Valad Property Group has joined the gathering tide of investment trusts to face up to the new reality in the markets in the wake of the credit crunch.
Real estate, investment, infrastructure, investment banks, financial engineers and fringe dwellers like MFS and City Pacific, are all on the list of sectors and groups to have been shaken by the new investor scepticism.
Centro and Allco were early significant victims; the lessons of Centro’s collapse have been a while coming to some of its peers in the market. They have waited until close to the end of the financial year to grasp the nettle and write down asset values, slash expected payout levels and to warn about what looks like being a miserable 2009 financial year.
The Babcock and Brown and Macquarie Bank investment banks, their listed investment funds, and the likes of Transurban, Mirvac and others, are all on the list of groups to have started confronting this new reality.
Debt is out, leverage is bad, earnings should be paid from cash flow and earnings, not borrowings, and accounts and business models should be a clean as possible. For example, generating profits by selling property assets into controlled wholesale funds, is a no no, something the likes of Mirvac, are struggling to understand.
Valad is one group that has waited for ages to reveal its conversion to this new reality.
In the meantime the value of its listed securities have more than halved in less than a year: from a high of $2.07 and a low recently of 68.5c. Yesterday they finished off 5c at 78.5c after finally telling investors the horrible truth.
In fact it’s almost a year since Valad lifted its profile by pushing into Europe with a $2 billion deal to buy the British property and funds management group, Scarborough.
It has been forced to cut its estimated full-year dividend and will undertake a series of asset sales with joint venture partners in an effort to simplify the business and relieve debt stress.
There will also be write downs in asset values of $65 million to $85 million, representing 3% to 4% of total investment and trading assets including joint ventures and other co-investments.
The securities touched a low for the day of 74c after the release before trading: that was a fall of 10%.
Valad told analysts yesterday that earnings and dividends per share are forecast to be 11.1c for the 12 months ending June 30 (that’s next Monday), compared with the 12.5c expected by the group in its March 20 update.
The company also said it will delay using all of the $1.2 billion of capital raised as property prices may have further to drop. That will cost it revenue and profits as there won’t be any flow of fees from buying and packaging assets for sale into its managed funds. (That’s what the likes of Centro were doing.)
The company said: "In light of current market conditions, Valad has chosen not to deploy all of the $1.2 billion of capital recently raised within its managed funds based on the expectation that buying opportunities will improve throughout the course of this year and next, resulting in greater returns for fund investors and Valad’s security holders.
"This stance is supported by Valad’s fund investors. New base management and transaction fees have therefore not been earned during the second half as expected.
"Similarly, while strong profits have been realised from Valad’s development and trading business in the second half, the activity level has been below that which was previously expected and Valad has elected not to sell off quality assets at the expense of future profits and growth opportunities."
According to Valad’s website, it has about $20 billion in assets under management in Australia, New Zealand, Europe and Britain.
Valad gets an estimated 40% of earnings from Australia and New Zealand, 31% from the UK and the remaining 29% from Europe. All areas have seen weakening property values and rising costs for credit, so the pressure looks like remaining with Valad and its peers for some time to come.
Valad has already raised $200 million by selling convertible notes to Kimco Realty Corp of the US as part of an agreement between the two companies. Valad raised $340 million in February for a new fund to target British property and it raised $470 million in the same month to invest in offices and industrial sites in Scandinavia.
Chairman Stephen Day said in a statement to the ASX that: "It is clear that the subprime crisis has proved challenging for both financial and property markets this year.
"These market conditions have impacted our 2008 financial year earnings with the combination of our decision to be careful with the deployment of available capital in our funds and the lower activity in the markets.”
"Uncertainty across all financial markets, particularly global property markets, has resulted in a decline in activity during the 2008 financial year. The lower level of activity has slowed growth in both Valad’s funds management and development and trading businesses,” Mr Day said.
That doesn’t hold out hopes of an improvement in 2009.
As part of the strategic review, Valad will "transfer” a 40% interest in Gold Fields House at Circular Quay to one of its global institutional investors "at an equivalent price of $340 million for the whole asset”.
"The transaction will return approximately A$54 million of capital and reduce balance sheet gearing by approximately 1%.
"Valad has several assets in its pipeline and on balance sheet that can be structured into ‘club’ deals similar to the Gold Fields House transaction which provides a profit uplift on tr
