The owner of Battersea Power Station has been wrecked by the commercial-property crash.
The past three years have been nothing short of brutal for property investor Real Estate Opportunities (LSE: REO) and its shareholders.
Riding the bubble
Until 2007, REO was riding high on the back of property bubbles in the UK and Ireland. Indeed, in December 2006, it added London landmark Battersea Power Station to its extensive portfolio of Irish and British commercial and domestic property, paying £400 million for the site.
At their peak, REO's shares hit a closing high of 165p on 16 March and 5 June 2007. Alas, as commercial and domestic property prices started to dive on both sides of the Irish Sea, all went downhill from there. In less than two years, UK commercial property valuations fell 43%.
As you can see from its portfolio, REO has relatively few properties in the UK, most of which are in London. However, it owns dozens of properties in Dublin and the surrounding area, where prices have crashed spectacularly since peaking in 2006.
Thus, REO's share price hit an all-time low of 7.5p on 2 April 2009, although they subsequently recovered, to close at 16.5p on Tuesday. Unfortunately, REO's share price crashed again yesterday, plunging 42% to close at 9.5p (down 7p) after the publication of its latest results.
As things stand today, REO has lost 94% of its value since its 2007 peak. Ouch.
Now that's what I call a loss
In the 14 months to 28 February 2010, REO saw the value of its property portfolio tumble by 43% to £1.1 billion. At £388 million, Battersea Power Station (BPS) accounts for more than a third (35%) of REO's total assets.
Battersea Power Station, REO's largest asset in the UK, has fared a lot better than its Irish property portfolio. The value of BPS has fallen by just £12 million (3%) since REO bought it 3.5 years ago. On the other hand, many of REO's Irish properties have fallen in value by 50%+ since Ireland's property bubble burst. Subject to shareholder approval, the firm today announced plans to spin off BPS into a new, separately listed vehicle.
In the past 18 months, the destruction of value at REO has been immense. At 31 December 2008, REO had a net asset value (NAV) per share of 104.1p. At 28 February 2010, NAV was a negative 178.2p per share.
Although REO reaped property income (largely rent) of £44 million during this 14-month reporting period, it reported an underlying pre-tax loss of £929 million. This was largely due to an £811 million write-down of property assets. This produced a loss per share of 248.2p, versus a loss of 107.8p in 2008.
Given that REO's market cap today is a mere £31.7 million, losing close to a billion pounds is going some.
The poster child for property mania
Having sold its stake in China Real Estate Opportunities (LSE: CREO) for £28 million in March, REO is now sitting on £67 million in cash. However, with net debt of £1.68 billion, REO exists at the mercy of its lenders, with which it is negotiating major balance-sheet restructuring.
Furthermore, in common with all major Irish property developers, REO and its lenders have had to be rescued by NAMA, Ireland's National Asset Management Agency set up to buy toxic property loans from Irish banks.
Frankly, facing such severe losses and write-downs, it's a miracle that REO survives at all. In many ways, it stands as a monument to the reckless excess of the mid to late Noughties, when hugely leveraged bets on property were 'the only game in town'. Today, REO's investors are older, wiser and a great deal poorer, thanks to massive mismanagement of risk.
With a negative NAV, negative earnings, huge gearing and an uncertain future, I wouldn't go near REO's shares with the proverbial bargepole. Only bottom-fishers with strong hearts would be tempted to pick up this particular cigar butt, as the risk of a 100% loss is considerable!
More from Cliff D'Arcy:
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