and commercial units to KKR and its real estate subsidiary Velero. The sale was conducted in order to boost Adler Group’s liquidity position and in order to pay down debt and achieve the company’s goal of reaching an LTV ratio below 50%.150 KKR paid EUR 1.05b for the assets, which according to Adler Group is a premium to the portfolio’s book value as of September 30, 2021. Adler Group estimated to receive net proceeds of EUR 600m through the sale. This is the only large divestment of Adler Group in the recent past, which was sold with a premium to its current book value and was used as a way to convince the capital markets that the valuation of Adler Group’s property portfolio was correct.151
However the sale was also strongly criticized by some investors, because by selling the best parts of the company’s portfolio its net rental income was substantially reduced. This development is evident in Adler Group’s Q1 2022 financial statement. In comparison to the numbers published the year prior, the net rental income reduced by more than 16% and the FFO1 decreased by about 8%.152
On June 30, 2022, Adler Group also announced the sale of its Waypoint Portfolio, a portfolio of 1’200 residential and commercial real estate properties in Berlin together with its joint venture partner. Considering the purchase price portion attributable to the joint venture partner and other minority interests as well as taking into account deferred taxes, Adler Group estimates to realize a capital inflow of approximately EUR 170m. This is a markdown of about 2% in comparison to Adler’s reported book value of the portfolio.153
8.4 Vonovia becomes largest Shareholder in Adler GroupOn October 7, 2021, Vonovia SE (“Vonovia”), Germany’s largest landlord announced that it entered onto an agreement with Aggregate Holding, whereby Aggregate Holdings will sell the option of buying 13% of Adler Group at EUR 13 per share. Aggregate Holdings, at the time the largest shareholder of Adler Group, owned 26.6% in the company, out of which the other half of the stake in Adler Group was tied up as collateral for a EUR 250m loan that Vonovia provided to help service a margin loan Aggregate Holdings had with JP Morgan, Citi and Banco Santander.154
After Adler Group shares plunged, breaching the terms of the loan that Vonovia provided to Aggregate Holdings and resulting in a margin call, Vonovia seized 20.5% of Adler Group’s shares from Aggregate Holdings.155 Vonovia stated that “By taking this step, Vonovia is protecting itself against a loss of its receivable, following a failure by Aggregate Holding Invest to provide contractually agreed cash collateral.”156 At the time Vonovia also stated that regarding the newly acquired stake in Adler Group it “considers all options, including the full or partial sale of the shares.”157
150 Bloomberg News, Adler Repaid Key Credit Facility Last Year With Proceeds From Asset Sales, 2021.
151 Finanzen.net, Adler Group verkauft Immobilien an Investor KKR, 2022.
152 Finanzen.net, Adler Group verkauft Immobilien an Investor KKR, 2022.
153 Finanzen.net, Adler Group S.A. veräussert Beteiligung an Portfolio in Berlin, 2022.
154 Bloomberg News, Vonovia Comes Back for Adler Stake After Rejected First Overture, 2021.
155 Bloomberg News, Vonovia Pounces on Rival Landlord Adler With Margin Call Trigger, 2022.
156 Bloomberg News, Vonovia Pounces on Rival Landlord Adler With Margin Call Trigger, 2022.
157 Vonovia, Update on Recent Developments around Adler Optionality, 2022.
After Vonovia secured its 20.5% stake in Adler Group, many market participants anticipated a tender offer by Vonovia, given the company’s previous attempts to buy its competitor. On June 1, 2022, Vonovia announced that it is not considering a full takeover of Adler Group, stating that, “The markets have changed and therefore the original idea of acquiring the Adler Group is definitely off the table.”158 Rudolf Buch, Vonovia CEO also stated that “We will not continue to buy Adler stock and are also prepared to sell our stake in the future,”159 adding that “I accept that the majority of our shareholders do not want a takeover and therefore we will not do it.”160 This statement ended the speculation about a takeover by Vonovia, which would have likely resulted in a restructuring of the company to improve its governance.
8.5 KPMG Resigns as AuditorOn May 17, 2022, after finishing its special investigation and publishing its final report, KPMG announced that it will no longer audit Adler Group’s financial statements. This did not come as a surprise, given Adler Group’s lack of cooperation during KPMG Forensic’s special investigation.161 Adler Group subsequently announced, the launch of a tender for the mandate to audit its consolidated financial statements for the financial year 2022, but was so far not able to find an auditor.162
8.6 Adler Real Estate Squeeze OutOn June 23, 2022, Adler Group subsidiary Adler Real Estate, in which the parent currently holds 96.72% asked its shareholders for permission to sell almost all of the company’s existing apartments. This move is interesting, given that Adler Real Estate holds the majority of Adler Group’s real estate portfolio. Adler Real Estate shareholders were asked to allow the company to sell 22’301 out of 23’475 residential and commercial units, in essence liquidating the entire company.163
On the same day, Adler Group also announced its intention to squeeze out the minority interests in Adler Real Estate in return for a cash settlement as part of the ongoing integration process. Adler Group’s AGM will vote on the transfer of the shares of the remaining shareholders to Adler Group against payment of a cash compensation of EUR 19m. The resolution to transfer the shares will be
adopted at an extraordinary general meeting, which is expected to take place at the end of 2022. A delisting of Adler Real Estate is planned to be conducted after registration of the squeeze out.164
158 Finanzen.net, Vonovia- und ADLER-Aktien schlussendlich uneins: Vonovia Chef stellt Rückzug von ADLER Group in Aussicht, 2022.
159 Finanzen.net, Vonovia- und ADLER-Aktien schlussendlich uneins: Vonovia Chef stellt Rückzug von ADLER Group in Aussicht, 2022.
160 Finanzen.net, Vonovia- und ADLER-Aktien schlussendlich uneins: Vonovia Chef stellt Rückzug von ADLER Group in Aussicht, 2022.
161 Finanzen.net, KPMG steht nicht als Abschlussprüfer 2022 zur Verfügung – Consus Real Estate wird Abschreibungen vornehmen müssen, 2022.
162 Finanzen.net, Adler Group S.A.: Bekanntmachung der Einleitung eines Prüfungsausschreibungsverfahrens, 2022.
163 Finanzen.net, Adler Group S.A. leitet im Rahmen des laufenden Integrationsprozesses ein Squeeze-Out- Verfahren der Minderheitsaktionäre der ADLER Real Estate ein, 2022.
The reason for the squeeze out of Adler Real Estate’s minority shareholders is that the Adler Group subsidiary is currently the company’s only entity flushed with liquidity.165 In order to transfer this liquidity upstream to Adler Group, in order for the parent company to service its debt, it is essential to own 100% of Adler Real Estate, as minority shareholders as well as bondholders will otherwise likely interfere if any cash is being extracted or moved from the company.166
8.7 LEG Buys Portfolio and Stake in Brack Capital PropertiesBesides the divestments to KKR and sale of the Waypoint Portfolio, Adler Group also sold part of its portfolio to competitor LEG. On December 1, 2021, Adler Group announced it sold a residential real estate portfolio of about 15’400 apartment units, and 185 commercial property units to German competitor LEG for about EUR 1.39b.167 Adler Group will keep 10.1% of the portfolio due to tax reasons and the price paid will be slightly below the property valuation according to Adler Group.168
As part of the deal, LEG also secured a 31% stake in property developer Brack Capital Properties, a Adler Group subsidiary owning over 12’100 apartments for EUR 328m. Adler Group sold 7% of the stake for about EUR 75m, the remaining 24% were sold to LEG by other shareholders. In addition, to the equity stake, LEG also bought an option to acquire a remaining 63% stake in Brack Capital Properties for EUR 765m.169
On August 3, 2022, LEG announced that it will not exercise its option on Brack Capital Properties. This poses a problem for Adler Group, as the company previously assumed that LEG would exercise the option, resulting in EUR 765m of liquidity flowing to Adler Group. This decision poses further pressure for Adler Group to divest parts of its portfolio in order to fulfill its liquidity needs.170
8.8 BaFin InvestigationOn May 24, 2022, German newspaper Handelsblatt announced that BaFin would launch an investigation into Adler Group’s financial statements.171 On June 26, 2022, BaFin also announced that it will additionally investigate Adler Real Estate’s financial statements.172 On August 1, 2022, after conducting its investigation, BaFin stated that Adler Real Estate’s 2019 annual financial report contains
flaws in the valuation of the Gerresheim property. According to BaFin the Gerresheim property, which at the time was valued on Adler Group’s books at EUR 375m was overvalued by up to EUR 233m.173 In response to the news, Adler Group announced that it believes the allegations are false and that it will proceed with legal action against BaFin. Besides BaFin, also the Luxembourg authority CSSF has launched an investigation into Adler Group’s Luxembourg subsidiaries.174
164 Finanzen.net, Adler Group S.A. leitet im Rahmen des laufenden Integrationsprozesses ein Squeeze-Out- Verfahren der Minderheitsaktionäre der ADLER Real Estate ein, 2022.
165 Bloomberg News, Adler Loan Spurs Bondholders to Seek Ways to Get Paid Back, 2022.
166 Bloomberg News, Adler Repaid Key Credit Facility Last Year With Proceeds From Asset Sales, 2021.
167 Finanzen.net, LEG-Aktie schwächer, ADLER Aktie mit zweistelligem Kurssprung: LEG Immobilien übernimmt ADLER-Portfolio und erhöht Prognose, 2021.
168 Finanzen.net, Adler Group S.A. sells stake in portfolio in Berlin, 2022.
169 Finanzen.net, LEG Immobilien SE: LEG nimmt Abstand vom Erwerb weiterer Aktien der Brack Capital Properties N.V. (BCP) von der Adler Real Estate AG, 2022.
170 Finanzen.net, Weiterer Rückschlag für Adler Group: BCP-Geschäft mit LEG geplatzt, 2022.
171 Finanzen.net, Adler Group brechen nach Pressebericht ein, 2022.
172 Finanzen.net, Adler Group begrüsst Prüfungsanordnung der BaFin für die Rechnungslegung 2021 der ADLER Real Estate AG, 2022
173 Finanzen.net, ADLER Real Estate Aktiengesellschaft: Fehlerbekanntmachung für den gebilligten Konzernabschluss zum Abschlussstichtag 31.12.2019, 2022.
174 Finanzen.net, Der angeschlagene Immobilienkonzern ADLER Group will Rechtsmittel gegen einen Bescheid der Bundesanstalt für Finanzdienstleitungsaufsicht (BaFin) einlegen, 2022.
9 Conclusion
Given the developments at Adler Group as described in this paper, it is evident that the company is facing severe governance issues, evident especially in the egregious behavior by company insiders. Adler Group was operated as a self-service shop for Cevdet Caner and his associates who systematically transferred assets out of the company to the detriment of minority shareholders, bondholders and banks.
The process of transferring assets out of Adler Group can be split up in three steps. In a first step, Adler Group usually conducts a coup d’état transaction. In such a transaction, Adler Group buys a controlling, or factually controlling stake in a better capitalized, asset rich company. Once Adler Group holds a controlling stake in the target company, they call an EGM, flip the board and attempt to force the target company to do a reverse takeover or a merger with the parent at inflated balance sheet values. In a second step, value is transferred out of the company by saddling it with debt and then stripping it of its newly acquired assets via uncommercial looting transactions. In these looting transactions, Adler Group either sells assets to undisclosed related parties at deflated prices, or it buys assets from undisclosed related parties at inflated prices. In either way, these transactions are not conducted at arm’s length and they transfer value out of Adler Group into the hands of related parties. In a third step, Adler Group marks up the remaining assets in its book at inflated prices through conducting marking transactions, which fix the balance sheet gaps created by the looting transactions. In the process, assets are bought by undisclosed related parties at inflated prices, but the consideration is only partly paid and never intended to be settled in full. Adler Group thereby creates false profits on its income statement and its balance sheet is artificially marked up by unrecoverable receivables. When the purchase price is eventually not paid, the transaction is reversed and Adler Group receives its assets back, marked in the books at an inflated price but with a large mortgage attached. This mode of operating the company, has lead to Adler Group breaching its bond covenants, leading to a technical default. This is both due to the company exceeding the LTV ratio of 60% on Adler Real Estate’s level, as well as Adler Group’s inability to publish an audited financial statement for 2021. Furthermore, it is unclear whether the company will be able to find an auditor to sign off its 2022 annual financial report which could result in further chaos and instability at the company. In addition, Adler Group’s difficulty to raise cash from capital markets, banks and other lenders will put further pressure on its ability to finish construction at its development projects, which could result in further impairments on the valuation of its real estate portfolio.
To conclude, Adler Group is facing massive challenges in the months and years ahead. It is unclear, whether the company will be able to regain the confidence of the capital markets, which is essential in order for it to operate in the current challenging environment. A bankruptcy of Adler Group could have large impacts on other publicly listed German real estate companies, and the European real estate sector as a whole. In addition, a bankruptcy of Adler Group could further diminish trust in the German capital markets
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