When the auditors from KPMG refused to certify the balance sheet of the real estate group Adler at the end of April, Germany had a new balance sheet scandal. In the meantime, the financial supervisory authority and the public prosecutor’s office are investigating, and KPMG is refusing further orders.
Adler Group construction site in Berlin: The group is selling residential units on a large scale in order to stabilize the financial situation.
The ailing real estate group Adler Group is fighting for the trust of investors and other interest groups – and thus for its future. On Tuesday, the company tried to reassure investors and observers by presenting its figures for the first quarter. The Chairman of the Board of Directors, Stefan Kirsten, who has been in office since mid-February, spoke of a “solid performance” despite a small loss of around 15 million euros. However, that sounded like whistling in the woods insofar as Adler had to contend with disturbing news in the past two weeks.
KPMG duped Kirsten
As recently as mid-May, Kirsten had tried to improve investor and journalist confidence in the scandalous company by announcing changes in senior management and an improvement in corporate governance. Kirsten made it public that Thomas Echelmeyer, an experienced manager and auditor, will take over the position of CFO on an interim basis on June 1st. In addition, he commissioned the consulting firm PwC to analyze and develop a robust compliance function and hired PJT Partners as financial advisors to carry out, among other things, an in-depth cash flow analysis.
At the same time, Kirsten announced that KPMG would also be appointed as auditor for 2022. But the auditors threw a spanner in the works for the former Vonovia manager. On the evening of the same day, to Kirsten’s surprise, they announced that they did not want to continue the mandate at the Adler Group. Since then, Adler has been looking for a new auditor for the next annual financial statements.
The relationship between the group and KPMG was very strained insofar as the auditors refused on April 29 to certify Adler’s annual accounts for 2021. This raised concerns that Germany had another major accounting scandal after Wirecard. A day later, the Adler Group presented unaudited annual accounts and reported a loss of a good one billion euros. The main reason was value adjustments at the subsidiary for project developments Consus Real Estate, which got into difficulties.
Adler as the new Wirecard?
The affair surrounding the Luxembourg group, whose shares are listed in the German small-cap index S-DAX, became public in the fall. In October, the British short seller Fraser Perring, via his analysis company Viceroy Research, accused the Adler Group of serious manipulations in the valuation of projects and alleged insider trading and balance sheet tricks in a report.
As a so-called short seller, Perring bets professionally on sharply falling share prices, with public drumming being part of the craft. However, he had already made a decisive contribution to uncovering the balance sheet scandal at the financial service provider Wirecard, which had to file for bankruptcy in the summer of 2020.
In response to the allegations, Adler commissioned a forensic investigation at KPMG, which, however, did not bring the hoped-for complete exoneration. Not only did doubts remain, but KPMG even refused the attestation for the 2021 annual financial statements. The company has been reeling ever since. The share price of the Adler Group has fallen by more than 80 percent since last summer and is currently listed at well under five euros.
A good week ago, a report in the “Handelsblatt” finally revealed that the Frankfurt public prosecutor’s office had now started investigations in connection with the company’s important real estate projects. The information is probably based on statements by members of the Bundestag. In mid-May there was a secret meeting of the finance committee of the German Bundestag, in which Mark Branson, head of the financial supervisory authority Bafin, informed the MPs.
Bafin with balance sheet control procedures
According to media reports, Branson said Bafin takes the allegations very seriously. However, neither the Bafin and the public prosecutor’s office nor the Adler Group wanted to confirm the start of investigations. The focus of the investigations is said to be a project in the Düsseldorf district of Gerresheim (“Glasmacherviertel”) from 2019, which is said to have led to inconsistencies. According to its own statements, the Bafin has been carrying out a balance sheet control procedure at Adler for several months. The authority is said to have filed a criminal complaint with the public prosecutor’s office in the past few weeks.
Complaints about the Adler Group’s stalled projects are now piling up nationwide. According to media reports, local politicians in Düsseldorf, Hamburg, Offenbach and Stuttgart, among others, complain that some prestigious projects, for example on the Hamburg Holsten Areal in the popular Altona district, are hardly making any headway. There are full-bodied promises and big plans, but little or nothing is happening, according to one of the numerous reports. The Adler Group, on the other hand, emphasizes that the projects that have started are progressing and that they want to bring them to a successful conclusion.
At the center of the crisis is ultimately the project development subsidiary Consus, which had to write off investments and loans to affiliated companies, which burned more than its entire equity. For the restructuring of Consus, Kirsten relies on a balance sheet restructuring by the Adler Group and the continuation of the project development business. What will happen to the fully consolidated subsidiary afterwards is still open. In the industry, confidence in Consus is likely to be close to zero, especially since the German real estate market is considered overheated by observers anyway.
Course of 30 000 housing units
Financial analysts are currently looking primarily at the Adler Group’s cash flow, since the company is cut off from new bank loans and the capital markets without an audit, according to the chairman of the board Kirsten. In the first quarter is the Leverage as measured by loan-to-value ratio (LTV) from 50.9 percent at the end of December to the current 52 percent. Compared to the same quarter last year, net rental income and operating income (FFO1) are down, but this is due to the halving of the units owned by Adler.
The group had sold 15,500 residential units to LEG by the end of December. According to Adler, the sale of a further 14,400 units to the KKR/Velero was 97 percent complete as of May 30. After the sales to stabilize the financial situation, the Adler Group will still own a good 27,400 residential units, a good 70 percent of them in Berlin and the rest in western German cities such as Duisburg, Dortmund, Essen, Düsseldorf and Oberhausen.
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