Dunloe Ewart, the property company under the leadership of Mr Noel Smyth, has managed to turn itself from losses into a profitable group, and from a minuscule domestic operator into an all-Ireland company. But it is now at a threshold. Does it go private, or entice a partial or full takeover, or substantially increase the number of joint ventures for the developments, or just continue on as in the past but with different financing arrangements?
Dunloe Ewart has complained about the difficulty in funding the developments because of the depressed share price. This is what chairman Mr Noel Smyth had to say: "If the large development of the company which is to be turned into profit over the next five years results in a market valuation of the company which is a significant discount to net asset value, it is difficult to justify undertaking developments where the ultimate value for shareholders is diminished, rather than enhanced." There has, indeed, been a distinct move against property companies over the past year, but, ironically, Dunloe Ewart has been least hit, and is one of the highest rated. Its share price of 39.5 cents is at a mere 2 per cent discount to the net asset value (NAV) per share of 40.5 cents. Contrast that to the plight of the fast growing Green Property group; its share price of 555 cents compares with a NAV of 813 cents. That's a 32 per cent discount.
But the same problem exists in Britain. British Land, which is a joint venture partner with Dunloe Ewart, at the Cherrywood site, has a share price which is at a 37 per cent discount to the NAV. And Land Securities, another large group, is on a 24 per cent discount. If these market valuations are to be believed, it could be asked: why is Dunloe Ewart so highly rated? But it could be argued that these discounts are too large. The markets have always had a love- (but never too cosy) hate relationship with property companies. This is one of the cool periods.
Property companies are always susceptible to economic cycles. Indeed, they are invariably among the first to be hit in a downturn.
Dunloe Ewart, with developments having an end value of some £2 billion would be vulnerable to any downturn. But with half at the development stage in Belfast and half in the Republic, it is not totally exposed to the domestic economy. Also, with Belfast office space at £14 sterling per square foot, compared with over £30 in Dublin, there has to be some upward potential in the Northern Ireland market. And it has some choice potential developments; the £400 million proposed development in central Belfast, along Royal Avenue and North Street, with John Laing Property and MEPC, is one. That could make a profit of between £27 million and £33 million. In the Republic, the commercial market may be peaking. In the office market, about 2 per cent is vacant but that could quickly go into an over-supply situation, according to some property observers and the Sandyford Industrial Park will directly compete with Dunloe Ewart's attractive site at Cherrywood. However, Dunloe has other potentially attractive sites, like the developments at Sir John Rogerson's Quay, and Dublin Airport.
The group's developments, of course, will not come together at the same time. But assuming a 25 per cent return, around £1.5 billion would have to be funded. This could be funded mostly from joint venture arrangements and bank loans but the group would still have to find £300 million plus. This is a substantial sum for a firm capitalised at only €155 million (£122 million) and a gearing of 133 per cent, up from 103 per cent in 1998.
Mr Smyth has assembled a very fine property portfolio but is it over-loaded? Already the borrowings for its development stock, including its share of joint ventures amounted to €48 million last December, and as development debt increases, it intends to manage its interest rate exposure. The company said it has a "substantial development funding requirement, the timing of which is dependent on when planning permission for the various projects is received". This has prompted the review of its options. Clearly the group should get rid of secondary sites and concentrate of prime sites. This would partly ease the need for funding. It would be difficult for a publicly-quoted property company to acquire Dunloe Ewart. Why, for example, should they use their poorly rated paper to acquire Dunloe Ewart which is relatively expensive. British Land, which has a 5 per cent stake, would be an obvious suitor, but its poor rating would inhibit a move. Dunloe Ewart, however, could appeal to a large private property company, or to individuals.
Taking the company private has certain attractions, particularly as the company has warned that 1999 results will not be repeated in 2000, as last year's operating profit of €35.5 million, up from €19.9 million, had non-recurring items. Poorer results this year will hardly help the share price thereby compounding the difficulties of funding through the market.
Taking on new joint-venture partners has distinct attractions as it would preserve Dunloe Ewart as a publicly-quoted group. However, the group carrying out the review will have to come up with sustainable solutions to cope with the next five years. That's not an easy one.
