FRANKFURT, Oct 8 (Reuters) - Private equity investor Round Hill Capital is weighing its options to exit property group Vitus in what could become one of the largest real estate transactions in Germany this year, four people familiar with the matter said.
Vitus owns about 30,000 apartments and has an enterprise value of 1.2-1.4 billion euros ($1.6-1.9 billion), the sources said. Round Hill and co-investors bought a majority in the group in 2007 from Blackstone for 1.6 billion euros and have been looking for an exit for several years.
Round Hill is hoping to benefit from buoyant property valuations in Germany that two real estate groups, LEG and Deutsche Annington, have used for stock market flotations earlier this year.
Despite the high demand for German property groups in general - the sector index has risen 20 percent over the last two years - the sources said that Round Hill will face an uphill struggle to achieve a high price.
"The sellers will likely have to face a discount of 15 to 20 percent on the net asset value," one of the sources said, adding that the quality of Vitus' properties and its current expensive financing would weigh on the price.
The bulk of Vitus' apartments are located in cities like Bremen, Kiel, Moenchengladbach and Wuppertal, which are not seen as top tier real estate areas.
"Vitus' financing is anything but ideal, and a buyer will take that into account when considering what he is willing to pay," one of the sources said, adding a transaction may include deleveraging and a reorganisation of debt.
In September 2012, Vitus issued 754 million euros in commercial mortgage-backed securities and at the time said its total debt stands at 887 million euros.
The sources said that among the options under consideration is a so-called share deal through which Vitus would merge with a listed real estate group. Round Hill and the co-owners would receive shares of that group which they could later sell on the stock exchange.
Deutsche Annington, Gagfah or TAG Immobilien have been approached over a share deal, the people said.
Deutsche Annington sold nearly 16 percent of its shares in a listing in July, the remainder is held by private equity group Terra Firma. Deutsche Annington's shares traded at 19.23 euros late on Tuesday, giving it a market capitalisation of 4.3 billion euros.
An alternative exit route for Round Hill and the Vitus co-owners is also under discussion, a third source said, adding new institutional investors could potentially replace some of the existing owners.
"Round Hill could sell some of its stake but would retain the lucrative job of managing the properties," the source added.
While no formal auction has been launched, the Vitus owners and their advisors - Deutsche Bank and Goldman Sachs - have been in intensive talks with potential buyers.
"The hope is to get a deal sealed this year," one of the sources said, adding that an initial public offering of Vitus is currently not seen as a likely option.
Vitus was formed in the 1990s and early 2000s by German investor WCM, which merged several formerly government-owned residential companies. It also acquired mandates to manage additional 20,000 flats for third-party investors.
The real estate groups declined to comment. Round Hill was not available for comment.