Seven months or so ago Lend Lease was chatting informally to Mirvac about a possible combining of interests.
Nothing came of the talks, much to the relief of Lend Lease shareholders, but no doubt to the continuing disappointment of Mirvac holders.
Mirvac (MGR) shares were well over $6 each at the time the news broke in early December; Lend Lease shares were closer to $20 each than $19.
Monday MGR closed down 5c at $3.19 but yesterday it edged higher to close at $3.25, which was where it finished last Friday after its announcement. Lend Lease shares finished at $9.90 on Monday, up 11c and rose a further 7c yesterday to end at $9.97.
In late January Mirvac placed $300 million worth of its securities with the Middle East investor, Nakheel at $5.20 each. Yesterday’s close gives a loss of $2 on each of the 57.69 million securities sold to Nakheel, which has since topped up its stake to around 14%.
Mirvac Friday revealed plans to write down the value of its assets by between $400 million and $500 million, revealed a probably cut in the 2008 final distribution and placed doubt on the level of payment for 2009.
Lend lease Friday revealed its advances on Queensland based property group, FKP, had been spurned, despite offering around $1.3 billion, or $5 a share, for a security that was selling around $3.80 before the announcement. FKP shares ended at $5.05 yesterday, down 5c.
FKP said ‘go away’, twice to LLC, which also confirmed that it had been unable to fund its equity contribution to the development team that had been selected to build the athletes village for the 2012 London Olympic Games.
Mirvac signalled to the rest of the property development sector that the easy credit, borrow your way to profits and payout approach to business was over, and this was picked up in yesterday’s announcement from Valad Property Group.
Brokers have been mixed in their reactions to the moves from Mirvac, Lend Lease and Valad Property group which joined the write down and restructuring trend Monday with some significant moves of its own.
Valad shares were again punished by investors. They slid 9% yesterday, or 7c, to close at 71c. Investors remain unsettled by the lateness of the downgrades to earnings, asset sales and other changes.
Goldman Sachs JBWere said that "Valad’s move "towards "cash"distributions is arguably more relevant to VPG than any other A-REIT given the group’s reliance on development & trading and profit share income. Combined with the level of cash earnings within VCS (~50%), and the weak near term outlook for transaction based income, achieving core EPS growth in FY09 looks challenging.
"Interestingly, balance sheet assets have been written down by only 3-4%, with transactions, income growth and equity raised during the period assisting in maintaining look-through gearing at ~40%.
"We see this as aggressive, and in particular the current market value of VPG’s ~$900m of intangibles, which management has indicated may be subject to some form of impairment testing at the FY08 result (ex this we estimate VPG’s look-through gearing would increase to >50%)."
But Merrill Lynch was more upbeat, though it was hedged:
"VPG reduced its FY08 EPS/DPS guidance from 12.5¢ to 11.1¢ due to delays in launching funds and lower development profits. The guidance is, however subject to 3 transactions closing pre June 30, which add 3¢ to EPS. The fact that these 3 transactions add an incremental 3¢ (or 49% of 2H08 EPS) highlights the fixed cost in the business and its leverage to lumpy trading profits.
"With few market transactions combined with cap rate expansion, this leverage is a key risk. VPG will also write-down $65-85m of investment assets in June (3-4% of value).
"Given cap rate expansion and VPG’s exposure to the UK/EU markets we are somewhat surprised by the limited extent of these, testament to the asset value created by the group. We do however expect further write downs in FY09.
"Although VPG has been one of the few AREIT’s to raise fund equity since Dec, AUM growth has slowed due to VPG not deploying capital and slower inflows. Transaction fees will be minimal in FY08, a trend we expect to continue. In the absence of new AUM, VPG will likely rely on trading and development profits in FY09 and we expect the sell down of major AU projects such as Pentridge.
"In a bold move, VPG will reduce its DPU to adjust for capex from FY09. We have been advocating this for all AREIT’s in order to reduce reliance on gearing, DRP’s and asset sales. We estimate VPG’s current payout ratio is 106% of AFFO.
"At a 13.9% FY09 yield, valuation still compelling. Despite the earnings downgrade, VPG trades at a steep discount to the sector (13.3% FY09 yield versus 8.3% for the sector)."
And on Lend Lease’s move on FKP, Goldman Sachs JBWere said:
"The value of LLC scrip has declined significantly in recent months making any scrip based bid more dilutive to LLC shareholders. We believe LLC will require either asset sales or acquisitions to hit management’s EPS growth target of 10%+. The climate for asset sales is becoming more difficult, particularly in the UK. With earnings risk becoming increasingly negative for a number of LLC’s businesses and the environment for asset sales now more difficult, we believe acquisitions could become a key source of earnings growth.
"Without them (and in the absence of asset sales) we believe could find it difficu
