Three of the main Irish news outlets today report that NAMA is set to make a €600m “profit” in 2011. This follows a presentation by NAMA CEO, Brendan McDonagh in Londonyesterday when he gave an update on the Agency’s progress (*, see below). There was a reference in Brendan’s presentation to NAMA being on course to make an operating profit of €600m in 2011. With the honourable exception of Simon Carswell in today’s Irish Times – and even he might have made the matter clearer – the rest of the Irish media give the impression that NAMA will be profitable in 2011:
“NAMA boss says agency will make €600m profit this year” headline in the Irish Independent
“NAMA .. on course to make trading profit of €600m this year” with a photograph of the NAMA CEO with the caption “Brendan McDonagh says NAMA expects €600m profit this year” at RTE
Why is this misleading? There is a difference between an “operating” or “trading” or “gross” profit, on one hand, and a “net profit” on the other – the usual difference is the former will exclude the effects of exceptional events, or costs/income that are not directly associated with the main business of the company or sometimes “paper” profits or losses. So NAMA’s operating profit will INCLUDE interest received from borrowers, interest paid by NAMA on its bonds, profits if loans are redeemed or sold at more than NAMA paid for them, losses if NAMA sells loans for less than it paid for them and NAMA’s administration expenses but will EXCLUDE losses when revaluing remaining loans because the underlying property has fallen in value, and dividends paid to the so-called “independent” third-party investors. The calculation of losses on NAMA’s existing loan-book takes place only once a year at year end, and the loss is known as the “impairment loss”. It is excluded from operating profit; for example in 2010, NAMA made an operating profit of some €400m but there was an impairment loss of some €1.5bn which mean that NAMA overall made a loss of €1.1bn in 2010.
How much of an impairment charge will NAMA take this year? Well up to last weekend, I would have said something in the region of €1bn on the basis of falls in the Irish market in particular in the past year, and anaemic and mixed results in other markets. So the €600m operating profit might have become a €400m net loss.
But Minister Noonan’s announcements on Tuesday in Budget 2012 might materially change this with respect to Irish commercial property valuations. Three measures announced – the reduction of stamp duty from 6% to 2%, the binning of efforts to deal with Upward Only Rent Review (UORR) leases and the softening of rules on Capital Gains Tax – all tend to boost the value of Irish commercial property. By how much? I would have said by 10-15% on the basis of the 10%+ falls in 2011 that have been attributed to uncertainty over the UORR issue, and the reduction in stamp duty effectively increases prices by 4%. With NAMA having €9.25bn of commercial property by reference to November 2009 values, which has dropped by 30%-odd so far if you strip out Long Term Economic Value and the 20% fall in values since November 2009, I would estimate NAMA’s commercial property to be worth €6-7bn today; so a 10% increase may give a €600-700m clawback from the €1bn estimated impairment charge that NAMA was carrying up to last weekend.
If NAMA had to book a €1bn impairment loss then the betting on here was that the Agency would have required additional capital – a bailout for NAMA! So Minister Noonan’s announcements might just have saved NAMA’s skin, and in the 12th month of the year. Dramatic stuff!
* NAMA’s update on progress: Friday 9 December 2011
– approved the sales of assets totalling €6.2 billion, with €4.3bn approved Jan-Oct 2011, and €1.9bn in 2010 and 80% located outside Ireland.
– on course to make an *operating profit* of €600 million in 2011;
– approved 63 insolvency appointments so far this year compared with 30 in 2010;
– likely to redeem a cumulative total of €2 billion in NAMA senior debt before the end of 2011. NAMA had redeemed €1.25bn of its bonds to the end of September 2011. These bonds cost NAMA approximately 1.7% (1.2% next year following recent ECB interest rate reductions) so NAMA is handing over cash effectively to the ECB – by “effectively” I mean the banks who were given NAMA bonds in return for their loans exchange these bonds with the ECB for cash – to redeem bonds that cost the Agency very very little. The view on here is that this cash would more usefully be deployed in the Irish economy as NAMA bonds don’t have to be redeemed until 2020.
– generated over €5 billion in gross cash receipts to the end of November 2011 and approved €950 million in new loans to complete development work in progress.
NAMA Wine Lake 
I don’t get why they are protecting the trade in one small area while destroying it for the remainder of the economy.
This is just a repeat of the fake fur and no knickers economic thought that we’ve had for the last twenty years.
And what I’m about to write might be heretic. But if this lot were in for the last while, things would be worse for I just don’t see them ever putting the sovereign wealth fund in place.
Did Namawinelake and other property interests not forecast that Nama property would lose billions if UORRs were scrapped. Surely now that many businesses and thousands of jobs have been sacrificed at the nama alter, there should be provison for these extra billions in the Nama figures. Brendan McDonagh talked about 20% losses if UORRs scrapped. I hope Nama announces the good news when the investors flood back in to Ireland and when commercial prices increase as they predicted, this may cheer up the thousands of unemployed retail workers and the Irish business people queing up in the courts to have their business and homes get the red card. Expecting to see the troika Marian Finnegan, Ann Hargaden, Marie Hunt making lots of happy statements in the new year. Congratulations to the property industry for its equality record, it is great to see so many women at the top of an industry or are they just the ones pushed out front to take the flak when it all goes horribly wrong again.
They would lose on paper for the first two years but then REAL trade would kick in and we might get going. And not like the pure insanity of the 1920/30 and 1950/60 where we took an unbelievable amount of time to cop on that trade’s the thing not value at that time.
The conference referenced was sponsored by “Davy”….optics,optics!,
“Davy is hit with €50,000 fine by the Central Bank
THE Central Bank has fined Davy Stockbrokers €50,000 and reprimanded Ireland’s largest stockbroker for breaching its regulations.”
Same page Indo today.
what exactly is a ‘conference’ these days,is it 70 private clients of Davy……looking forward to reading the full presentation from the ‘conference’ or private client meeting.
wikipedia…
“A conference is a meeting of people who “confer” about a topic.”
http://en.wikipedia.org/wiki/Conference
According to Davy site……
“At an investor presentation in Davy’s London Office, NAMA CEO Brendan McDonagh reiterated that the UK and Northern Ireland account for 37% of its portfolio of €31.7bn (nominal €74bn) of property-related loans.”
http://www.davy.ie/LR?id=2518
NAMA site….
“Speaking at an investor conference in London, Brendan McDonagh said asset sales totalling €4.3 billion had been approved between January and October 2011”
http://www.nama.ie/news/nama-approves-asset-sales-of-e6-2-billion/
@ NWL Yes there clearly is a general problem with the standard of Irish business journalists. Most appear to be either very lazy or ignorant or perhaps a mixture of the two.
However may I praise Emmet Oliver who picked up a Revenue Report http://www.revenue.ie/en/about/publications/comprehensive-expenditure-review.pdf and produced a story in Friday’s Independent on it http://www.independent.ie/business/irish/small-changes-at-revenue-could-raise-over-euro600m-2959122.html. If you look at page 5 of the Report, the Revenue expects to produce extra tax of nearly €600M in 2012 by way of improved administration and legislative changes, €171M in additional tax & €405M from improved cash flow. This is some target!
Between the substantial yield they are hoping for from flogging off houses and these administrative changes, Mickey Noonan will be rolling in money by year end!
This rubbish about “approving” the sale of assets totaling €6.2 billion is an insult to the intelligence of the onlooker and displays the arrogance within NAMA. A few “heads” sitting around the table saying “I think we’ll sell that” does not constitute a sale.
BTW, NAMA is selling it’s prime assets at the bottom of the market, leaving the remnants for later. It’s record – even with the cherry picked assets- has been mixed. It is rumoured that One Warrington Place was purchased by NAMA in the mid €30 millions. It was sold for sub €28 million. In London it recently sold a city office block for a €7 million profit.
It is suffering from the elevated values given to it in Ireland by the agents when purchasing the assets from the banks. It will only get worse. As I keep repeating, allowing now for the binning of the UORR legislation, NAMA’s loss will comfortably exceed €10 billion.
For Gawd’s sake, it takes in excess of 4 weeks and and multiple Form A applications to get agreement to pay off loans at par! Someday someone will sue them for the cost of the extra interest – but it’s no way to run a business.
@wstt – “the loss will be ten billion with the binning of the UORRs”. What would the number have been if the tenants had been set free?
@WSTT. I concur with your analysis. The old accounting adage needs to be applied when discussing (NAMA) sales and that is “a sale isn’t a sale until the money’s banked!”
@Despero, That is a great question, that is almost impossible to answer precisely, but the general impression is that it would have been north of €2 billion.