Monday 16 September 2019

Richard Curran: 'Has Vernon got his property timing right at Green again?'

Payout: Stephen Vernon and Pat Gunne’s €10m investment in Green Reit has put them in line for the lion’s share of more than €80m in six years
Payout: Stephen Vernon and Pat Gunne’s €10m investment in Green Reit has put them in line for the lion’s share of more than €80m in six years
Richard Curran

Richard Curran

It is February 2002. Green Property CEO Stephen Vernon is a little frustrated. Two years earlier he had seen the stock market seriously undervalue the property portfolio he had built up at Green since 1993.

The stock was continually trading at well below its net asset value. A mooted management buyout and a bit of takeover interest had lifted the share price but by February 2002 it was still trading at 25pc below its net asset value.

The company, which owned a huge property portfolio, including the massive Blanchardstown Centre, was effectively put up for sale. Prospective bidders started to circle and by July of that year, Mr Vernon, backed by Merrill Lynch and Bank of Scotland, bought out the company in an MBO.

He believed the market was wrong and he was right about the potential of the assets.

The Vernon-led group paid just under €1bn for it. Mr Vernon quickly began selling off assets like the Setanta Centre for €85m and another series of assets in the years that followed.

The more he sold, the quicker his financiers were paid back and the more of the company Mr Vernon effectively owned.

It has never been published just how much money he made from buying out Green Property, because it was a private trust.

But when he sold the Blanchardstown Centre in 2016 for €1bn to investment giant Blackrock, the level of debt still owed would have been greatly reduced. Vernon is likely to have made several hundred million euro from his time at Green Property.

Fast forward to this week and the board of Green Reit, the real estate investment trust floated by Mr Vernon in 2013, has put itself up for sale. It cited the gap between its financial performance and asset values, and the share price.

This time is different though. Stephen Vernon, and his management colleague Pat Gunne, will not be making a play to buy the business or its assets.

The very reason Green Reit was set up in the first place was to avail of the commercial property opportunities created by the crash. From the outset, it had all its ducks in a row.

Mr Vernon and Mr Gunne knew the property scene in Ireland inside out. Property values had fallen by 50pc and were still on the floor. Development assets needed capital and finance to develop, both of which were in short supply.

The Government desperately wanted to get the commercial property sector moving again.

One reason was the fact the state was up to its backside in property, from having a €70bn Nama property portfolio, to owning most of the banks.

It was prepared to provide tax breaks to encourage investment. Green was the first Reit to float on the Irish Stock Exchange. It didn't beat around the bush when it came to outlining its plans.

When it floated, with Finance Minister Michael Noonan on the floor of the stock exchange on the first day's trading, it said: "By establishing the company during the current cyclical weakness in the real estate market, the board believes the company will give shareholders the opportunity to take advantage of the re-pricing of assets that has occurred."

It never mentioned the long-haul, the long-term, the pension fund market, or solid returns in the decades ahead. This was a large opportunistic property play.

And it worked spectacularly. Shareholders have got a decent return. Mr Vernon and his colleague Pat Gunne, who stuck €10m each into the venture, have done very well. The company is managed through a separate vehicle called Green Property Reit Ventures, which is 68pc owned by Mr Vernon and Mr Gunne.

Since flotation Green Property Reit Ventures has received over €78m in management fees and shares in lieu of performance. Throw in the uplift of around €5m in Mr Vernon's shares held through another Green entity, and Mr Vernon and Mr Gunne are in line for the lion's share of payouts and stock uplift of more than €80m in six years.

Green Reit said the decision to sell came following a strategic review and that ultimately it is about generating the best return for shareholders. Yet, it did come as a surprise and many will ask whether it means Mr Vernon, Mr Gunne and the board can smell trouble ahead for the property market.

The company has emphasised that it firmly believes in the potential of the market and its assets. But Mr Vernon certainly has a nose for these things.

Back in late 2014 I interviewed him for RTÉ Radio about how he managed to avoid the scars of the property crash.

He said that back in 2005 and 2006 commercial property prices were "quite ridiculous". He instinctively believed the sums just didn't add up. He had stopped buying a couple of years before.

Without anything to buy at reasonable prices, he spent the time enjoying himself. He climbed mountains, travelled in South America and even visited the Galapagos Islands.

While his property developer colleagues back in Ireland were racking up billions of new debt at crazy prices, Mr Vernon, was basically biding his time.

He said that ultimately real estate is highly cyclical. When things are going well everybody decides to do the same thing. If it is good to build offices, everybody builds office blocks.

"They even end up with the same business plans", he said. Then inevitably, you end up with oversupply. The only real question to be answered is where we are in that cycle at any moment in time, he said.

The cycle can be anything from two to seven years, he said. The last big boom was basically two seven-year cycles in a row with a tiny blip inbetween.

In 2016, Mr Vernon sold Blanchardstown Town Centre and by 2018 Green Reit had got out of retail. He believed it was facing too much competition from online and required a lot of new investment. Instead he decided to concentrate on logistics as a property investment category.

He has a track record of getting his timing right about property. This may prompt more questions about whether Green Reit and its board are seeing round corners and what might be coming.

Back in 2014 talking about why he set up Green Reit, he had some interesting things to say about property players and risk. You can sit on the assets, and if they have a good cash flow and you are not over-borrowed, "you can spend the rest of your life playing golf and having lunch. The life of property companies is often like that".

"As they mature and the people that run them mature, they become more risk-averse. That was never what we wanted", he said.

Back in 2014, Mr Vernon still had a lot he wanted to do.

The question now is whether the market is undervaluing the potential of the assets Green Reit has, or whether the market is now more risk-averse and cautious about the future.

Back in 2002, Mr Vernon was right and the market was wrong. In 2019, who is right and who is wrong?

Green Reit benefited from various tax structures which meant it didn't have to pay tax on profits. However, if it now faces paying 25pc tax on the increase in value in some of its properties if the company is sold. This is a feature of the legislation that underpins Reits.

A sale of assets might be more attractive for would-be buyers instead of acquiring the company. But, buy the company and you get all the assets. Those you don't want can be sold off. However, a buyer would be taking on a single large portfolio with the commensurate risk.

What happens with Green Reit will test the water for what lies ahead in certain sections of the commercial property market.

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