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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.

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.

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.

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