The property sector has long been the Achilles heel of Australian banking and investment, from the big guys, to the little investor.
Every boom and every bust seems property somewhere at the centre of the problems for banks, for investors and for myriad other groups., such as tradesmen, building companies and contractors etc,
Usually it’s been big scale commercial property, home units, and broadacres. Do the names Mainline, Associated Securities, AGC, Cambridge Credit, Caga, Lensworth Finance, State Bank of Victoria, State Bank of South Australia, Estate Mortgage, seem familiar?
This time around there’s a variation on the old property play: financial engineering, funds under management, internalised management, stapled securities, overseas adventures in the US, UK, Europe, Macquarie Bank, Babcock and Brown, borrowing to pay distributions rather than from earnings; a new paradigm was hailed.
And then it all went belly up and the likes of Mirvac, Stockland, MFS, City Pacific, Raptis, Lend Lease, even Westfield were hit hard by the slump and credit crunch as the easy money dried up and risk became fashionable.
But one group has come to represent the debacle of taking a perfectly respectable, well-run high quality business and turning it into a basket case, totting on the edge of failure.
There’s a growing black hole in the property sector of the Australian share market. It’s called GPT Property, which was once one of the bluest of blue chip real estate plays in the country.
But it fell among the sharpies and market players: Babcock and Brown, Lend Lease and Westfield have all had a role in the trusts demise, but none more than the former management and board led by Nick Lyons, the former CEO and Peter Joseph, the former chairman.
Now it’s a horrible mess, chewing up millions of dollars a day in cash and destroyed market value.
GPT again is broke and on its last feet, having run through around $1.6 billion raised in October of last year.
Yesterday it stuck its hand out to ask for up to $1.69 billion in new funds from securityholders.
By last night it had sort of nailed down $1.2 billion from major shareholders.
But that didn’t include rival Stockland which will have to contribute more than $150 million to maintain its 12.7% holding in GPT. Good luck. Stockland said Friday it would participate in the issue by GPT.
This raising will take the amount sought from the market to around $3.3 billion raised in the space of nine months. Surely that is a record for cash consumption.
But then its 2008 financial year loss (To December 31) was a nasty $3.25 billion, exceeded only by that bigger basket case, Centro Properties and Centro Retail Trust, now in the hands of its banks with shareholders facing almost total destruction of their diminished value.
But in the February, 2009 release of the huge loss details in the annual figures, GPT spoke confidently about having enough cash in the tin.
"Materially strengthened balance sheet through $1.6 billion capital raising in October 2008 (33.7% headline gearing, look-through gearing 46.6% – net of cash)
"Significant headroom in relation to gearing covenants ($1.9 billion on a balance sheet basis);• Distribution Reinvestment Plan (DRP) to operate from March 2009 quarter distribution;• Liquidity position remains comfortable ($260 million of capital expenditure funding required over the next 12 months covered by $961.9 million of cash)."
So to pop up and ask for another $1.2 billion, three months after that was written, means something has gone wrong, again at GPT.
GPT said the raising comprises a $1.57 billion non-renounceable one-for-one rights offer to retail and institutional investor and a $120 million placement to institutions.
The new stapled securities are priced at 35 cents each, and at a discount to the company’s closing price on Wednesday at 47.5 cents.
"This capital raising immediately addresses the key balance sheet issues currently facing GPT, namely gearing covenant headroom and liquidity," GPT chief executive Michael Cameron said in a statement.
"In addition, the new capital allows GPT to seek to accelerate its exit from its Joint Venture with Babcock & Brown.
"GPT will make no further capital commitment to the joint venture."
The institutional component of the entitlement offer of about $1.1 billion, and the placement, are fully underwritten and the results will be known next Monday. Last night brokers said this had been filled
The retail part of the rights offer, which is expected to raise about $470 million, is not underwritten. That’s where Stockland will be asked to put up its hand.
So no money is expected there and no broker would underwrite it, knowing small holders will ignore than offer.
Mr Cameron said GPT was committed to its core domestic strategy and "returning GPT to being a pre-eminent Australian real estate business."
Hold on, here’s what GPT said in February of this year: "Strategy focused on high quality Australian real estate (represents 80% of real estate investments)."
Babcock & Brown Ltd went into voluntary administration in March; GPT has a joint venture property investment operation with the unlisted Babcock & Brown Pty International Ltd entity.
It was the key to the new strategy after the Lend Lease takeover attempt failed.
Now it has crippled the company, forced out management and board, members and ruined the futures of all its securityholders, who are once again being asked to bail it out.
GPT has acknowledged that the joint venture, which holds European and US assets, is unlikely to have any material value in the future. That’s cold comfort for the securityholders.
Of interest will be the pos
