Mirvac, Valad Pay The Price Of Botched Property Deals

Sydney, Aug 27, 2008 (ABN Newswire) - Another company looking for redemption from asset write downs and a change in management (started, it claims well before the proverbial hit the fan in June and July) is Mirvac, a once promising real estate player now doing it tough among the growing flock of troubled property groups.

The new CEO reckons its got a 'gold-plated balance sheet' to quote a story on AAP yesterday about the result, and that the rationalisation of its diverse property operations and a push into the booming Middle East market, will help "shield it from the storm lashing the local sector."

It hasn't so far and until the credit crunch stops forcing asset values lower and companies to de-merge and put assets up for sale, nothing will save Mirvac or any of its fellow property financial engineers from further rough handling.

Unlike the older and wiser Westfield group of the Lowy family, Mirvac, GPT (and Valad and all those other property wannabees), strayed far and wide from what they did best; developing residential, light industrial and some commercial CBD properties for sale and or lease or rent to good quality clients.

Funds management, joint ventures, plunges into the US, UK, Europe, the Middle East, Asia (especially Japan ), higher borrowings, more leverage, more leverage; anything to drive returns higher in the easy money, low credit risk days.

But no more and all those financially- engineered property groups are now suffering, from Lend Lease, to GPT, Valad and a host of others. Mirvac is no different and yet you wonder if they still don't understand the changed nature of business.

Mirvac reported a full-year net profit of $171.8 million, down 69.1% from the previous year. Revenue for the period was down 5.8% to $2.128 billion.

"Mirvac's statutory net profit after tax of $171.8 million was impacted by the previously announced asset impairments totalling $400.1 million. Due to the sustained deterioration in market conditions Mirvac prudently reassessed the value of its residential and non-residential developments, intangible values and co-investments in managed listed funds," the company said.

"Operating profit after tax (profit before specific non-cash and significant items) was $352.2 million, an increase of 10.4 per cent.

"Full year distributions to securityholders of 32.9 cents per stapled security represented a 3.1 per cent increase on the previous 12 months."

It reaffirmed earnings per share guidance range of 23 cents to 25 cents per stapled security and distribution guidance of 20 cents per stapled security for the 2009 year, which will be sharply down on the 32.9 cents distributed in 2008 with a final payout of 8.23 cents a security.

So the distribution could be down 33% or so this year.

The investment division, comprising Mirvac Property Trust and Mirvac Asset Management, made a pre-tax profit of $404 million for the year.

But its development division made a pre-tax net loss of $65.8 million, after booking a $219.9 million impairment to the carrying value of its inventory.

"Residential developments have been exposed to the continuing poor sentiment, affordability and mortgage related stress, which adversely impacted some development values," Mirvac said.

At the end of June, Mirvac's funds management business had $7.2 billion in funds under management.

"Funds Management was adversely affected by the deterioration in the real estate markets with the value of certain assets being written-down by $104 million including infrastructure investments (Lane Cove Tunnel and River City Motorway) and intangible assets (Mirvac Domaine, Mirvac Equity Funds and JF Infrastructure). Funds Management's net loss before tax was $93.9 million, and operating profit before tax was $9.5 million, a decrease of 59.9 per cent."

Newly appointed chief executive Nick Collishaw said after the profit announcement that he believed Mirvac's recent $400 million write-down of its assets properly reflected market conditions.

"If the market deteriorates further then we will continue to assess the carrying values and report accordingly, but as we sit here today we believe we have taken appropriate action to reflect the current and the real carrying values of those assets," he said.

He said Mirvac retained a strong balance sheet with gearing at 32.5% and $1.2 billion of undrawn debt facilities.

Investors kept Mirvac securities down yesterday in the weaker market. They closed off one cent at $2.82, after falling more during the day, before the market recovered much of the morning's fall.

The securities plunged 70% from January to mid-July 2008, then recovered about to be around 60% down after the update, write-downs and announced retirement of CEO Greg Paramour.

He left as of August 26, , hung around for the start of yesterday's briefing and then departed.Nick Collishaw then ran the chat with analysts.

Mr Collishaw said Mirvac was now focused on cutting costs at its funds management and residential development businesses, as well as grow and secure recurring income at its investment division.

Mirvac said it was excited about its push into the United Arab Emirates but would not risk its balance sheet or capital in chasing deals. It would partner in the region with Nakheel, which is also a major shareholder in Mirvac.

Like so many other companies in the sector, such as its bigger rival Stockland, Mirvac is looking past 2009 and to 2010 and beyond to resume growing.

Like Mirvac, Valad Property group tried to best complexion on a rotten result and a rotten final six months.

In fact the two groups had a similar experience, being forced to cut asset values, changing its business model (rediscovering prudence and conservative financing, plus paying distributions out of earnings) and revealing a change at the top of the company.

And like Mirvac, 2009 is basically being written off with a lower profit and sharp drop in distributions being forecast. It's a similar story across this sector as companies and their investors count the cost in billions of dollars of losses and collapsed asset in stock market values.

Mirvac lost its CEO, now Valad's executive chairman, Stephen Day is stepping aside because of ill-health (but will remain on the board) He will be replaced by Peter Hurley, currently a senior executive.

The company said Stephen Day decided to become a director based on medical advice. Hurley will return to Sydney after being based in London the past 12 months.

Valad has been the worst-performing Australian real estate investment trust the past three months, mainly because of worries about its business model and its exposure to the worsening UK real estate market..

The group reported a net loss of $248 million for the 12 months ended June 30, compared with net income of $109.1 million in 2007.

That was after a huge write off.

In a statement to the AX with its report, Valad said "it achieved a 123% rise in annual underlying profit to A$169.6 million compared with A$76.2 million in the previous corresponding period, reflecting a solid performance in a very difficult environment.

"Following a business review that highlighted the need to realign operations amid challenging global market conditions, asset revaluations and goodwill write-downs have led to a net reported loss of A$248 million in the 12 months ended June 30, 2008, compared with a net profit of A$109.1 million in fiscal 2007.

"Executive Chairman, Stephen Day on medical advice has decided to change his role to Executive Director.

"Operational responsibility will rest with Peter Hurley, who will become Managing Director. Mr. Hurley has been based in London for the past 12 months integrating the Group's European business and will eventually return to Sydney. Trevor Gerber, who is currently Deputy Chairman, will become the Independent Non-Executive Chairman.

"The past 12 months have been a torrid time in world property and financial markets. This, combined with 14 years of effort since founding Valad in 1995, has taken its toll on my health and as a result the Board changes are required going forward," Mr. Day said.

"As a consequence of my decision, Trevor Gerber has accepted the Board's offer to be Valad's Independent, Non-Executive Chairman. Trevor has been Deputy Chairman and Lead Independent Director and the Board looks forward to working under Trevor's Chairmanship.

"A business review undertaken over the past two months has resulted in a A$247 million write-down of goodwill relating to the 2007 acquisition of the European platform, a write-down of A$15 million in the Asia Pacific VCS portfolio and a A$24 million write-down of the Crownstone European portfolio. 

"These unrealised devaluations, along with another A$117 million in properties and fund co-investment, have also been included in the fiscal 2008 results."

"Mr. Hurley said the business review has been a necessary step to ensure that Valad responds effectively to the tough prevailing conditions.

"The conditions that we are all facing have been challenging and we are disappointed not to have met our original FY08 DPS and EPS targets," he said.

"With no sign that uncertainty in the financial and property markets will ease anytime soon, we have taken a very conservative view of the future, and have begun a process to re-set the business so that growth can be achieved from today. 

"We see no benefit for any of our stakeholders in taking a bullish view of our earnings in FY09, although we believe that working off this base there is every possibility for over performance, particularly with regard to our Funds Management business

"We have also adjusted our distribution policy to pay out 75% of underlying earnings to better match our cash earnings over the coming year.

Valad expects fiscal 2009 net profit in the range of A$115 million to A$145 million, which translates to earnings per security of 7.00 to 9.00 cents and distributions per security of 5.25 to 6.75 cents.

"The FY09 guidance represents our conservative view of reliable earnings that we expect to achieve this year. This is obviously formed on the basis that market conditions remain under stress but do not suffer a material deterioration," Mr. Hurley

Total dividends were 11.1 Australian cents a share, the same as in the good days of 2007. As we have just seen, that will be a highpoint for at least a year, possibly more, with a 50% fall expected for 2009.



Valad's shares have dropped so much in the past three months of trading that its market value has been slashed to just over $750 million. yesterday the securities rose in the late rebound in the market to finish up 9%, or 4 cents at 47 cents.


 

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