Peter Bill: Reality Check

A break beckons, so this may be the last posting for a while. So, first a look at the newly-posted accounts of the property company runs by David Pearl, who famously cycles around his North London patch seeking bargains. Second a preview at what's contained in today's Standard column.

The accounts to  September 2010 for Structadene show Pearl's heavily leveraged business has made it through the recession. Asset values are down from £892m to £655m. But liabilities have fallen from £785m to £553m, leaving net assets of £111m, close to last year's £104m. 

The P&L account shows why the asset values have fallen by £237m - through sales. A profit from disposals of £13m accounts for more than half the pre-tax profits of £22m - which are about the same as last year. Rising values should put Pearl in a better position this time next year.

But a note on the accounts does show Pearl is having a Stamp Duty spat with HMRC. Well, not exactly a spat: Customs wants to extract the sum of £6,889,950 in duty from Structadene. But Pearl's layers are contesting the charge and have confidently made no provision in the accounts

Today's column reveals the name of 560-foot residential tower planned in Cherry Orchard Road, Croydon - it's a type of Cherry! There is also news that the floating pontoon on the Thames might not only get built in time for 2012 - it may become a permanent tourist attraction: just like the Millennium Wheel.

But more serious is the analysis of the £1b bid made by Wellcome for the Olympic Park and the ticklish decision that has reached all up to Downing Street on whether to go for the highest bidder for the Olympic Village - or give over the whole park to Wellcome. Expect a decision in the next two weeks, or sooner.

The silly season arrived early this weekend with news in The Independent of a possible tie-up between the Nigerian and London stock exchanges. An idea that may not appeal to LSE chairman, Chris Gibson-Smith. But wearing his hat as chairman of British Land, Dr Smith, will have approved plans, reported in the FT today, for BL to raise up to $500m from the US bond market. Why so much money, and why in dollars?

The answer, in most cases, is that the new money is cheaper than the old money. In other words it's all about remortgaging, or, in official language, "debt restructuring." In this case, BL hints the new money will cost the bank rate plus 1.5%. That sounds a good deal for anyone remortgaging a house: as it would to anyone looking for cash to build an extension, someone who can't get cash from the High Street bank.

BL has gone to Wall Street to get a better bond rate. What will they do with the money? The answer is probably an impossibly complicated mix of re-mortgaging - plus extension building. Lots of money is needed to build the Cheesegrater tower on Leadenhall and a new HQ for UBS at Broadgate: here the 28 day period for English Heritage to object to being overruled on the listing of the existing buildings expires in a matter of days.

BL will be paying half the £460m cost of UBS building, say £230 million. They will be paying half the £340m bill for the 736ft Leadenhall Tower, another £170m. That's a total of £400m sterling - or more than $600m on just two buildings due to complete over the next four years. Wall Street was originally asked for $200m but is now giving $500m, presumably at the expense of the City  and, er, the London Stock Exchange.

This morning DTZ made it more than clear they have received more than one approach for the business.  A stock exchange announcement talks in the plural of "approaches" - "including" one from St George Participations. That is the vehicle of the French Mathy family, which already owns 54% of the business: the family that sort of promised their shares to BNP Paribas. A half-promise revealed in on May 12^th which only mentioned one "approach".

My EG column on June 3suggested the likely outcome is a French-ified DTZ. But two other possibilities were floated. One, a management buy-out: two, a breakaway of the Asian business, led by CY Leung, the Asian CEO, who would not take kindly to French rule. There is a third slim possibility; CBRE, JLL, or even Savills taking a look at the books; perhaps just out of nosiness...or perhaps not?  The Mathy family gets to choose.

Whatever the family which lost tens of millions in their DTZ misadventure decide, they have at least got one thing right: this is a pretty good moment to sell. Hope now outweighs fear in the market. The upward cycle feels like it is becoming established. With luck, the buyer will pay a decent premium on the current share price of 40p, which values DTZ at a ludicrous £111m: a still decent business and brand worth a lot more than that - in the right hands.

The Southern Cross firestorm lost some heat over the weekend with the absence of fresh fuel. But the story will flare again this week as landlords are due to meet today, with every sign they will agree to rent cuts that should have been agreed long before the Daily Mail and the Sun ever heard of the care home company hobbled by get-rich investors with rents which cannot be met. Meanwhile a small but telling tale caught the eye. 

It comes from the Times diary which prints extracts of e-mails between British Land chief executive, Chris Grigg, and property grandee, Sir Stuart Lipton. Grigg is proposing to replace several of Lipton's Broadgate blocks with a whopping great silver billet for UBS to a design that Sir Stuart has publicly excoriated. That has led to English Heritage recommending listing. If that happens BL's plans will need to be torn up, wasting millions.

 
So, what does Sir Stuart do? Invite Grigg to lunch with Kay Andrews, chair of English Heritage, saying she is "keen to engage." Oh to be in the room when the impeccably mannered Grigg got the invitation. His reaction must have been well beyond the "are you are taking the piss" response of, "I can only assume that sending it [the email] to us is intended as some form of joke... a joke to be in particularly poor taste."

Sir Stuart fired back: "The property industry always competes against each other, and matters sometimes become difficult but we all remain friends ... you have chosen to make the matter personal with comments about me and that you wanted nothing to do with any member of the Lipton family, which is an unusual strategy in the property world." This row has the potential to become very nasty indeed.

But only if Culture Secretary, Jeremy Hunt, confirms the listing, which seems pretty unlikely. Hunt would be risking his political career by blocking the 700 000 sq ft redevelopment. The aftermath of Lipton-Grigg row is therefore likely to be one of mutually simmering resentments, stoked by Lipton who obviously feels newcomer Grigg lacks the developers touch and by Grigg, who clearly thinks Sir Stuart is an interfering old b....

The Southern Cross saga continues. Today the FT splashes again, this time with the forced sale of 132 care homes. The fact that the near-bust business wants to rid itself of 20% of its homes was known days ago. Making it the lead betrays two motives: one this tale is now rolling from the business into the wider political arena; two, in order to stay on the bandwagon newspapers are happy to give prominence to each other's stories. 

 
Note to Southern Cross landlords, like Nick Leslau, who this week blamed the management and was instantly branded "despicable" by the Sun for wanting to put "D-day veterans out on the streets". That is just a taste of what might come. Landlords are always cast as wicked. It is your fixed role in the media pantomime. You all may have very good reasons for not accepting a 20% rent cut. But best stay quiet.

Another worried landlord today is Adrian Wyatt of Quintain, who, like Nick Leslau, has long hair and is given to speaking his mind. Activist shareholder Laxey has just increased their stake in Quintain, turning the heat up on Wyatt says the Times.Happily this morning Quintain announced the £53m disposal of some student accommodation at Wembley. But as I suggested in the Standard two weeks ago, Quintain has some convincing to do.

Today's Standard column is devoted to one story: the £400m Lord's re-development. The MCC has got slightly cold feet over upgrading the ground using profits from building 300 000 sq ft of flats. Mike Hussey of chosen developer, Almacantar, has been asked to look at down-scaling the plans. That much is sort of known. But guess what? So has Savills now. Their task is to second guess all the advice given by Cushman & Wakefield.

Why? Because MCC chairman, Oliver Stocken, is extremely worried that the plans are too ambitious. Relying on the profits from the flats to pay for them is too risky. A view not taken by Robert Griffiths QC, the planning silk who chaired the group of the Good and the Great which supervised the whole process: In fact, so fed up is Griffiths that he asked me along to his chambers on Monday. Get your Standard later; or read here later.

Southern Cross continues to dominate the news agenda, with attention finally tuning to the landlords. The Times today worries that London & Regional will be "hit" by the non-payment of rents on its 91 homes. No doubt billionaire L&R owners, Ian and Richard Livingstone, will rub along. The Guardian names Nigel Wray and Nick Leslau, but fails to find the owner of 40 homes hiding behind the name Bondcare in Gibraltar. The hunt is up.

The Sunday Times obtained an answer to the question posed in Friday's blog: how much did Blackstone make from building and floating Southern Cross? "Senior sources" at the US private equity house provided an answer, knowing perhaps that diligent analysis the 2006 prospectus could have done so anyway. The answer is $1 billion - just a touch over £600 million. And how much did the Southern Cross directors make?

The FT outed three more beneficiaries on Saturday, to add to the guy who confessed to the Times on Friday. Mug shots of the four plus a chap from Blackstone appeared like a row of convicted criminals across the front page the Pink U'n. This, two days after the Daily Mail bit into Blackstone with "sharks who made a killing from care" splash. Can it finally be dawning that this feeding frenzy will dwarf the monetary squabbles?

I warned repeatedly in EG, the last time on 19th March 2011, that this scandal would one day infuriate readers of the Daily Mail. It has gone way beyond that now. Today's FT further discredits the whole basis of sale and leaseback in a way that will make it even harder for anyone to execute the manoeuvre. So, is there any way back from a scandal, which still has a way to run and is on the verge of turning political?

Blackstone is tarred as the greedy manipulative baddie who made off with the cash. That won't harm the US private equity house too much. If they keep their heads down and don't stupidly repeat the offer to buy the carcass of Southern Cross, they can quietly get on with life. There job is to make money, after all. The only lingering issue is this: is Blackstone still benefitting directly or indirectly from rental income?

Southern Cross, as is, is finished: the management is talking about scaling back and changing the name. So, expect all the non-profitable homes to be sold and the rump to be called something fresh and cosy. It is the freeholders who continue to amaze. Why didn't they take rent reductions? How could they not know that this tale would balloon into a scandal and they would be cast as the wicked landlords?

Times readers today are fed an unappetising tale from Philip Scott, a former Southern Cross director who made £13 million from selling his shares - when they had some value. In a breathtaking piece of fault transference he blames management for playing "hardball" with the landlords, by withholding rents on the 750 care homes for the next four months, ignoring the fact that business is nearly bust. In passing Scott reveals himself as one of those landlords, owning four homes.

Yesterday the Daily Mail threw petrol on the smouldering row between landlords enjoying £230m a year from upward only rental agreements and the management of Southern Cross.The paper's front page plashed with a picture of Blackstone boss, Stephen Schwarzman and his fur-clad wife, under the headline "sharks who made a killing out of care." A reference to the millions made by the US equity house in 2006 when Southern Cross was floated.

This inflammatory front page story finally moved Blackstone to respond with a hurt statement saying "not us governor". Nearly all the leases were agreed before we came along. Yes, but who sold the freeholds and how much did you make from the float? The Times says today it was £2b, which feels like a wild guess. I guessed a few hundred million in a Standard article in October 2008. Blackstone would be wise to have some answers prepared.

Since Monday's posting the story has exploded into a spin war. But what of the real world?  It looks like Southern Cross will go bust and management of the care homes fragment. The rents are unsustainable, but few hearts will bleed for the landlords. Will Blackstone have the gall to pick up some pieces as they indicated last year? Probably not. But perhaps they will have the heart to admit culpability for floating a sick business on the basis of eternal health. 

Tomorrow is the deadline for Southern Cross landlords to acquiesce to rent reductions on 750 homes leased by the near-bankrupt care home operator. Today the story was finally shoved under the noses of the City, with a front page article in the FT on this tale of greed and obduracy. Will the unknown recipients of £250 million a year in rents agree to cuts of 20-30%? You would think so. But negations have been going on for many months. Clearly some landlords holding upward only 30-year leases would rather Southern Cross went bust. After all, somebody is bound to look after the 30 000 elderly occupants, aren't they? So, what does it matter?

The management of Southern Cross has played a poor hand badly. They have failed to put forward their side of a strong PR case. Why not let the world know the gory details of the millions made by West LB who helped assemble the collection of care homes. How about Blackstone? The US equity house put together a flotation of business at 300p a share in March 2007, a price based on new leases guaranteeing upward only rents, lumbering Southern Cross with lease liabilities of £4.9 billion. Why not let the world know who these landlords are? After all, they will appear in the list of creditors if the company goes bust tomorrow. 

 
On a calmer note, the Daily Telegraph today rather buries the fact that British Land and London & Stamford are having a row about over the valuation of 74 acres of land at Meadowhall, the giant northern shopping centre they co-own. It has been known for a while that a 700 000 sq ft extension to the 1.4m sq ft centre on the M1 near Sheffield was planned. Patrick Vaughan and Raymond Mould of L&S want to exercise their option to buy the land at "market value." BL think the plot destined to take an IKEA is worth £20 million. The two gentlemen of L&S clearly disagree. So, the matter is to go to arbitration says the Telegraph.

The earth finally moved this morning with the consummation of a £197m deal for the takeover of King Sturge by Jones Lang LaSalle. CBRE will already be saying the price is too high, having apparently offered about £40-£50m less a month so back. There are 90 or so benefiting partners. Richard Batten and Chris Ireland hold about 5% each. That means the pair will get just under £10m each, half now and half over the next five years.

Those in the marzipan layer, who can no longer anticipate equity icing, will grumble. Some will leave. Cashing in on 251 years of goodwill by the present partners will trouble industry traditionalists. The "we had to do something" argument does not quite wash. Doing nothing was of course an option.But, as one partner confided "our hearts said stay independent, our heads said join JLL". The deal does appear to make sense.

Most KS staff will be flattered to join JLL, whether they admit it or not. JLL staff may not feel quite the same way. But those joining have come from a business which may be a lot smaller - but it is one that makes much bigger margins. There will be fallings out after the honeymoon period. But JLL will be all the better for subsuming King Sturge and KS staff will have wider opportunities at JLL.

The earth is beginning to be moved at Network Rail by former Olympic Delivery Authority chief, David Higgins. The rail-thin Aussie tells Building today that the major projects division is to be "run like a separate business" by current investment director, Simon Kirby, who has taken over the running of the 125-strong department from Ian Lindsay who is chuffing down the line to Cross rail to tend their land and property.

Higgins hints of shaping up the department to make it fit to tender for building parts of HS2. Fine: but that project is years away. What is more immediately relevant, to the property sector at least, is the interminably stalled development projects around Euston, Waterloo and Victoria stations, just for starters. Years ago British Land was appointed development partner at Euston, Hammerson at Victoria and nobody at Waterloo.

Higgins is the most capable man since Mussolini to keep the trains running on time. But unlike his predecessor, Iain Coucher, he is not prey to militaristic tendencies. "Change management" consultants have been appointed. Developers are to be brought in much earlier in the process of planning schemes. Eight different templates are being forged that will allow risk sharing with private firms who wish to hook up with Network Rail.

Can Higgins succeed? At making sure the trains run on time - no problem. Can he succeed in the narrower field of making major London station projects run on time? Hopefully, but it is 2 months too early to tell. A lot will depend on his new man, Simon Kirby. Higgins has promised transparency at Network Rail. So, let's hear it next from Kirby. Let's hear how he will get the London station projects out of the shunting yards.