Victim of its own success

Feed a sunflower regularly with mineral-enriched water and it will grow tall, but will be weak and flaccid and might even collapse under the weight of a mature flower. This is what is happening to Orco Property Group. The stem may not yet have snapped, but only with the aid of a crutch provided by a Paris court

Emil Górecki

The company has a short but fascinating history. It was founded in 1991 by Jean-Francois Ott, who is still the president and shareholder, and also by Olivier Jacques André Rouchaud, who pulled out after a few months. In the first few years of its life, Otto expanded the company in the Czech Republic through acquisitions in Prague’s Vinohrady district, among others. Orco owned 15 buildings in 1999 and decided to invest in nearby Budapest. The company grew and made its debut on the Paris Stock Exchange the next year. DTZ estimated the value of its property portfolio at EUR 56.8 mln. Jean-Francois Ott then shifted his attention to Warsaw, where a third branch office was set up. Another office was opened in Bratislava in 2001. Two years later, Orco bought out IPB Real, a Czech developer involved in the residential sector. The number of properties and projects increased almost with each passing day. This was why two deputy presidents were recruited to the board in 2004 with responsibility for Central European projects, as well as two deputy presidents for financial affairs and for Orco’s hotel operations. The company then made its first purchases in Berlin, although it was most active in Budapest and Warsaw. Its land bank held around 1 mln sqm. The Endurance Fund for real estate was later launched.

Collapse of a lucky star

The company’s debut on the Prague Stock Exchange on 1st February 2005 raised money for even more acquisitions. It was able to enter the Croatian market, where it took part in the privatization of the hotel sector. Orco then announced the development project in Warsaw city centre of the Złota 44 deluxe apartment building, designed by Daniel Libeskind. The company’s portfolio bulged to EUR 1 bln, accompanied by aggressive purchases and announcements of yet more projects. It opened a second Endurance umbrella fund in 2006 and listed on the Warsaw and Budapest stock exchanges in mid-2007. The company flew ever nearer to the sun, until 2008 when the financial crisis erupted. Revenue slumped 10 pct to EUR 113 mln in the first half-year compared with the same period of 2007. A net loss of almost EUR 4.9 mln appeared on the balance sheet, amounting to more than EUR 20 mln after nine months, when a press release on the results lamely announced that “the company would have to adapt to the changing market conditions.”

Cost cutting takes over

By February 2009, 220 people had been laid off throughout the entire group. Jean-Francois Ott, Orco Property Group’s president, admits that: “Central and Eastern Europe felt the global crisis much more severely than was expected. The markets in which we operate just came to a halt, except for the leasing. Nobody had any idea what the effects of the crisis would be for the region. I just did not think they would be so drastic.”

The value of Orco’s shares slumped by 90 pct over the year. The founder reduced his stake in the company from 12.3 pct to 1.6 pct. A large number of managerial personnel left. In March, a Paris commercial court granted Orco half-year protection against its creditors, with the possibility of prolonging the period of grace by a further six months, giving it time to sort out its problems and introduce a damage limitation plan. The company is now obligated to pay its creditors EUR 188 mln in 2009, with EUR 100 mln having been refinanced so far. A large amount of assets will be sold, according to this arrangement, but will not have to be alienated immediately under the terms of the court’s decree, which would have made Orco unattractive as regards potential purchasers. But the fact that it has had to hide under court protection means, according to analysts, that negotiations with creditors are not going as Jean-François Ott would have hoped. Negotiations will be even more painful now that the market knows that Orco has its back against the wall, the more so since a section of shareholders who own around 10 pct of the company have formed an SOS Orco group to demand the sacking of the board.

The unaudited financial results, which were published after some procrastination, reveal a company loss of EUR 390 mln. Jean-Francois Ott points out that: “The restructuring plan has 15 pages. We are closing offices outside capital cities and concentrating on projects that generate regular income, that is office and retail facilities that are leased out. We are pulling out of Russia, leaving only one hotel there, and will be focusing on Prague, Berlin, and Dusseldorf, as well as Warsaw and Budapest. We will also cease managing properties and not be starting any new hotel projects. Our immediate activities will be aimed at acquiring hard cash to pay our debts.”

Among the projects which have priority status for the heads of Luxemburg-based Orco, president Ott includes the Złota 44 apartment building (the construction of which is already around six months behind schedule), the Vaci 1 shopping centre (the former Budapest Stock Exchange building), the Sky Office complex in Dusseldorf, the Palác Archa and Bubny office buildings in Prague and the City Gate mixed-useproject in Bratislava. Ott asks the question: “Are we heading for a fall? I believe in our hard work. I see the company as an ailing child undergoing treatment. We have customers, our projects have been appraised by them and as long as we have customers we shall work for them.”

How did these problems arise?

All the estate agents we approached refused to say anything about the health of Jean-François Ott’s child. All we were only told by a few Warsaw and Prague agency offices was that the company is in a desperate situation. “We avoid making any kinds of remarks that could hurt our customers, so we have no comment to make on the situation of specific companies – especially those in dire straits,” was the gist of what I was told by DTZ, Colliers International and King Sturge.

Orco Property Group grew rapidly from its very inception 18 years ago: more than 130 projects in seven countries and several fields of activity. It appears, however, that the charisma and knowledge acquired in élite universities have been insufficient for the effective management of such a company. Indeed, it seems the situation was allowed to get out of control. Orco is today being forced to sell its assets. The published plan to cut its losses has left it with only a few priority projects remaining, while the rest are likely to be sold off. ν