Boom, bust and boom again

The de­vel­op­ers reap­ing the re­wards of the re­cov­ery

The Irish Times - - Front Page -

David Ehrlich, the found­ing chief ex­ec­u­tive of the State’s big­gest land­lord earned a ¤4.2 mil­lion profit sell­ing his shares in the com­pany to its largest in­vestor, listed Cana­dian prop­erty firm Capreit.

Ehrlich re­signed last year from the top job at Ir­ish Res­i­den­tial Prop­erty Real Es­tate In­vest­ment Trust (Ires Reit), one of a clutch of new com­pa­nies that launched in time to catch a re­cov­ery in house and apart­ment prices.

Many have over­seas in­vestors and raised cash from stock mar­kets rather than bor­row­ing it.

Share­hold­ers and ex­ec­u­tives are reap­ing the re­wards of a re­cov­ery driven by a short­age of homes and com­mer­cial space. Broth­ers Michael and Kevin Stan­ley, and Alan McIntosh, re­cently con­verted some founder shares in the com­pany they founded, listed res­i­den­tial builder Cairn Homes, into or­di­nary stock.

The deal, worth ¤61.4 mil­lion at the time, fol­lowed a sim­i­lar ex­er­cise in 2017 that yielded ¤16 mil­lion.

Founder shares (see panel), real es­tate in­vest­ment trust (Reit) fees and old favourites such as long-term in­cen­tive plans all fea­ture when prop­erty play­ers take money off the ta­ble.

Share­hold­ers, who do not ben­e­fit, seem happy with the ar­range­ment. At Cairn’s an­nual gen­eral meet­ing this week, one queried the com­plex­ity of the founder-share mech­a­nism, but left it at that. As long as the com­pa­nies do well, in­vestors may be con­tent, but a shift in for­tunes, or a feel­ing that ex­ec­u­tives are ben­e­fit­ing too much, could prompt some to ask: “Are they worth it?”

Green Reit

Green Reit at­tracted US hedge fund king and Don­ald Trump sup­porter John Paul­son as a key in­vestor when it be­came the first real-es­tate in­vest­ment trust to float in Ire­land in July 2013.

His firm, Paul­son & Co, has since cut its stake in Green from 13 per cent to 1.7 per cent, lock­ing in prof­its from a 58 per cent surge in the share price since the com­pany’s ini­tial pub­lic of­fer­ing (IPO).

The pro­mot­ers of Ire­land’s first Reit con­tinue to be re­warded hand­somely. Green Reit doesn’t pay its chief ex­ec­u­tive, Pat Gunne. In­stead, he is re­mu­ner­ated by the Reit’s in­vest­ment man­ager, Green Prop­erty Reit Ven­tures, where he and prop­erty mag­nate Stephen Ver­non are di­rec­tors.

Green Reit paid a to­tal of ¤78.3 mil­lion to the in­vest­ment man­age­ment com­pany in cash and stock be­tween the flota­tion and the end of last De­cem­ber – more than its an­nual rent roll and about 7.2 per cent of its cur­rent mar­ket value.

Per­for­mance fees peaked at ¤20.9 mil­lion for the year to June 2015. This el­e­ment has be­gun to fall back as base fees, de­ter­mined by a 1 per cent charge on the net as­set value of its prop­er­ties, have be­come more im­por­tant.

Green Reit said in Feb­ru­ary that it paid a base fee of ¤5.8 mil­lion for the six months of its fi­nan­cial year to June.

How­ever, the board es­ti­mates that no per­for­mance fee will be payable for the full year.

Green Reit con­firmed last year that Green Prop­erty Reit Ven­tures’ in­vest­ment man­age­ment con­tract has been re­newed for a fur­ther three years from this July.

An­other Ver­non en­tity, Green Prop­erty, which sold about ¤1.5 bil­lion of mostly UK prop­erty be­fore the fi­nan­cial crash, off­loaded Blan­chard­stown Shop­ping Cen­tre two years ago to US pri­vate eq­uity gi­ant Black­stone for ¤950 mil­lion.

Hiber­nia Reit

Hiber­nia Reit, Ire­land’s sec­ond listed prop­erty trust, de­cided in late 2015 to “in­ter­nalise” the man­age­ment of the com­pany, re­sult­ing in chief ex­ec­u­tive Kevin Nowlan re­ceiv­ing a ¤364,000 pay pack­age for the year to March 2017.

How­ever, Nowlan was also a key ben­e­fi­ciary from the man­age­ment in­ter­nal­i­sa­tion deal, which re­sulted in ¤21.1 mil­lion be­ing paid to Nowlan Prop­erty Lim­ited for the pre­vi­ous year.

Base and per­for­mance fees be­fore that trans­ac­tion, “top-up” fees due since the in­ter­nal­i­sa­tion deal and per­for­mance-re­lated pay­ments to other em­ploy­ees bring the to­tal fees and ex­ec­u­tive pay since the com­pany’s 2013 IPO to more than ¤42 mil­lion.

Cairn Homes

The float­ing of Cairn Homes in the sum­mer of 2015 was the first list­ing of an Ir­ish res­i­den­tial de­vel­oper in al­most two decades.

The com­pany’s founders, chief ex­ec­u­tive Michael Stan­ley, his brother Kevin, who is chief com­mer­cial of­fi­cer, and Scottish ac­coun­tant and se­rial en­tre­pre­neur Alan McIntosh, were en­ti­tled from the out­set to 20 per cent of the busi­ness’s to­tal re­turns over seven years through a founder-share mech­a­nism.

Over the past two years, 53.7 mil­lion founder stock has been con­verted into or­di­nary shares at a to­tal cost of ¤77.5 mil­lion. That in­cluded this year’s ¤61.4 mil­lion con­ver­sion.

How­ever, the di­rec­tors cashed in some of their chips last Septem­ber, sell­ing 15.65 mil­lion shares at ¤1.70 each for ¤26.6 mil­lion. Michael Stan­ley and McIntosh have also been paid ¤4.11 mil­lion over the past three years.

Last year, a le­gal chal­lenge to the Rev­enue saved the Stan­leys, and their three broth­ers Robert, Conor and Joseph, a tax bill for ¤35.5 mil­lion. The case re­lated to the re­struc­tur­ing a decade ear­lier of Shan­non Homes, co-owned by their fa­ther, Joseph snr, who trans­ferred his in­ter­est to them on retiring.

Glen­veagh Prop­er­ties

Glen­veagh Prop­er­ties, which floated last Oc­to­ber, also opted for a founder-share scheme to re­ward ex­ec­u­tive chair­man John Mulc­ahy, chief ex­ec­u­tive Justin Bickle and chief op­er­a­tions of­fi­cer Stephen Gar­vey.

Glen­veagh holds a to­tal of 200 mil­lion founder shares for the three – split 90 mil­lion each for Bickle and Gar­vey and 20 mil­lion for Mulc­ahy. The com­pany’s stock price yes­ter­day and on Wed­nes­day val­ued 200 mil­lion shares at more than ¤230 mil­lion. They will not all con­vert at once, and will do so only sub­ject to cer­tain con­di­tions.

The com­pany’s re­cent an­nual re­port shows that Mulc­ahy will earn a ¤300,000 salary from Glen­veagh this year, plus a po­ten­tial bonus of ¤150,000- ¤225,000. Glen­veagh will pay Bickle ¤450,000 and a bonus of be­tween ¤315,000 and ¤450,000. Gar­vey will re­ceive ¤350,000 salary, with a bonus of ¤245,000 to ¤350,000. Glen­veagh says the trio must meet chal­leng­ing targets be­fore it pays any bonus.

Ires Reit

Ires Reit launched on the Dublin stock mar­ket in 2014 with less fan­fare than oth­ers, but soon made its pres­ence felt in the city’s rental sec­tor. Ires bought 2,450 apart­ments, vir­tu­ally all of which are rented, some for as much as ¤2,600 a month.

Ehrlich earned a profit of ¤4.2 mil­lion on the sale of 11.79 mil­lion Ires shares to Capreit. He ex­er­cised op­tions over the stock at an av­er­age of ¤1.02 each, valu­ing them at ¤12.02 mil­lion. Capreit paid ¤1.3773 a share or ¤16.24 mil­lion in to­tal for them.

The shares are the bulk of the 12.51 mil­lion Ires gave Ehrlich un­der its long-term in­cen­tive plan. He has agreed to sell his re­main­ing 716,667, also at ¤1.3773, or ¤987,000. This would net him a fur­ther ¤256,000 profit at the op­tion price of ¤1.02.

Be­tween Ires’s flota­tion in 2014 and Ehrlich’s res­ig­na­tion in Oc­to­ber, the com­pany paid him ¤2.715 mil­lion in salary and bonuses. Adding it all up, he made ¤7 mil­lion from the ven­ture. And he re­mains a di­rec­tor of Ires Reit, al­beit in a non-ex­ec­u­tive ca­pac­ity.

He is also a trustee of Capreit, a sub­sidiary of which is Ires’s in­vest­ment man­ager. This busi­ness and its staff were paid more than ¤3 mil­lion in fees over the last three years.

Ires has granted Ehrlich’s suc­ces­sor, Mar­garet Sweeney, op­tions over two mil­lion shares un­der the in­cen­tive plan and paid her ¤127,000 last year.

Core In­dus­trial Reit

While “mar­ket con­di­tions” forced Core In­dus­trial Reit to pull a planned ¤225 mil­lion IPO in March, doc­u­ments seen by The Ir­ish Times show how it was lined up to de­liver a pay­day for its pro­mot­ers.

US hedge fund York Cap­i­tal, which was be­hind the flota­tion, planned to roll a num­ber of “seed” prop­er­ties it bought in 2015 and 2016 into the ve­hi­cle at a value of ¤83 mil­lion. How­ever, loans against the prop­er­ties amounted to only ¤39.5 mil­lion – in­di­cat­ing that the fund had ben­e­fited from a mas­sive boost in their value.

The prospec­tus also dis­closed that a York af­fil­i­ate, Sav­ile Row SARL, had been earn­ing 14 per cent an­nual in­ter­est on a ¤14 mil­lion loan se­cured against prop­er­ties in the port­fo­lio, which Core In­dus­trial planned to re­pay with IPO pro­ceeds.

Af­ter the IPO, Core In­dus­trial would have been sad­dled with ¤6.4 mil­lion of ex­penses, amount­ing to al­most 16.5 per cent of its net as­sets. These were mostly un­paid fees due from York Cap­i­tal to com­pa­nies con­trolled by two ad­vis­ers, Daniel Dono­van and Wil­liam Red­mond, who were in line to be­come the Reit’s top ex­ec­u­tives.

Core In­dus­trial’s post­poned flota­tion has not put oth­ers off us­ing the prop­erty IPO as a route to riches. US pri­vate eq­uity firm Oak­tree plans to put a num­ber of re­tail prop­er­ties it snapped up fol­low­ing the crash into a Reit to be man­aged by Sigma Re­tail Part­ners.

Oak­tree’s pur­chase of a ma­jor­ity stake in the Square shop­ping cen­tre in Tal­laght has given the planned listed ve­hi­cle a key as­set. Sources say Sigma’s top ex­ec­u­tives, Mar­cus Wren and Neil Ban­non, will get po­ten­tially lu­cra­tive founder shares for rolling their busi­ness into the listed com­pany.

But there are signs of re­straint emerg­ing in the mar­ket. Jonathan Laredo, Michael Gib­bons and Charles Peak, the ex­ec­u­tives be­hind Yew Grove Reit, which hopes to raise ¤100 mil­lion from float­ing on the Dublin and Lon­don mar­kets this month, will take half their agreed salaries until the com­pany reaches a net as­set value of ¤175 mil­lion.

The three, of UK-based Peak Cap­i­tal Part­ners, are eye­ing a big­ger prize – shares awarded un­der an in­cen­tive scheme tied to net as­set value, div­i­dends and to­tal in­vestor re­turns.

It is not yet clear if pri­vate com­pa­nies are get­ting in on the act. Di­rec­tors’ pay and div­i­dends – most are owner man­aged – are their most route to fi­nan­cial re­ward.

One of the big­gest, Seán Mul­ryan’s Bal­ly­more, op­er­ated un­der aegis of the Na­tional As­set Man­age­ment Agency be­tween 2010 and last year, so paid no div­i­dends. Re­turns for Bal­ly­more Prop­er­ties Ire­land Ltd, a key part of the group, show it paid its two di­rec­tors, Mul­ryan and John Paul Sisk, ¤305,616 last year. In Bri­tain, Bal­ly­more Ltd and sub­sidiaries paid off a £367,000 loan to Mul­ryan.

He and fel­low di­rec­tors John Mul­ryan and David Pear­son also col­lected £200,000 in fees.

Vic­to­ria Homes, run by Derek Byrne and Danny Whe­lan, re­cently re­vealed plans for a ¤375 mil­lion de­vel­op­ment in Dublin.

The busi­ness is backed by in­ter­na­tional in­vestors and its main hold­ing com­pany is in Belize in Cen­tral Amer­ica. Ac­cord­ing to its re­turns, it owed share­hold­ers – and for­mer di­rec­tors – Paddy and Joan Mur­phy ¤755,600 at the end of 2016, roughly ¤150,000 more than 12 months ear­lier.

Like the plcs, some pri­vate de­vel­op­ers have raised money from in­ter­na­tional back­ers, ei­ther through eq­uity or loans. It is likely that these in­vestors will have first call as the prof­its be­gin to roll in.

Clockwise from top: Michael Stan­ley, chief ex­ec­u­tive of Cairn Homes; Kevin Nowlan, chief ex­ec­u­tive of Hiber­nia Reit; Stephen Ver­non, a di­rec­tor of Green Reit; Justin Bickle, chief ex­ec­u­tive of Glen­veagh Prop­er­ties and David Ehrlich, for­mer chief ex­ec­u­tive of Ires Reit.

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