The Adler Group and its subsidiary Adler Real Estate do not rest. For the second time this year, the financial regulator Bafin found massive errors in the balance sheet for 2019 during its special audit. Many shareholders may have lost almost all their money.
Construction site in Berlin: With the Wasserstadt Mitte project, Adler Real Estate wants to create an urban district in the German capital.
The scandal surrounding the controversial real estate group Adler Group widened again considerably on Thursday. The German financial supervisory authority (Bafin) identified three further accounting errors during its audit of the 2019 consolidated financial statements of the German Adler Real Estate, a subsidiary of the Adler Group, which is domiciled in Luxembourg. Overall, the balance sheet total was overstated by a whopping 3.9 billion and the overall result by 543 million euros.
Impermissible full consolidation
In the opinion of the financial regulator, Adler Real Estate should not have fully consolidated the subsidiary Ado Properties in the consolidated financial statements, which has happened. Full consolidation is not permitted because groups may only fully consolidate associated companies in their annual financial statements if there is a situation of control. The indirect shareholding of 33.25 percent held by Adler Real Estate in Ado Properties was not sufficient in the overall view of the agreements made up to December 31, 2019. The Adler Group announced that it would appeal against Bafin’s decision.
According to Bafin, various balance sheet items of Adler Real Estate were overstated as a result of the full consolidation, namely non-current assets held for sale by 4.4 billion, liabilities held for sale by 1.7 billion and non-controlling interests by 1.7 billion Billion euro.
Insufficient management report
In addition, the financial supervisory authority criticizes that the management report provided insufficient information about the risks associated with an incorrect assessment of the control of Ado Properties. Above all, it was not explained that without full consolidation, the result would have been a significant increase in the loan-to-value (LTV) indicator to around 70 percent.
The LTV expresses the loans taken out in comparison to the expected value of real estate projects. 70 percent is considered very high. Adler Real Estate also did not keep a record of whether and why contractual partners of corporate and real estate transactions were classified as related parties, it said.
Search for new auditor
In 2019, Adler Real Estate, the Luxembourg-based Ado Properties and the Berlin project developer Consus Real Estate merged. As a first step, Adler Real Estate bought into an Israeli group of companies (Ado Group) and secured a 33 percent stake in its subsidiary Ado Properties. However, the new Ado management then wanted to take over the heavily indebted major shareholder Adler Real Estate by means of a public exchange offer, so the daughter should buy the mother. That happened in April 2020. In a further step, Consus was added.
The Adler Group hit the headlines and faced an existential crisis in October 2021 because a British short seller had accused management of fraud and financial misrepresentation and the use of opaque family and friends structures. Adler has always denied the allegations. In April of this year, however, the auditing company KPMG refused the group the attestation for the 2021 annual financial statements and finally resigned the mandate. Adler is still looking for a new auditor. Apparently nobody in the industry wants to touch the hot potato.
Many shareholders with a total loss
The decision of the Bafin is a so-called partial error determination. The Bafin had already made such a decision in August because Adler Real Estate had overvalued an important real estate project in Düsseldorf from its point of view. The financial supervisory authority announced that the audit of the consolidated financial statements and the management report of Adler Real Estate for the 2019 financial year is ongoing. The same applies to the audit of the 2020 and 2021 financial years. The Luxembourg authorities are responsible for controlling the balance sheet of the parent company Adler Group.
The shares of the Adler Group hardly reacted to the new report on Thursday, at the end of the day they were listed slightly in the red at 1.63 euros. However, a lot of negative things have already flowed into the price. The high was 14 euros this year and around 28 euros in 2021. For many existing shareholders, the commitment should prove to be almost a total loss.
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