- Financials become unbelieveably cheap in a crash...
- You'd be a genius to be able to pick the bottom
- I'm no genius
BNB - Babcock & Brown
- Thread starter Dakaz
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- babcock & brown bnb
A Stupid Story that might tell the BNB investors sumthin' about BNB's modus operandi?
- So much of Joseph's claims that the Babcock joint venture in 2005 was needed to add some sparkle to its earnings and distributions.
Putting the BNB joint venture to one side for the moment, the GPT problem today is more an issue of disparate assets, some of which the company has no control over, and the underlying assets.
One of those, last year's European acquisition Halverton, has gone from a profit maker to the tune of $26 million to a loss maker forecast at negative $15million in a matter of months.
The picture emerges of a company that has moved into everything from management-intensive US aged care facilities, to poorly performing hotels with little in the way of a unifying theme.
- So much of Joseph's claims that the Babcock joint venture in 2005 was needed to add some sparkle to its earnings and distributions.
Putting the BNB joint venture to one side for the moment, the GPT problem today is more an issue of disparate assets, some of which the company has no control over, and the underlying assets.
One of those, last year's European acquisition Halverton, has gone from a profit maker to the tune of $26 million to a loss maker forecast at negative $15million in a matter of months.
The picture emerges of a company that has moved into everything from management-intensive US aged care facilities, to poorly performing hotels with little in the way of a unifying theme.
What happened at 230pm yesterday to BNB's sp? It was up all day and took a terrible tumble about 230pm. I cant see any announcements or anything untoward. MQG was down all day and didn't take a similar move at 230pm so I cant see it being related to any general market news.
Anyone?
Anyone?
Attachments
As you all know, Phil Green is the current CEO of BNB.
Max Green was Phil Green's brother. In the late 90's, Max Green stole over $42million from various clients. He was acting as their solicitor.
Subsequently, Max Green was murdered in 1998 whilst staying in a hotel in Cambodia. It is suspected that the murder was committed by a hitman that was hired by one of Max's disgruntled clients/victims.
It should be noted that Phil Green had no part in any of Max Greens wrongdoing.
http://en.wikipedia.org/wiki/Max_Green
http://www.crikey.com.au/Business/2...the-murdered-solicitors-business-partner.html
Max Green was Phil Green's brother. In the late 90's, Max Green stole over $42million from various clients. He was acting as their solicitor.
Subsequently, Max Green was murdered in 1998 whilst staying in a hotel in Cambodia. It is suspected that the murder was committed by a hitman that was hired by one of Max's disgruntled clients/victims.
It should be noted that Phil Green had no part in any of Max Greens wrongdoing.
http://en.wikipedia.org/wiki/Max_Green
http://www.crikey.com.au/Business/2...the-murdered-solicitors-business-partner.html
This is from the Eureka Report, a subscription only service. Personally I am very cynical about what the BNB guy says. But you people can judge for yourselves. It's too long to put in one post, so I've split it up
PORTFOLIO POINT: Against a backdrop of falling US residential prices, Babcock & Brown’s portfolio has been revalued upwards. Why? Read on …
Here’s the basic story: own one unit of US residential real estate and you’re watching the value plunge, but own 9000 and the value rose about 6% last year and is holding steady in 2008. It might sound like alchemy to a simple boy from the Queensland bush (me), but not to Eric Lucas, Babcock & Brown’s global head of real estate.
I was troubled by the fine print in Babcock’s annual results when they were released in February, as the company claimed a $101 upwards revaluation of its investment property portfolio – mainly US residential real estate. And then Lucas was quoted in the press recently as saying those valuations were holding this year; no depreciation in US residential real estate for Babcock & Brown.
Further, Babcock contracted to buy the bulk of its portfolio of rental units in September 2006 – pretty much the top of the US housing bubble. And the way the fine print read to me, that upwards revaluation looked like being “fair value” – the directors’ internal discretion.
So there was only one thing to do: ask Eric Lucas to explain it.
The interview
Michael Pascoe: At a time when the headlines are screaming about plunging residential real estate values in the US, is it rather hard to explain in layman's terms how Babcock & Brown increased its valuations last year and is maintaining them this year?
Eric Lucas: A couple of key macro things need to be understood about the residential market in the United States. Assets we are invested in are apartments for rent, they're not residential individual dwellings or apartments for sale. They're portfolios of rental apartments and, in fact, during the first quarter of 2008, the median price per unit for rental apartments for sale in the United States as portfolios, that are purchased by portfolio investors, actually increased, notwithstanding the fact that owner-occupied residential housing prices have declined.
There's a relationship between those two things because, clearly, as people are unable to get mortgage finance to purchase their own homes, increasingly they move to rental properties. These are seen as being defensive, therefore institutional investors that are looking for defensive real estate investments tend to gravitate towards these sorts of assets.
When you say residential portfolios, you're talking about transactions of a large number of units in single buildings? Whole blocks of units?
That's correct. We have an interest in about 28,000 units in the United States, of which we own 100% of 9000 units, which is the revaluation portfolio that you're referring to. That's the BNP portfolio that we closed on at the start of last year.
Has there been much activity though in those sort of portfolios?
There's been quite a bit of activity and one of the reasons is that, unlike commercial real estate, residential real estate – even if it's for portfolio investment – is still able to be supported by financing from Fannie Mae and Freddie Mac, so institutional investors that have allocations for real estate and are otherwise constrained by financing elsewhere have actually gravitated towards residential real estate. I'm certainly not saying there's been a boom in this investment but it has not dropped off to anything like the same extent that you've seen in commercial investment.
My impression was there has been a big drop off … that there's actually not much activity at all, which is one of the things making it harder for valuers.
That's definitely the case in relation to, say, office properties. It's much less the case for these types of portfolio income-producing residential assets. Outside the Babcock portfolio, we have another portfolio called Alliance, which is the first portfolio that we bought where Babcock & Brown's interest is about 25% through the GPT joint venture and we have some co-investors in there. We've sold individual portfolios out of that Alliance portfolio and the feedback from the teams is that there are still buyers out there because the transactions are able to be supported by Fannie Mae and Freddie Mac.
Getting back to the valuation of the Babcock portfolio, which I think is your main concern and I can understand why this question comes up – and you're certainly not the first person to ask it, given the headline numbers around residential real estate in the United States – we contracted to acquire these assets in late 2006. We closed on the financing in 2007. The valuation was actually done at the behest of the lenders into that financing and this was the valuation that came out of that exercise.
That was an internal revaluation though, wasn't it?
It was based on an external valuation.
Can I be clear about that? Was it an external valuation or an internal valuation?
It was the bank's valuation, which was external.
I don't think that was stated that way in your 2007 financial report.
We didn't state how the valuation had been done in our annual report.
The price at which the deal was done was set back in 2006, which was pretty much the top of the US residential real estate market, wasn't it?
It may have been the top of the owner-occupied, single dwelling market but in the case of this portfolio, this was acquired essentially on a 6% yield. The revaluation basically took the cap rate to 5.75%. But the thing to remember about this portfolio is that since the time that we acquired it, the NOI (net operating income) that we get from this portfolio has increased by about 12%.
How?
By increased occupancy and reduced expenses.
Have rents increased?
Sorry, increase to the top line both through increased occupancy and increases in rent.
How much have rents increased, on average?
The gross revenue's gone up by 10%.
So the gross revenue's up by 10%. Rents have gone up by 10% in the past 12 months in the US?
Part of that will be rental growth and part of it will be increased occupancy since the date that we contracted to purchase the property, September 2006.
If you had to sell those properties individually, how much cheaper do you think they'd be than what you paid for them?
That’s not really an option in the structure in which they're held and the way they're operated. In the BNP portfolio, for instance, there are 9000 units across 35 properties. They tend to be in the south and the south-west – the sunbelt states. We're not engaged in the activity of selling them individually. That's not the plan.
The other thing to bear in mind in terms of valuation – and this is confirmed by valuers – is that the per unit cost that we're carrying them on our books for is less than replacement cost.
That's understandable, but if you've also cut the spend on maintenance on these units …
I'm sorry, it's less than it would cost to build them today.
Yes, and the maintenance on those units … they are deteriorating, that's understandable, isn't it? That's like saying a new car is worth more than a 10 year old car.
No, that's not the point. The point is that there's constant maintenance done to keep these up to a standard where you would obtain a rental for one of these units that's not materially different from a unit that would be newly constructed.
But you did say you've cut costs. You've cut maintenance costs?
We didn't say we cut maintenance costs. We haven't necessarily cut the amount of maintenance we're doing on individual assets; we've cut the cost to us of delivering that maintenance and managing the portfolio.
That $100 million revaluation last year was a large whack of Babcock & Brown's profit.
It was $60 million.
I thought it was $100 million revaluation.
No, there may have been total revaluations of $100 million but this particular portfolio is revalued by $A60 million.
That's the 9000 that are 100%-owned or the total portfolio?
That's the 9000 that are 100%-owned.
And so there was no revaluation of those in which you only had a partial share?
That's right.
PORTFOLIO POINT: Against a backdrop of falling US residential prices, Babcock & Brown’s portfolio has been revalued upwards. Why? Read on …
Here’s the basic story: own one unit of US residential real estate and you’re watching the value plunge, but own 9000 and the value rose about 6% last year and is holding steady in 2008. It might sound like alchemy to a simple boy from the Queensland bush (me), but not to Eric Lucas, Babcock & Brown’s global head of real estate.
I was troubled by the fine print in Babcock’s annual results when they were released in February, as the company claimed a $101 upwards revaluation of its investment property portfolio – mainly US residential real estate. And then Lucas was quoted in the press recently as saying those valuations were holding this year; no depreciation in US residential real estate for Babcock & Brown.
Further, Babcock contracted to buy the bulk of its portfolio of rental units in September 2006 – pretty much the top of the US housing bubble. And the way the fine print read to me, that upwards revaluation looked like being “fair value” – the directors’ internal discretion.
So there was only one thing to do: ask Eric Lucas to explain it.
The interview
Michael Pascoe: At a time when the headlines are screaming about plunging residential real estate values in the US, is it rather hard to explain in layman's terms how Babcock & Brown increased its valuations last year and is maintaining them this year?
Eric Lucas: A couple of key macro things need to be understood about the residential market in the United States. Assets we are invested in are apartments for rent, they're not residential individual dwellings or apartments for sale. They're portfolios of rental apartments and, in fact, during the first quarter of 2008, the median price per unit for rental apartments for sale in the United States as portfolios, that are purchased by portfolio investors, actually increased, notwithstanding the fact that owner-occupied residential housing prices have declined.
There's a relationship between those two things because, clearly, as people are unable to get mortgage finance to purchase their own homes, increasingly they move to rental properties. These are seen as being defensive, therefore institutional investors that are looking for defensive real estate investments tend to gravitate towards these sorts of assets.
When you say residential portfolios, you're talking about transactions of a large number of units in single buildings? Whole blocks of units?
That's correct. We have an interest in about 28,000 units in the United States, of which we own 100% of 9000 units, which is the revaluation portfolio that you're referring to. That's the BNP portfolio that we closed on at the start of last year.
Has there been much activity though in those sort of portfolios?
There's been quite a bit of activity and one of the reasons is that, unlike commercial real estate, residential real estate – even if it's for portfolio investment – is still able to be supported by financing from Fannie Mae and Freddie Mac, so institutional investors that have allocations for real estate and are otherwise constrained by financing elsewhere have actually gravitated towards residential real estate. I'm certainly not saying there's been a boom in this investment but it has not dropped off to anything like the same extent that you've seen in commercial investment.
My impression was there has been a big drop off … that there's actually not much activity at all, which is one of the things making it harder for valuers.
That's definitely the case in relation to, say, office properties. It's much less the case for these types of portfolio income-producing residential assets. Outside the Babcock portfolio, we have another portfolio called Alliance, which is the first portfolio that we bought where Babcock & Brown's interest is about 25% through the GPT joint venture and we have some co-investors in there. We've sold individual portfolios out of that Alliance portfolio and the feedback from the teams is that there are still buyers out there because the transactions are able to be supported by Fannie Mae and Freddie Mac.
Getting back to the valuation of the Babcock portfolio, which I think is your main concern and I can understand why this question comes up – and you're certainly not the first person to ask it, given the headline numbers around residential real estate in the United States – we contracted to acquire these assets in late 2006. We closed on the financing in 2007. The valuation was actually done at the behest of the lenders into that financing and this was the valuation that came out of that exercise.
That was an internal revaluation though, wasn't it?
It was based on an external valuation.
Can I be clear about that? Was it an external valuation or an internal valuation?
It was the bank's valuation, which was external.
I don't think that was stated that way in your 2007 financial report.
We didn't state how the valuation had been done in our annual report.
The price at which the deal was done was set back in 2006, which was pretty much the top of the US residential real estate market, wasn't it?
It may have been the top of the owner-occupied, single dwelling market but in the case of this portfolio, this was acquired essentially on a 6% yield. The revaluation basically took the cap rate to 5.75%. But the thing to remember about this portfolio is that since the time that we acquired it, the NOI (net operating income) that we get from this portfolio has increased by about 12%.
How?
By increased occupancy and reduced expenses.
Have rents increased?
Sorry, increase to the top line both through increased occupancy and increases in rent.
How much have rents increased, on average?
The gross revenue's gone up by 10%.
So the gross revenue's up by 10%. Rents have gone up by 10% in the past 12 months in the US?
Part of that will be rental growth and part of it will be increased occupancy since the date that we contracted to purchase the property, September 2006.
If you had to sell those properties individually, how much cheaper do you think they'd be than what you paid for them?
That’s not really an option in the structure in which they're held and the way they're operated. In the BNP portfolio, for instance, there are 9000 units across 35 properties. They tend to be in the south and the south-west – the sunbelt states. We're not engaged in the activity of selling them individually. That's not the plan.
The other thing to bear in mind in terms of valuation – and this is confirmed by valuers – is that the per unit cost that we're carrying them on our books for is less than replacement cost.
That's understandable, but if you've also cut the spend on maintenance on these units …
I'm sorry, it's less than it would cost to build them today.
Yes, and the maintenance on those units … they are deteriorating, that's understandable, isn't it? That's like saying a new car is worth more than a 10 year old car.
No, that's not the point. The point is that there's constant maintenance done to keep these up to a standard where you would obtain a rental for one of these units that's not materially different from a unit that would be newly constructed.
But you did say you've cut costs. You've cut maintenance costs?
We didn't say we cut maintenance costs. We haven't necessarily cut the amount of maintenance we're doing on individual assets; we've cut the cost to us of delivering that maintenance and managing the portfolio.
That $100 million revaluation last year was a large whack of Babcock & Brown's profit.
It was $60 million.
I thought it was $100 million revaluation.
No, there may have been total revaluations of $100 million but this particular portfolio is revalued by $A60 million.
That's the 9000 that are 100%-owned or the total portfolio?
That's the 9000 that are 100%-owned.
And so there was no revaluation of those in which you only had a partial share?
That's right.
(second part)
So Babcock & Brown's total real estate holdings then went up by $100 million. Where else did you get an upwards revaluation of real estate last year?
I think the major part of the balance between the 60 and the 100 would have been a revaluation of self-storage assets that we have developed in Hong Kong and Singapore, and the revaluation there takes place upon completion of the redevelopment. They’re held at cost through the redevelopment phase and then when they are open for business, they're revalued as a going concern.
You were recently quoted as saying that you had re-examined the valuation of the residential properties and were maintaining it this year. Cap rates in the States on residential property portfolios haven't moved at all?
I don't think I've said that. We go through a semi-annual revaluation process and in any event we revalue all assets every three years but as we go through the semi-annual they are directors' valuations, but if we have reason to believe that anything's moved by 5% we get an external valuation. That's our valuation policy for investment assets.
Well in that case, what's been the directors' valuation – that there's been no movement in cap rates in US residential portfolio?
At what period?
Well I presume you would have done it before the end of June 30 given the last figures were December 31.
Obviously we haven't announced that to the market yet, but in terms of the underlying value of this portfolio, even if there's been a modest uptick in cap rates – and I think if you talk to anyone who's active in the US multi-family for rental market you won't find anyone who says the deterioration there, if any, has been worse than modest – in the case of this portfolio, because of the ongoing increases that we're seeing in rents the ultimate impact on value might be expected not to be significant, if at all.
I suppose people can get confused. I certainly get confused by being able to value a property based on its income stream as opposed to what the resale of a like property might be at any point in time.
I think that you'll find that the international standard for valuation that all of the major institutional investors in Australia apply is a discounted cash flow analysis rather than comparable sales.
Is this a bit of financial engineering that is being applied to the residential sector, which normally isn't thought of that way?
No, it's absolutely not. It's the same standard that's applied to all assets that are held by institutional investors.
If you had to put properties up for sale from that portfolio in the next couple of months, you are confident you could sell them at the present book value?
Yes, that's the basis on which directors sign off on valuations. The general standard at which directors sign off on is that the valuation should reflect a sale between a willing buyer and a willing but not forced seller and I think the idea of selling 9000 apartments in two months in the current market might reflect a forced seller and so you would see that reflected in the approach of the directors back to the valuation. But the other point that I'd make about this portfolio is that it's financed on a 10-year interest-only, no covenant facility, so we are under no pressure to sell any part of this portfolio at any time for the next nine years.
But still it's the valuation, which is nonetheless of interest given that it was such an important part of Babcock & Brown's profit and any devaluation would obviously be a major hit this year.
It was $60 million out of an overall revenue number for Babcock & Brown last year of $1.2 billion, so it was a bit less than 5% of our revenue number.
Do you think it would be reasonable to say something looks a little bit like alchemy when one individual unit might have fallen by 15–20% but put a thousand of them together and they've actually gone up by 6%?
No I don't think it does look like alchemy. I think it would look like ignoring the discussion that we've just had around the other aspects surrounding this valuation and it would ignore the fact that the median price for an individual rental apartment of the type that we're invested in – and I'm not saying this is the median price in our portfolio – is about $115,000 and the median house price you will see in the Case-Schiller Index or dwelling price is substantially higher than that.
The reality is that these assets are valued in the same way as CBD office properties, where you have large numbers of units and individual tenants. The valuations are driven by the cash flow that can be generated currently and in the future from those assets and individual houses have never been valued based on their cash flow producing capability.
So Babcock & Brown's total real estate holdings then went up by $100 million. Where else did you get an upwards revaluation of real estate last year?
I think the major part of the balance between the 60 and the 100 would have been a revaluation of self-storage assets that we have developed in Hong Kong and Singapore, and the revaluation there takes place upon completion of the redevelopment. They’re held at cost through the redevelopment phase and then when they are open for business, they're revalued as a going concern.
You were recently quoted as saying that you had re-examined the valuation of the residential properties and were maintaining it this year. Cap rates in the States on residential property portfolios haven't moved at all?
I don't think I've said that. We go through a semi-annual revaluation process and in any event we revalue all assets every three years but as we go through the semi-annual they are directors' valuations, but if we have reason to believe that anything's moved by 5% we get an external valuation. That's our valuation policy for investment assets.
Well in that case, what's been the directors' valuation – that there's been no movement in cap rates in US residential portfolio?
At what period?
Well I presume you would have done it before the end of June 30 given the last figures were December 31.
Obviously we haven't announced that to the market yet, but in terms of the underlying value of this portfolio, even if there's been a modest uptick in cap rates – and I think if you talk to anyone who's active in the US multi-family for rental market you won't find anyone who says the deterioration there, if any, has been worse than modest – in the case of this portfolio, because of the ongoing increases that we're seeing in rents the ultimate impact on value might be expected not to be significant, if at all.
I suppose people can get confused. I certainly get confused by being able to value a property based on its income stream as opposed to what the resale of a like property might be at any point in time.
I think that you'll find that the international standard for valuation that all of the major institutional investors in Australia apply is a discounted cash flow analysis rather than comparable sales.
Is this a bit of financial engineering that is being applied to the residential sector, which normally isn't thought of that way?
No, it's absolutely not. It's the same standard that's applied to all assets that are held by institutional investors.
If you had to put properties up for sale from that portfolio in the next couple of months, you are confident you could sell them at the present book value?
Yes, that's the basis on which directors sign off on valuations. The general standard at which directors sign off on is that the valuation should reflect a sale between a willing buyer and a willing but not forced seller and I think the idea of selling 9000 apartments in two months in the current market might reflect a forced seller and so you would see that reflected in the approach of the directors back to the valuation. But the other point that I'd make about this portfolio is that it's financed on a 10-year interest-only, no covenant facility, so we are under no pressure to sell any part of this portfolio at any time for the next nine years.
But still it's the valuation, which is nonetheless of interest given that it was such an important part of Babcock & Brown's profit and any devaluation would obviously be a major hit this year.
It was $60 million out of an overall revenue number for Babcock & Brown last year of $1.2 billion, so it was a bit less than 5% of our revenue number.
Do you think it would be reasonable to say something looks a little bit like alchemy when one individual unit might have fallen by 15–20% but put a thousand of them together and they've actually gone up by 6%?
No I don't think it does look like alchemy. I think it would look like ignoring the discussion that we've just had around the other aspects surrounding this valuation and it would ignore the fact that the median price for an individual rental apartment of the type that we're invested in – and I'm not saying this is the median price in our portfolio – is about $115,000 and the median house price you will see in the Case-Schiller Index or dwelling price is substantially higher than that.
The reality is that these assets are valued in the same way as CBD office properties, where you have large numbers of units and individual tenants. The valuations are driven by the cash flow that can be generated currently and in the future from those assets and individual houses have never been valued based on their cash flow producing capability.
Another Michael West classic:
http://business.theage.com.au/busin...20080806-3qnf.html?page=fullpage#contentSwap1
B&B's 'culture of greed'
Email Print Normal font Large font 'Don't mention this to Sydney'AdvertisementMichael West
August 6, 2008
Pursuit of the ''quick buck'', ''ginning up rosy projections'' on deals, making ''absurdly optimistic assumptions'' in business models, ignoring the slog of asset management and ''a culture of greed and personal greed and personal enrichment''.
These and other claims were made by a disenchanted executive of Babcock & Brown and resulted in an investigation by the firm into the activities of some of its leading executives. No wrong-doing was found. No further action was taken.
BusinessDay has obtained a copy of a memo written by an executive in Babcock & Brown's European business.
The executive wrote to the firm's management last year calling for an inquiry into ''serious violations of corporate standards and inappropriate conduct on the part of three senior individuals: Martin Rey, Christian Terberger and Artus Pourroy''.
Rey is an executive director of B&B and the head of the group's operations in Europe, the Middle East and Africa.
The email, dated April 18, 2007 and sent from Munich in Germany, contains trenchant criticism of the company's corporate culture but does not detail the alleged violations.
B&B's general counsel Margaret Cole told BusinessDay this week that an internal investigation had been conducted as a result of the allegations. The investigation by two internal auditors from London reported to the chairman of the audit and risk management committee, Michael Sharpe, and the B&B board and was concluded last September.
''The outcome of the internal audit review is that the allegations could not be substantiated, and the outcome of the external review affirmed the appropriateness of the internal review process,'' said Ms Cole.
The European division is B&B's biggest business, accounting for revenues last year of $1.3 billion (up from $761 million in 2006) and assets of $5.1 billion (up from $4.5 billion in the previous year) and run out of Germany where there are more than 40 employees. The Munich office was established in 2003, the year before the firm floated.
The memo asked for internal audit resources to be committed to an investigation and for support from the head of internal audit Michael Sharpe.
'Culture of greed'
It also detailed a number of criticisms of the group's corporate culture. These included greed, focus on bonuses and short-term rewards at the expense of asset management, lack of leadership, churning of assets and lack of risk control.
''Criticism is something which happens behind closed doors with people being clearly afraid to talk openly about potential issues (running the risk of getting punished around bonus time, etc.),'' said the memo.
''There is also a mentality to the effect that as long as you make certain senior people look good and play along, they look after you and you get rewarded accordingly come bonus time. Those people who do not agree or support a project quite often have to face negative consequences and unfair criticism. It is an environment where more than often you hear "....don't mention this to Sydney/or to such and such person....."; or ".....otherwise you will be in trouble".
There was particular mention of the renewable energy sector in Munich which was suffering a lack of leadership and defecting staff.
As long as employees were making money for the company they could get away with ''outrageous and inappropriate behaviour towards colleagues or subordinates. People have left the company for that reason only.''
This gap was filled, wrote the author, by a ``culture of greed and personal enrichment'' where money had been spent to optimise bonuses for senior employees and ''schemes were discussed and pushed which were even from a layman's perspective "illegal".''
In the segment headed, ''Focus on bonus and short term rewards,'' the executive alleges that ''actual situations'' had been overstated in board papers and ''bad situations'' had been understated.
``There is hardly any financial incentive to follow through on a deal just completed. In other companies the acquired projects are actually required to generate a certain benchmark return before bonus pay outs take place. "You do not get paid until the project is working well for the company", that should be the standard. Instead we have created an environment where senior people are rewarded for building and ginning up rosy projections to justify their rewards.''
Real estate risks
Unless the real estate market had been booming, said the memo, the firm would be sitting on a troubled real estate portfolio in Munich. ``It is widely acknowledged that both the facts and the numbers in board papers have been consistently on the optimistic side of things (in some instances you might call manipulated).''
B&B has booked $1.1 billion of gross assets in property in Germany, excluding the GPT joint venture. Its equity proportion is $203 million. It also has property in France, Italy and Spain across residential, industrial and commercial sectors.
Since the sub-prime meltdown last year European property values have declined. The group is now in the process of selling European retail property, German office and French office and light industrial assets representing some 23% of its portfolio.
In its $6.9 billion GPT joint venture, assets under management are geared at almost 70%. Some $300 million in asset sales were realised last year, sales which B&B has said were struck ``at aggregate'' in excess of book value.
There is also a Public Private Partnerships (PPP) business run out of Germany which focuses on transport, education and health assets.
The memo had warned that there was ''a long-term risk waiting to materialise once the markets go down''.
''Why bonus pay-outs are not fully aligned to the actual/sustainable profits of the company is an open question''.
Retail and residential real estate portfolios were sold within very short time frames, the memo went on, which meant the company had become more involved in a brokering business instead of focusing on asset management and building up a long-term profitable asset base.
These problems would become visible to the market if the asset base was reduced, said the memo.
Financial engineers out of favour
Since B&B shares collapsed in May, plunging from more than $12 to below $6, triggering market capitalisation review clauses with the firm's bankers, the stock price has recovered only partially to $6.50. Concern persists about high debt levels and the sustainability of earnings in the adverse trading climate for financial engineers.
The memo noted that evidence of the group's attitude to asset management - after it had struck a deal and achieved a ''quick buck'' - was reflected in the promotion of a receptionist to the role of asset manager.
Although the attitude to asset management had improved it was still perceived to be ''a pure support function and not a profit centre...once the deal is signed...it is simply dropped in asset management's lap''.
''The fact that GPT has been partially taking over asset management functions not only is a big warning (and means we gotta (sic) share our precious fee income). It is a vote of non-confidence. It shows the lack of quality we provide, and it will come to haunt us. Once the market goes down it'll become evident whether we have used the entrepreneurial opportunities contained in the portfolios or just chased the "quick buck".''
'Never say no'
Risk management capabilities, alleges the memo, had been called a ``burden'' by one senior employee. ``And it is business wisdom that some of the best deals are the deals you do not do. But our corporate culture is such that you never say no to a deal (at least once the approval process has started)''.
It was for this lack of risk control that deal makers ''(including their favourites who cannot do any wrong) are often allowed to set absurdly optimistic assumptions for models (or not disclose material facts)''.
The disaffected executive then asked for Martin Rey, Christian Terberger and Artus Pourroy to be investigated ''in the context of the above issues'' without detailing specific allegations, allegations for which the author noted there was ''back up detail''.
''I fully realize that this process will not only be painful (as it involves also a board member) but also require resources from internal audit and support from Michael Sharpe''. The author asked to speak with Michael Sharpe personally as the allegations were ''sensitive''.
B&B review
A statement from B&B authorised by general counsel Margaret Cole said the author had identified a number of areas of concern, including remuneration and bonuses, asset control, earnings profile and risk management ``and made allegations that the named persons had in the context of these issues engaged in "serious violation of corporate standards and inappropriate conduct".
''We took and continue to take allegations such as those expressed in the email extremely seriously. A review of those allegations was conducted by our internal audit department last year, and we commissioned an external review of that internal audit to confirm the appropriateness of that review.''
mwest@fairfax.com.au
BusinessDay
http://business.theage.com.au/busin...20080806-3qnf.html?page=fullpage#contentSwap1
B&B's 'culture of greed'
Email Print Normal font Large font 'Don't mention this to Sydney'AdvertisementMichael West
August 6, 2008
Pursuit of the ''quick buck'', ''ginning up rosy projections'' on deals, making ''absurdly optimistic assumptions'' in business models, ignoring the slog of asset management and ''a culture of greed and personal greed and personal enrichment''.
These and other claims were made by a disenchanted executive of Babcock & Brown and resulted in an investigation by the firm into the activities of some of its leading executives. No wrong-doing was found. No further action was taken.
BusinessDay has obtained a copy of a memo written by an executive in Babcock & Brown's European business.
The executive wrote to the firm's management last year calling for an inquiry into ''serious violations of corporate standards and inappropriate conduct on the part of three senior individuals: Martin Rey, Christian Terberger and Artus Pourroy''.
Rey is an executive director of B&B and the head of the group's operations in Europe, the Middle East and Africa.
The email, dated April 18, 2007 and sent from Munich in Germany, contains trenchant criticism of the company's corporate culture but does not detail the alleged violations.
B&B's general counsel Margaret Cole told BusinessDay this week that an internal investigation had been conducted as a result of the allegations. The investigation by two internal auditors from London reported to the chairman of the audit and risk management committee, Michael Sharpe, and the B&B board and was concluded last September.
''The outcome of the internal audit review is that the allegations could not be substantiated, and the outcome of the external review affirmed the appropriateness of the internal review process,'' said Ms Cole.
The European division is B&B's biggest business, accounting for revenues last year of $1.3 billion (up from $761 million in 2006) and assets of $5.1 billion (up from $4.5 billion in the previous year) and run out of Germany where there are more than 40 employees. The Munich office was established in 2003, the year before the firm floated.
The memo asked for internal audit resources to be committed to an investigation and for support from the head of internal audit Michael Sharpe.
'Culture of greed'
It also detailed a number of criticisms of the group's corporate culture. These included greed, focus on bonuses and short-term rewards at the expense of asset management, lack of leadership, churning of assets and lack of risk control.
''Criticism is something which happens behind closed doors with people being clearly afraid to talk openly about potential issues (running the risk of getting punished around bonus time, etc.),'' said the memo.
''There is also a mentality to the effect that as long as you make certain senior people look good and play along, they look after you and you get rewarded accordingly come bonus time. Those people who do not agree or support a project quite often have to face negative consequences and unfair criticism. It is an environment where more than often you hear "....don't mention this to Sydney/or to such and such person....."; or ".....otherwise you will be in trouble".
There was particular mention of the renewable energy sector in Munich which was suffering a lack of leadership and defecting staff.
As long as employees were making money for the company they could get away with ''outrageous and inappropriate behaviour towards colleagues or subordinates. People have left the company for that reason only.''
This gap was filled, wrote the author, by a ``culture of greed and personal enrichment'' where money had been spent to optimise bonuses for senior employees and ''schemes were discussed and pushed which were even from a layman's perspective "illegal".''
In the segment headed, ''Focus on bonus and short term rewards,'' the executive alleges that ''actual situations'' had been overstated in board papers and ''bad situations'' had been understated.
``There is hardly any financial incentive to follow through on a deal just completed. In other companies the acquired projects are actually required to generate a certain benchmark return before bonus pay outs take place. "You do not get paid until the project is working well for the company", that should be the standard. Instead we have created an environment where senior people are rewarded for building and ginning up rosy projections to justify their rewards.''
Real estate risks
Unless the real estate market had been booming, said the memo, the firm would be sitting on a troubled real estate portfolio in Munich. ``It is widely acknowledged that both the facts and the numbers in board papers have been consistently on the optimistic side of things (in some instances you might call manipulated).''
B&B has booked $1.1 billion of gross assets in property in Germany, excluding the GPT joint venture. Its equity proportion is $203 million. It also has property in France, Italy and Spain across residential, industrial and commercial sectors.
Since the sub-prime meltdown last year European property values have declined. The group is now in the process of selling European retail property, German office and French office and light industrial assets representing some 23% of its portfolio.
In its $6.9 billion GPT joint venture, assets under management are geared at almost 70%. Some $300 million in asset sales were realised last year, sales which B&B has said were struck ``at aggregate'' in excess of book value.
There is also a Public Private Partnerships (PPP) business run out of Germany which focuses on transport, education and health assets.
The memo had warned that there was ''a long-term risk waiting to materialise once the markets go down''.
''Why bonus pay-outs are not fully aligned to the actual/sustainable profits of the company is an open question''.
Retail and residential real estate portfolios were sold within very short time frames, the memo went on, which meant the company had become more involved in a brokering business instead of focusing on asset management and building up a long-term profitable asset base.
These problems would become visible to the market if the asset base was reduced, said the memo.
Financial engineers out of favour
Since B&B shares collapsed in May, plunging from more than $12 to below $6, triggering market capitalisation review clauses with the firm's bankers, the stock price has recovered only partially to $6.50. Concern persists about high debt levels and the sustainability of earnings in the adverse trading climate for financial engineers.
The memo noted that evidence of the group's attitude to asset management - after it had struck a deal and achieved a ''quick buck'' - was reflected in the promotion of a receptionist to the role of asset manager.
Although the attitude to asset management had improved it was still perceived to be ''a pure support function and not a profit centre...once the deal is signed...it is simply dropped in asset management's lap''.
''The fact that GPT has been partially taking over asset management functions not only is a big warning (and means we gotta (sic) share our precious fee income). It is a vote of non-confidence. It shows the lack of quality we provide, and it will come to haunt us. Once the market goes down it'll become evident whether we have used the entrepreneurial opportunities contained in the portfolios or just chased the "quick buck".''
'Never say no'
Risk management capabilities, alleges the memo, had been called a ``burden'' by one senior employee. ``And it is business wisdom that some of the best deals are the deals you do not do. But our corporate culture is such that you never say no to a deal (at least once the approval process has started)''.
It was for this lack of risk control that deal makers ''(including their favourites who cannot do any wrong) are often allowed to set absurdly optimistic assumptions for models (or not disclose material facts)''.
The disaffected executive then asked for Martin Rey, Christian Terberger and Artus Pourroy to be investigated ''in the context of the above issues'' without detailing specific allegations, allegations for which the author noted there was ''back up detail''.
''I fully realize that this process will not only be painful (as it involves also a board member) but also require resources from internal audit and support from Michael Sharpe''. The author asked to speak with Michael Sharpe personally as the allegations were ''sensitive''.
B&B review
A statement from B&B authorised by general counsel Margaret Cole said the author had identified a number of areas of concern, including remuneration and bonuses, asset control, earnings profile and risk management ``and made allegations that the named persons had in the context of these issues engaged in "serious violation of corporate standards and inappropriate conduct".
''We took and continue to take allegations such as those expressed in the email extremely seriously. A review of those allegations was conducted by our internal audit department last year, and we commissioned an external review of that internal audit to confirm the appropriateness of that review.''
mwest@fairfax.com.au
BusinessDay
Some on this forum (eg me) have been trying to convey this message for quite a while. Hopefully others listened and sold.
If everyone is selling - who is buying? If they are such a dog why are there buyers? Over 8 million shares sold today - someone is buying - why? Do they know something about the results or is it just the people selling the 8 million who know something about the results?
If everyone is selling - who is buying? If they are such a dog why are there buyers? Over 8 million shares sold today - someone is buying - why? Do they know something about the results or is it just the people selling the 8 million who know something about the results?
It's short sellers like me. I'm not actually buying, I,m cashing in. This stock has been a short sellers dream
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Agree, just that so many people try to buy this for a quick bounce and get burnt then stopped out. Fueling more downside...
I was just thinking that, and was thinking of short selling it yesterday, but to be honest, i don't even want to touch it. It'll be a "watch this space" scenario.
Good luck with the shorting CAB SAV
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i wonder if they are taking vacationers this summer?
anyones applications been denied?
anyones applications been denied?
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Management buyout? or other bank buy out? at this price they have a discount to net assets of some 1.5 Billion. Could it have dropped to a price now where a takeover is appealing?
If you ask me, its time for Phil Green to go, and it looks like the board is finally going to take some action. At the end of the day, he was paid ridiculous amounts of money to ensure the success of this company yet it has allowed dodgy practices and vulnerable clauses and conditions in its borrowings, so the buck certainly does stop with him.
If you ask me, its time for Phil Green to go, and it looks like the board is finally going to take some action. At the end of the day, he was paid ridiculous amounts of money to ensure the success of this company yet it has allowed dodgy practices and vulnerable clauses and conditions in its borrowings, so the buck certainly does stop with him.
"Mr Restel said Babcock & Brown's woes were not Mr Green's fault."
www.news.com.au/business/story/0,27753,24211220-462,00.html
Nonetheless, it's perception that matters, and Mr Green's departure may help to clear the air.
prawn_86
Mod: Call me Dendrobranchiata
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Never have liked Phil Green, he just looks dodgy in all the photos i have seen. Like he is hiding something
72k worth went through at $8 this morning before opening. I wonder if it was just shifting between funds or if that is a buy out price...
72k worth went through at $8 this morning before opening. I wonder if it was just shifting between funds or if that is a buy out price...
Of course it isn't Uncle Phil's fault. Nothing EVER is Uncle Phil's fault. Just because he ran a country that is now in big big trouble - don't blame him, nothing to do with his decisions.
(Yes, I am being sarcastic for those in doubt).
Mr Restel said Babcock & Brown's woes were not Mr Green's fault.
"The credit crunch hit at a very bad time," Mr Restel said.
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HAHAHAHA - what a joke. Why were 100 millions of bonuses paided to employees if they aren't responsible for the results in both good times and bad? BNB was just one big free roll (heads I win, tails you lose) at shareholders expense.
"The credit crunch hit at a very bad time," Mr Restel said.
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HAHAHAHA - what a joke. Why were 100 millions of bonuses paided to employees if they aren't responsible for the results in both good times and bad? BNB was just one big free roll (heads I win, tails you lose) at shareholders expense.
