(Bloomberg) -- Vonovia SE offered Apollo Global Management Inc. a series of unusual sweeteners to close a €1 billion ($1.1 billion) property deal, increasing the discount in a sign of the struggles landlords face in selling once-prized assets.

Despite only buying 30% of a portfolio of 21,000 homes in the German state of Baden-Wuerttemberg, Apollo will get about 70% of the dividends and won’t pay asset-management fees for its share, according to Green Street analyst Andres Toome. That would take the discount to book value to 30%, compared with the 5% disclosed by the company when announcing the deal in late April, he said in a note. 

Read more: Apollo Stakes €1 Billion on Germany’s Real Estate Rebound

“It would have been beneficial for Vonovia shareholders if management was more upfront on deal economics,” Toome wrote in the note on Monday. 

Vonovia declined to comment on details, but confirmed concessions on dividends were agreed. “It is somewhat inverted to the ownership quota of 30%,” a spokeswoman told Bloomberg.

The revelation casts a shadow over a deal that suggested pricing was firming and confidence returning to Germany’s property sector, which has been reeling in the fallout of higher interest rates along with other markets in Europe. 

Call Option

Share prices of German residential landlords have been under pressure as investors fear that declining valuations will increase relative indebtedness. With bank lending tight and bond markets all but closed, asset sales are one of the main avenues for raising funds to refinance debt. 

Vonovia’s value has tumbled about 60% since the start of 2022, when central banks started raising interest rates. Germany’s largest landlord has announced its intention to sell as much as €13 billion of assets to pay down debt, but shareholders were left waiting until April for news of a material transaction. 

Apollo has no minority protection rights in the deal and that’s why they’re getting higher dividends from the portfolio, Vonovia Chief Executive Officer Rolf Buch told analysts on an earnings call last week. 

The sale includes a call option that will allow Vonovia to buy the assets back at a price that caps the private equity firm’s return, meaning it could claw the properties back at a discount in future. That makes Apollo’s greater share of dividends “more or less irrelevant,” Buch added. 

‘Like Chinese Water Torture’

Vonovia also agreed to sell multiple portfolios including newly built apartments to CBRE Investment Management for €535 million after taxes and transaction costs. That’s a slight discount to the properties’ €600 million book value and about 7% less than it cost to build them.

The Apollo deal “was struck to bolster Vonovia’s liquidity position,” Buch told journalists on the call last week. The subsequent deal with CBRE is “proof that the real estate market has bottomed out.”

Vonovia conducted an unscheduled valuation review for the first quarter, which resulted in a write down of less than 4%. That was enough to push the landlord’s loan-to-value ratio to 45.4%, more than offsetting the impact of the asset sales. 

“Just like Chinese water torture, reported values will edge lower each quarter, shifting attention to debt covenants,” Toome said in the note.

--With assistance from Eyk Henning.

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