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Allan Saunderson is managing editor of Property Finance Europe and a contributor to GlobeSt.com.

GUERNSEY-Eurocastle Investment, the German commercial real estate group controlled by New York’s Fortress Investments private equity firm and based on this English Channel island, posted a net loss after tax of €162 million in the first quarter, narrower than the €264 million in 4Q08 but much wider than an €84-million loss in Q1 2008. It also announced an issue of €130 million in perpetual convertible bonds, paying interest of 20%.

The losses primarily relate to non-cash valuation adjustments to the portfolio of some €130 million. Funds from operations reached €12.3 million or €0.20 per share for the three months ended 31 March, down from €22.6 million or €0.35 per share for Q1 2008 but better than the fourth quarter performance. Eurocastle owns some €6.0 billion in total assets, of which €4.0 billion in property and €1.7 billion in debt investments. However, it is carrying debt of €5.2 billion, giving net assets of around €654m. It said NAV per share at end-March was €10.60, comprising €1.07 for the debt investment business and €11.67 for the commercial property portfolio. This was well below total €13.35 at the end of December. Adjusted for the refinancing of the Mars portfolio, completed on 27 May the NAV per share as end-March should be €8.45 per share. Real estate NAV per share of €9.52 after the Mars Portfolio refinancing, reflected an NOI yield of 5.8%.

In the first quarter, Eurocastle sold eight assets for €100m compared to a carrying value of €104m – equating to a 5.6% NOI yield. It also signed 81 commercial leases for some 31,000 square meters, including new leases for 20,500 square meters. As at March 31, 2009 it had total leasable space of 2.1 million square meters. and occupancy of 85.7%, unchanged like for like from December.

The new capital is designed to repay two short-term recourse obligations coming due totalling €145 million. The convertible securities will be issued at par and the coupon of 20% will be payable annually in arrears or may be accrued and paid in shares at the company’s discretion. No interest will be paid until the corporate loan facility has been paid off in full. Eurocastle retains the right to redeem the securities after two years at a premium of 20%. They can be converted into shares at the holder’s option at a strike price of €0.30.

PFE COMMENT: How else are you going to raise capital in this market and under the extremely leveraged financial conditions in which Eurocastle was caught by the onset of the financial crisis? This is very expensive money but the group has given itself quite a few options in the case of even a partial value recovery across its German portfolio. The share price has been highly volatile in recent weeks, reflecting a lot of speculation over whether it can survive in its present form. Last trading around €0.42, the share has touched €0.18 in he early year, but then rebounded as high as €0.96 earlier this month.

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