Cashing in on the recovery of the property market

Earlier this week, David Ehrlich, the founding chief executive of the State's biggest landlord, earned a €4.2 million profit selling his shares in the company to its largest investor, listed Canadian property firm Capreit.

Ehrlich resigned last year from the top job at Irish Residential Property Real Estate Investment Trust (Ires Reit), one of a clutch of new companies that launched in time to catch a recovery in house and apartment prices. Many have overseas investors and raised cash from stock markets rather than borrowing it.

Shareholders and executives are reaping the rewards of a recovery driven by a shortage of homes and commercial space. Brothers Michael and Kevin Stanley, and Alan McIntosh, recently converted some founder shares in the company they founded, listed residential builder Cairn Homes, into ordinary stock. The deal, worth €61.4 million at the time, followed a similar exercise in 2017 that yielded €16 million.

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Founder shares, real estate investment trust fees and long-term incentive plans all feature when property players take money off the table. Photograph: Dara Mac Dónaill

Founder shares (see panel), real estate investment trust (Reit) fees and old favourites such as long-term incentive plans all feature when property players take money off the table.

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Shareholders, who do not benefit, seem happy with the arrangement. At Cairn’s annual general meeting this week, one queried the complexity of the founder-share mechanism, but left it at that. As long as the companies do well, investors may be content, but a shift in fortunes, or a feeling that executives are benefiting too much, could prompt some to ask: “Are they worth it?”

Green Reit

Green Reit attracted US hedge fund king and Donald Trump supporter John Paulson as a key investor when it became the first real-estate investment trust to float in Ireland in July 2013. His firm, Paulson & Co, has since cut its stake in Green from 13 per cent to 1.7 per cent, locking in profits from a 58 per cent surge in the share price since the company's initial public offering (IPO).

The promoters of Ireland's first Reit continue to be rewarded handsomely. Green Reit doesn't pay its chief executive, Pat Gunne. Instead, he is remunerated by the Reit's investment manager, Green Property Reit Ventures, where he and property magnate Stephen Vernon are directors.

Green Reit paid a total of €78.3 million to the investment management company in cash and stock between the flotation and the end of last December – more than its annual rent roll and about 7.2 per cent of its current market value.

Performance fees peaked at €20.9 million for the year to June 2015. This element has begun to fall back as base fees, determined by a 1 per cent charge on the net asset value of its properties, have become more important.

Green Reit said in February that it paid a base fee of €5.8 million for the six months of its financial year to June. However, the board estimates that no performance fee will be payable for the full year.

Green Reit confirmed last year that Green Property Reit Ventures’ investment management contract has been renewed for a further three years from this July.

Another Vernon entity, Green Property, which sold about €1.5 billion of mostly UK property before the financial crash, offloaded Blanchardstown Shopping Centre two years ago to US private equity giant Blackstone for €950 million.

Hibernia Reit

Hibernia Reit, Ireland's second listed property trust, decided in late 2015 to "internalise" the management of the company, resulting in chief executive Kevin Nowlan receiving a €364,000 pay package for the year to March 2017.

However, Nowlan was also a key beneficiary from the management internalisation deal, which resulted in €21.1 million being paid to Nowlan Property Limited for the previous year.

Base and performance fees before that transaction, “top-up” fees due since the internalisation deal and performance-related payments to other employees bring the total fees and executive pay since the company’s 2013 IPO to more than €42 million.

Cairn Homes

The floating of Cairn Homes in the summer of 2015 was the first listing of an Irish residential developer in almost two decades.

The company's founders, chief executive Michael Stanley, his brother Kevin, who is chief commercial officer, and Scottish accountant and serial entrepreneur Alan McIntosh, were entitled from the outset to 20 per cent of the business's total returns over seven years through a founder-share mechanism.

Over the past two years, 53.7 million founder stock has been converted into ordinary shares at a total cost of €77.5 million. That included this year’s €61.4 million conversion.

However, the directors cashed in some of their chips last September, selling 15.65 million shares at €1.70 each for €26.6 million. Michael Stanley and McIntosh have also been paid €4.11 million over the past three years.

Last year, a legal challenge to the Revenue saved the Stanleys, and their three brothers Robert, Conor and Joseph, a tax bill for €35.5 million. The case related to the restructuring a decade earlier of Shannon Homes, co-owned by their father, Joseph snr, who transferred his interest to them on retiring.

Glenveagh Properties

Glenveagh Properties, which floated last October, also opted for a founder-share scheme to reward executive chairman John Mulcahy, chief executive Justin Bickle and chief operations officer Stephen Garvey.

Glenveagh holds a total of 200 million founder shares for the three – split 90 million each for Bickle and Garvey and 20 million for Mulcahy. The company’s stock price yesterday and on Wednesday valued 200 million shares at more than €230 million. They will not all convert at once, and will do so only subject to certain conditions.

The company’s recent annual report shows that Mulcahy will earn a €300,000 salary from Glenveagh this year, plus a potential bonus of €150,000- €225,000. Glenveagh will pay Bickle €450,000 and a bonus of between €315,000 and €450,000. Garvey will receive €350,000 salary, with a bonus of €245,000 to €350,000. Glenveagh says the trio must meet challenging targets before it pays any bonus.

Ires Reit

Ires Reit launched on the Dublin stock market in 2014 with less fanfare than others, but soon made its presence felt in the city’s rental sector. Ires bought 2,450 apartments, virtually all of which are rented, some for as much as €2,600 a month.

Ehrlich earned a profit of €4.2 million on the sale of 11.79 million Ires shares to Capreit. He exercised options over the stock at an average of €1.02 each, valuing them at €12.02 million. Capreit paid €1.3773 a share or €16.24 million in total for them.

The shares are the bulk of the 12.51 million Ires gave Ehrlich under its long-term incentive plan. He has agreed to sell his remaining 716,667, also at €1.3773, or €987,000. This would net him a further €256,000 profit at the option price of €1.02.

Between Ires’s flotation in 2014 and Ehrlich’s resignation in October, the company paid him €2.715 million in salary and bonuses. Adding it all up, he made €7 million from the venture. And he remains a director of Ires Reit, albeit in a non-executive capacity. He is also a trustee of Capreit, a subsidiary of which is Ires’s investment manager. This business and its staff were paid more than €3 million in fees over the last three years.

Ires has granted Ehrlich's successor, Margaret Sweeney, options over two million shares under the incentive plan and paid her €127,000 last year.

Core Industrial Reit

While "market conditions" forced Core Industrial Reit to pull a planned €225 million IPO in March, documents seen by The Irish Times show how it was lined up to deliver a payday for its promoters.

US hedge fund York Capital, which was behind the flotation, planned to roll a number of "seed" properties it bought in 2015 and 2016 into the vehicle at a value of €83 million. However, loans against the properties amounted to only €39.5 million – indicating that the fund had benefited from a massive boost in their value.

The prospectus also disclosed that a York affiliate, Savile Row SARL, had been earning 14 per cent annual interest on a €14 million loan secured against properties in the portfolio, which Core Industrial planned to repay with IPO proceeds.

After the IPO, Core Industrial would have been saddled with €6.4 million of expenses, amounting to almost 16.5 million of its net assets. These were mostly unpaid fees due from York Capital to companies controlled by two advisers, Daniel Donovan and William Redmond, who were in line to become the Reit's top executives.

Core Industrial's postponed flotation has not put others off using the property IPO as a route to riches. US private equity firm Oaktree plans to put a number of retail properties it snapped up following the crash into a Reit to be managed by Sigma Retail Partners.

Oaktree's purchase of a majority stake in the Square shopping centre in Tallaght has given the planned listed vehicle a key asset. Sources say Sigma's top executives, Marcus Wren and Neil Bannon, will get potentially lucrative founder shares for rolling their business into the listed company.

But there are signs of restraint emerging in the market. Jonathan Laredo, Michael Gibbons and Charles Peak, the executives behind Yew Grove Reit, which hopes to raise €100 million from floating on the Dublin and London markets this month, will only take half their agreed salaries until the company reaches a net asset value of €175 million.

The three, of UK-based Peak Capital Partners, are eyeing a bigger prize – shares awarded under an incentive scheme tied to net asset value, dividends and total investor returns.

It is not yet clear if private companies are getting in on the act. Directors’ pay and dividends – most are owner managed – are their most obvious route to financial reward.

One of the biggest, Seán Mulryan's Ballymore, operated under the aegis of the National Asset Management Agency between 2010 and last year, so paid no dividends. Returns for Ballymore Properties Ireland Ltd, a key part of the group, show it paid its two directors, Mulryan and John Paul Sisk, €305,616 last year. In Britain, Ballymore Ltd and subsidiaries paid off a £367,000 loan to Mulryan. He and fellow directors John Mulryan and David Pearson also collected £200,000 in fees.

Victoria Homes, run by Derek Byrne and Danny Whelan, recently revealed plans for a €375 million development in Dublin. The business is backed by international investors and its main holding company is in Belize in Central America. According to its returns, it owed shareholders – and former directors – Paddy and Joan Murphy €755,600 at the end of 2016, roughly €150,000 more than 12 months earlier.

Like the plcs, some private developers have raised money from international backers, either through equity or loans. It is likely that these investors will have first call as the profits begin to roll in in the period ahead.

Founding fathers

Cairn Homes was the first to use founder shares as an incentive but the mechanism is becoming de rigueur among Irish property players. Glenveagh has adopted it and Oaktree’s Sigma-managed Reit may do so.

Broadly, the company holds the shares – which have no voting or dividend rights – on the beneficiaries’ behalf. The founders can convert them to ordinary stock only by hitting agreed performance targets.

In Cairn’s case, the main plank of this is that the company’s share price shows a compound annual return of 12.5 per cent during a test period from March 1st to June 30th every year. In Glenveagh, shares must exceed the issue price by 12.5 per cent over the same test period.

Companies favour March-June because that is when they publish results and annual reports, allowing markets to assess their performance. Both schemes end in 2022, but Cairn’s will have run for longer as it began in 2016 while Glenveagh’s kicked off this year.

Cairn’s founders agreed the scheme with other shareholders in the group before it floated. The board’s only role is to administer it. The rationale is that the founders transferred properties to the company before the stock market launch, including 50 acres of Stanley family land on Dublin’s Malahide Road, which was ready for building. Cairn, with aid from McIntosh, paid off a Nama debt secured on this.

One analyst notes that the Stanleys could have built on the land, taking the profit for themselves. Instead they moved it to the company and took on the running of up to a dozen other sites for Cairn.

He believes the high value on this year’s conversion is unlikely to be repeated in 2019. “Cairn looks fully valued now. The price may not meet the target next year,” he observes.

Glenveagh’s scheme is in place in lieu of a long-term incentive plan, which is the more usual way for listed companies to reward executives with shares. As it is in its first year, shareholders have yet to see it working in practice.