There’s been lots of brave talk from Stockland Group about how strong its balance sheet is: “bulletproof” was one word used in several reports, such as this one.
The management and board should know all about bullet-proofing, after all they went and gave its balance sheet a ‘shot’ through a bit of over enthusiastic financial engineering, of a Macquarie Bank kind. Stockland set off on a course of gearing-up assets (and boosting asset values), going off to the UK and believing the days of cheap and easy money would never stop.
The damage caused by that self-wounding was very apparent yesterday — $2.4 billion in write-downs, impairment charges and other costs. No wonder the company had to ask shareholders for $1.98 billion in June.
The writedowns left it to report a $1.8 billion “statutory loss”, but it naturally preferred to concentrate on the “underlying” profit of $631 million, down 6.3 per cent from the 2008 result. You’d almost think there’s been no financial crisis or recession the way management ignored the red ink and accentuated the underlying figures.
Stockland’s writedowns will be matched or exceeded by the likes of Centro, Lend Lease, Mirvac, GPT, Valad, Macquarie Airports and Macquarie Infrastructure, plus other Macquarie related trusts — the surviving trusts at Babcock & Brown and Allco, plus trusts at Colonial First State, BT, FKP, and a host of others.
Much of these losses will be described as ‘non-cash’ and the inference will be given, as they were by Stockland in yesterday’s announcement, that they have had no impact on the underlying results.
If that was the case, why is there a tax benefit from the writedowns (which sound like a very cashable benefit); and why have companies like Stockland raised billions in fresh capital to cut debt and satisfy nervous bankers?
The answer is that the so-called non-cash items do have a direct financial impact on the balance sheets of the companies by forcing reductions in asset values and pushing companies close to or through restrictions on debt to equity, interest cover and other measures in their loans. That sort of activity makes banks very nervous.
And if banks get nervous, even companies like Stockland have to submit and recapitalise. There’s a direct financial cost to the company and shareholders in issuing new shares to raise fresh capital, so it’s a crock to argue these losses have a “non cash” impact.
These non-cash writedowns have hurt this once blue chip property group, as they have hurt others. The CEO, Matthew Quinn and chairman, Graham Bradley, are still there after these losses. Hopefully there will be an apology to security holders at the annual meeting later this year.
Stockland said in its statement yesterday that its 2009 “statutory accounting result is a loss of $1.8 billion. This is primarily the result of a number of “negative non-cash” items, including:
- $1,126 million — Downward revaluation of investment properties
- $462 million — Inventory impairment (post tax)
- $362 million — Goodwill impairment
- $334 million — Impairment of strategic investments
- $95 million — Fair value adjustments of financial instruments and foreign exchange movements.
One deal stands out: in 2007 Stockland bought the Halldale property interests in the UK for $525 million. Yesterday, it revealed it had chopped the value of that deal by $200 million and decided to sell out of Britain and retreat to Australia, just as GPT is coming back to Australia after losing billions of dollars playing in Europe and the US with the sharks at Babcock and Brown.
And, guess who swooped on a 12 per cent stake in GPT earlier in the year? Stockland. It wrote down the value of its “strategic investments” in fellow developers, FKP and Aveum by $334 million in the June year: $282 million of that figure was because it had paid too much for the GPT stake.
It’s a good thing the balance sheet is “bulletproof”, because these blokes still can’t shoot straight.