好色先生TV

In May last year, we were all at a roadshow in Holland. Our share price had hit 426p, and we were trading at a 25% premium to net asset value, which was incredible. But amidst the celebrations, I remember saying: 鈥淲e run a business, not a share price鈥�.鈥�

A year later and Minerva鈥檚 chief executive, Salmaan Hasan, is reliving the poignancy of his own words. Minerva鈥檚 exposure to two big speculative office developments in the City of London has caused its shares to be hammered harder than any other quoted property company. In a year, the shares shed nearly 80% of their value, reducing Minerva鈥檚 market capitalisation from 拢687m to a low of 拢152m.

Walbrook and St Botolphs are under construction, and will collectively bring close to 1m sq ft of grade A office space to the City market in what could be one of its darkest hours.

Hasan vigorously defends the viability of the business, but Minerva鈥檚 vastly deflated share price has left the company vulnerable to a takeover approach. At the time of going to press, Limitless, the development arm of the Dubai government, has admitted it is considering a takeover bid.

So how will the company 鈥� which takes its name from the Roman goddess of wisdom and war 鈥� face the ensuing battle?

Hasan, himself a battle-hardened former banker, would prefer the market to eschew the distraction of takeover talk, and look a little harder at how the business is being run.

鈥楽ince last May, the business has made significant progress,鈥� he says. 鈥業 mean, we鈥檝e won planning for three schemes, restructured funding deals, prelet office space and presold a big chunk of residential. Yet today, everyone is saying the business is worth a fraction of what it was a year ago. Frankly, I take issue with that.鈥�

Despite operational successes, February鈥檚 half-year results reported a 拢108m drop in the value of Minerva鈥檚 portfolio. Coupled with higher financing costs, this produced a pretax loss of 拢115m. The bearish sentiment surrounding City offices means shares have been trading at an average 65% discount to net asset value (NAV) 鈥� far higher than any other FTSE 350 property company. So why has the market punished Minerva so harshly?

When Minerva changed its strategy to that of a 鈥榩ure developer鈥� in 2005, it sold off most of its income-producing properties to concentrate on six major development sites in London. Gearing up its balance sheet from 5% to nearly 70% in the space of a few years, the credit crunch means it now has to contend with higher financing costs. Although most of Minerva鈥檚 borrowing is fixed and hedged, it will be a few years before its cash-hungry developments produce any income.

Just how much income the City developments will produce is a pertinent question.

Designed by Foster & Partners, Walbrook is a stone鈥檚 throw from the Bank of England, and will deliver 410,000 sq ft of speculative office space at the end of 2009. The 拢275m financing package in place from Deutsche Postbank and Nationwide means Minerva needs to obtain rents in the region of 拢45/sq ft to break even.

To the east of the City near Aldgate, St Botolphs is designed by Grimshaw and will be completed in early 2010. An 84,000 sq ft prelet to insurer Lockton International has been agreed at a rent of 拢45/sq ft, and it has an option to take a further 40,000 sq ft. Even if the additional space is taken, 436,000 sq ft of office and retail space remains to be let. HSH Nordbank and Landesbank have provided a 拢315m development facility, and the break-even rent is in the region of 拢35/sq ft.

Analysts agree that a further significant prelet in the City could prompt a rerating of Minerva鈥檚 shares. So what are the chances?

Development director Tim Garnham accepts that expansion-led requirements in the City are on hold, but stresses that the market goes on.

鈥楾here are still tenants out there looking for space,鈥� he says. 鈥業 absolutely admit the numbers have dropped, but there are several players out there with requirements of 150,000 to 300,000 sq ft who have to move.鈥�

In a couple of years鈥� time, I am confident a lot of today鈥檚 negative sentiment will be considered overdone

Salmaan Hasan

There have been persistent rumours that 好色先生TV International has expressed interest in St Botolphs for when it quits 鈥楩ortress Wapping鈥� but, given the size of its requirement, this would involve a costly reneging of Minerva鈥檚 commitment to Lockton.

Assuming no further prelets are secured, the schemes will be among the last of those under construction to hit the market.

鈥楾hose last to the development party run the risk of delivering into a market devoid of demand,鈥� argues Mike Prew, real estate analyst at Lehman Brothers. He estimates that there is 5.5m sq ft of speculative space under construction in the City that will come to the market in the next two years.

This figure does not include prelet space, and Jones Lang LaSalle estimates the total space under construction for this year and next at 7.3m sq ft.

City surfeit

If demand remains depressed, the City market will be awash with office space by the time Walbrook and St Botolphs are completed. Research houses predict the overhang could cause rents to drop

by 10%-20%. However, the 鈥榯ap鈥� of development finance has been firmly switched off, and Minerva argues this could work in its favour.

鈥楢t one time, supply in the City pipeline for 2010 was 6m-7m sq ft, but in reality, it is now less than 1m sq ft,鈥� says Garnham. The Heron Tower is the only significant scheme due for completion in 2011, followed by the Pinnacle in 2012.

鈥業f you鈥檙e an occupier with a lease expiry in 2012, with almost negligible committed supply after 2010, those expiry dates are going to become more pertinent,鈥� Garnham adds.

鈥業n this market, demand can change in a second. What you won鈥檛 be able to do for three years is deliver office space of significant size and quality.鈥�

Or, in Hasan鈥檚 opinion, on a speculative basis.

鈥楨ven when the crunch calms down, development finance is going to remain at the riskier end of lending for some time, and it will be a year or two 鈥� maybe three 鈥� before speculative development will be financed again,鈥� he predicts.

Minerva鈥檚 own financing has come under a great deal of scrutiny. Some analysts fear the company鈥檚 high gearing, development exposure and lack of income-producing investments imposes a time limit on the 拢130m cash on its balance sheet. Given the extent of the company鈥檚 borrowings, how long will it take for the cash servicing the interest repayments to run out?

鈥楾he perception we need to sell assets to service interest repayments is patently untrue,鈥� confirms finance director Ivan Ezekiel, adding that interest repayments on the two City sites are being 鈥榬olled up鈥� and serviced through existing loans.

鈥榃e have got funding that will allow us to deliver these buildings, full stop,鈥� he says. 鈥楾hese financings would not be available in today鈥檚 market, as they were negotiated at a very different time. But even if we haven鈥檛 let the buildings on completion, the funding deals will not fall apart.

While I wouldn鈥檛 say our funders are relaxed, they understand that property is cyclical

Ivan Ezekiel, finance director

鈥榃e have had relationships with our four funders for over 10 years. While I wouldn鈥檛 say they are relaxed, they understand that property is cyclical, and have the patience, knowledge and understanding to see through difficult times.

鈥楨quity analysts ask lots of questions about whether they might call funding in due to demand issues. But all four are resolute that they are happy to continue.鈥�

The loan-to-value (LTV) ratios of Minerva鈥檚 City schemes are figures the analysts have been particularly dogged in pursuing.

鈥楾here are LTVs, but they won鈥檛 be used in the course of construction,鈥� Ezekiel says. 鈥楾hey could look at it, if they wish to, when the buildings complete, but it is likely to be a very different environment in three years鈥� time.鈥�

The market has also punished Minerva for its retail development exposure, noting delays in signing up John Lewis to its proposed 1m sq ft Park Place retail scheme in Croydon, and the recent exit of joint venture partner Lend Lease.

Garnham confirms that the compulsory purchase order has now been agreed and a revised planning application will be submitted this year, reflecting changes requested by John Lewis, which still has yet to sign a heads-of-terms agreement.

A delivery date of 2014 is anticipated and a new joint venture partner will be sought.

鈥業t is our intention to re-engage with an appropriate partner, because of the scale, capital commitment and long-term nature of this project,鈥� Hasan says. But would Minerva dispose of the project completely?

鈥楾his is a business we鈥檙e running, and there鈥檚 no room for sentiment. But we are committed to getting this scheme delivered, and would only ever consider selling it to redeploy capital more effectively, and not to repay debt.鈥�

Another long-term project is a 1m sq ft mixed-use scheme planned for the site of the Ram Brewery in Wandsworth, which Minerva acquired for 拢83.5m in 2006. It is hoped planning consent will be granted later this year, but the predominantly residential scheme will be developed in stages.

Meanwhile, the group is progressing two high-end residential schemes in west London: the Lancasters at Lancaster Gate, and the Odeon cinema on Kensington High Street.

鈥楲ondon鈥檚 ultra high-end market is the only subsector of residential that is showing fairly steep price growth this year and next,鈥� says Hasan, abhorring the generalisations of residential doom-mongerers.

The flats are aimed at the super-wealthy 鈥� 鈥榗ash buyers who don鈥檛 need a mortgage鈥� 鈥� and two big presales were concluded to investors within months of the Lancasters planning decision, netting more than 拢100m for Minerva and joint venture partner Northacre 鈥� the equivalent of 拢2,000/sq ft. Sales to individual occupiers will begin next year.

Minerva also nets a small income from its few remaining investment properties in London and Scotland, and these contributed 拢9.2m of income in its 2007 results.

Buying time

Those last to the development party run the risk of delivering into a market devoid of demand

Mike Prew, Lehman Brothers

While the real estate brokers remain powerful critics, there is evidence that the tide is turning.

In April, Merrill Lynch issued a 鈥榖uy鈥� note on Minerva鈥檚 shares.

鈥楩undamentally, we believe Minerva is now cheap,鈥� argues real estate analyst Bhupen Master. 鈥極ur analysis suggests the current share price implies the book values of Walbrook [拢180m] and St Botophs [拢97m] are written down to zero, and Park Place in Croydon is written down by 拢100m to 拢45m. This also ignores the potential uplift from Minerva鈥檚 two residential schemes, which are kept at historical cost on the balance sheet, or future prospects for the Ram Brewery site.鈥�

Master is confident that the structuring of Minerva鈥檚 construction loans means it will have sufficient funding to complete both developments and cover financing costs if the assets are not leased upon practical completion.

鈥楾he risks clearly increase if either scheme is vacant for a prolonged period after practical completion. We think this could be well over two years after practical completion,鈥� is his only caveat.

But analysts are not the only people who think Minerva鈥檚 shares are looking cheap. There was a minor rally in February when it was revealed that New York developer LeFrak had acquired a small stake in the company.

Then, last month, Minerva鈥檚 shares shot up by 16% in a day to 116p when Limitless declared it was considering a bid. The investor issued a statement saying it was in the 鈥榩reliminary stages of considering its options鈥� but, at the time of going to press, no formal bid offer had been tabled.

Bankers have talked about an eventual bid of 160p-a-share, valuing the company at 拢270m, but not even Minerva鈥檚 house broker thinks the company is worth that much.

Harry Stokes, analyst at Citi, valued the company at just 116p a share in May, assuming all of its projects are let or sold.

City sources believe that if Limitless does make an offer, it will wait for Minerva鈥檚 shares to fall back. But in the meantime, hedge funds are acquiring small stakes.

Hasan remains unruffled about the prospects of a takeover. 鈥榊es, real estate stock prices are very low, but the kind of M&A activity people are assuming will materialise has one big problem: there鈥檚 no debt.鈥�

But the aptly named Limitless has access to sovereign wealth, and so should not be ignored.

Despite the ups and downs of the past year, Hasan is stoical about the current market.

鈥業n a strange way, it has been fascinating to see how quickly property sentiment changed,鈥� he says. 鈥榃e recognise we are always going to be a proposition based on our ability to deliver profitable projects, but you can鈥檛 deliver quicker than you can build.

鈥業n a couple of years鈥� time, I am confident a lot of today鈥檚 negative sentiment will be considered overdone.鈥�