Vernon the contrarian testing his timing again

When he led Green Property's departure from the Irish Stock Exchange and into life as a private entity in 2002, Stephen Vernon did not believe he would ever return to the market with a public company.

But he is back, and so is Green, whose latest manifestation is as a real estate investment trust (REIT), which last week raised €310 million from mainly institutional investors and was yesterday admitted to the Irish Stock Exchange.

Key issues
So, why the change of heart? Two things have combined to lure Vernon back. This year's Finance Act included the tax framework required to establish REITs in the Republic. They're a familiar creature on most stock exchanges but completely new to the Irish market. Green REIT plc is the first, although the soundings are that there will be more.

The next was a change in the commercial property environment. “We wanted to participate in what we think will be a very interesting real estate market,” Vernon told a conference at the venture’s launch this week. “The stasis of the last five years is beginning to lift, we are seeing liquidity re-emerging in the Irish market.” So he and his colleagues decided that it was time to begin investing again, albeit in a measured way.

Plenty of people agreed with them as the proposal got a far better response than even its promoters had hoped.

When they first announced their plans, Green REIT had a target of raising €200 million. Investors signed up for over €100 million more. The offer attracted a few interesting names from the capital markets. “Our shareholder base is as good as anything we could have dreamed of,” Vernon says.

New York-based Paulson & Co, whose founder, hedge fund manager, John Paulson, who spotted the burgeoning sub-prime mortgage crisis in 2007 and made $3 billion shorting them, has taken almost 13 per cent. Investec is in for the same amount. Threadneedle Investments, a UK fund responsible for £84 billion in assets and part of the much larger Ameriprise group, has taken 8 per cent. Other backers include Blackrock, GP Holdings and Zurich Life.

The management, including Vernon himself, has taken 10 per cent and is locked in for three years. The trust will work by combining investors’ cash with a low level of borrowing to buy commercial property, mainly offices but some industrial units, in areas where there is real demand, essentially central Dublin and possibly the Republic’s other cities.

Green REIT’s prospectus says that borrowings will come to 35 per cent of the cash raised, although it has the scope to increase that to 50 per cent. Vernon agrees that the back-of-the-envelope calculation, €310 million plus 35 per cent of itself, which is €140 million, equals €150 million, sounds about right.

He does not see a problem with borrowing money. “The banks are willing to lend,” he says. “Our intention is to take bank finance. My plan would be to issue bonds in the longer term and replace the bank debt with cash.”

The trust’s managers have set a target of investing the funds raised over 12 months. According to its prospectus, Green is already eyeing properties with an estimated value of €500 million. These are predominantly in Dublin, and include either multiple or single buildings.

In terms of the actual nuts and bolts, the trust will have its own board, chaired by Gary Kennedy. Another company, Green Property REIT Ventures, will act as its investment manager, choosing, buying and taking day-to-day care of the assets. It will be led by Vernon, who is chairman, Green Property managing director, Pat Gunne, Mark Munro, Paul Culhane and Jim McKenna.

The trust will function by leasing the buildings. It will pay a fee of 1 per cent of the total invested to the management company. It has to pay 85 per cent of its rental income to shareholders as a dividend to comply with the legislation. As long as it does this, the rental income will not be taxed.

This liability falls on the shareholders. Vernon responded to criticism of the model this week, by arguing, with the support of the Minister for Finance, Michael Noonan, that the structure is more about tax transparency than tax breaks. The shares themselves are traded in the same way as those in any other plc.

This will be familiar territory as the original Green Property first became a plc in 1985, 20 years after it was founded. Vernon took the helm in 1993. Over the next nine years, the business expanded in Ireland and stepped up activity in Britain. One of its main assets was Blanchardstown shopping centre, which opened in 1996, and its tenants included a range of Government departments. During that time, its market capitalisation grew from €24 million to around €1 billion. However, by the turn of the century its managing director was growing frustrated with the markets, which he believed undervalued the company.

Management buyout
He decided to take matters into his own hands and led a management buyout bid in 2000, but abandoned it early in the process when he and his colleagues realised that they were unlikely to be able to offer a price that the board would be prepared to recommend to shareholders.

However, he did not have to wait long for a second chance. In mid 2002, he launched a second bid. The move sparked interest from a number of others, including Johnny Ronan’s and Richard Barrett’s Treasury Holdings, but by the end of the year, Vernon’s Rodinheights vehicle had seen them off and succeeded in taking the group private at €9.80 a-share, or €1.05 billion.

Treasury is now in liquidation. The old Green Property plc is still with us, but now as a qualifying investor fund, whose main asset is Blanchardstown. Once he took it private, Vernon steered the company in the opposite direction to virtually the rest of the Irish property industry. At the point that the delisting was completed, momentum in the market was building towards what turned into a six-year orgy of borrowing and buying that ended in the crash.

Around 18 months after Vernon took control of Green, Derek Quinlan headed an investment syndicate that bought the Savoy group of hotels in London for over €1 billion. Many other Irish developers followed him, buying up chunks of real estate and trophy properties in the British capital in highly leveraged deals. Back home they were trading plots of land, building hotels and mopping obscure shopping malls for eye-popping prices, all supported by borrowing.

In contrast, Green began a deliberate, phased, sell off of its British properties, which it says realised €1.48 billion in total. It followed that with the sale of a large part of its Irish portfolio until all that was left was the Blanchardstown centre and some less significant assets.

Asset management
The crash brought another opportunity. He established a separate company, Green Property Ventures, in 2008 as an asset manager. Not surprisingly, given when it was established, much of its focus was on what were distressed assets. Essentially the idea was to create a structure designed to aid lenders in getting the most out of properties against which they had security.

“We went to the banks and asked ‘what can we do’,” he says. It has agreements with clients that include AIB, Apollo Real Estate, GE Capital and Lloyds and owns or manages around €1.4 billion worth of property here and in Britain.

In late 2008, when the Irish financial system was in crisis, Green Property Ventures bought a group of properties in London and southern England from AIB for €970 million. The portfolio, including the Daily Telegraph's HQ, luxury homes, Mayfair office blocks and the UK's Department of Health head office, originally belonged to Achilleas Kallakis, the Greek conman who bought them using loans that were fraudulently obtained from the Irish bank.

Once AIB realised what had happened, it seized the properties involved and sold them at a €73 million loss to Green. It loaned the cash needed to the company at preferential rates.

According to evidence given to Kallakis’s trial in London last year by the bank’s former chairman, Dermot Gleeson, the whole deal was ushered through quickly, sparing the institution the need to tell the markets that it had a problem with a large property portfolio.

Vernon explained this week that the deal was always meant to be a “work out” arrangement. “The whole idea was to get the bank its money back,” he said, adding that this should be achieved over the next two to three years. The original deal included a profit-share agreement with AIB.

Last month, Green Property Ventures and its partner, CIT, got planning permission to redevelop one of the premises, the Market Towers in Vauxhall in London. The proposal involves knocking the existing blocks and replacing them with new ones of 48 and 53 storeys combining apartments, offices and retail.

Apart from that project, Vernon says that Green Property Ventures is likely to reach the end of its life in the next two to three years, while the original plc will simply sit there as an investment fund. The REIT, he says, is the “new Green Property”.