Where Atlas Estates' cash goes

Or, what NAV-based fees can do for a management company.

Last week we revealed that the objection of Noam Lanir's Livermore Investment Group to the delisting of Atlas Estates Ltd. (AIM:ATLS) from London's AIM was based on disagreements with other controlling shareholders in the company over management fees charged by Atlas Management Company.

The management fees are based on the net asset value (NAV) of the real estate company.

Atlas Estates owns commercial and residential properties in Eastern Europe. The firm went public in London three years ago, and raised ₤121.7 million. The sum is worth $177 million at the current exchange rate. It received its assets from Elran Investments Ltd. (TASE: ELIN), which at the time was controlled by Gad and Dori Dankner; Ron Izaki; and British investment firm RP Capital Group.

Two days before the public offering, the three set up a management company and registered it in the island tax haven Guernsey. They explained in the prospectus, "AMC was set up with the sole purpose to provide management services to the public company. AMC includes a staff of experts with a proven track record in real estate management."

On the day of its IPO, Elran held 37.5% in the management company, Izaki had 20%, and RP Capital held 42.5%. Following Elran's sale of its holdings to its two partners, Izaki now owns 49%, and RP Capital owns 51%.

While this has all been legitimate and legal, the more one looks into the documents of Atlas Estates, the more difficult it becomes to figure out the benefit that it has gained from the management company, especially as the latter received and continues to receive not-insignificant payments from Atlas Estates.

NAV and no more

The management agreement between AMC and Atlas Estates sets out that AMC is able to receive annual management fees of 2% of the adjusted NAV as of the end of the year. Adjusted NAV is often much higher than "regular" NAV, since it includes profit that the firm records from revaluing assets, and is net of deferred taxes.

Checks by "Globes" showed that in 2006, the management fees paid to AMC were €3.8 million, while in 2007 they rose to €5.2 million, as the adjusted NAV rose 17.3%.

But AMC does not rely only on management fees. According to the agreement, it also receives a performance-based fee if the return on capital is above a "hurdle rate" of 12% (again adjusted, in order to compensate for years with a negative return). The fee is 25% of the difference between the actual return and the hurdle rate. In short, another assured fee.

In 2007, the return was 23%, and AMC received €12.6 million for 2006-2007. Altogether, during the three years that passed from the IPO through the third quarter of 2008, AMC received a total of €25.9 million (about $36.1 million, or NIS 136.5 million) much more than the $20 million that the entire company is currently worth.

Rafael Berber is AMC chairman today, and Izaki is a director and chairman of the investment committee.

Holiday money

Many private equity funds receive management fees based on NAV. But while many of those companies manage a portfolio of many firms, AMC only manages one company Atlas Estates and not a large company, at that.

Furthermore, Atlas still does not have a history of profit or proven exits. The firm had a net loss of €10.6 million in 2006, a net profit of €8.3 million in 2007, and a net loss of €9.7 million over the first three quarters of 2008. Over the first three quarters of 2008, cash flow from current operations was a negative €30.1 million.

Salary costs, British-style

The following figures may best drive home the point. When Elran sold its holdings in AMC to Izaki and RP Capital, the transaction reflected a value of €17.3 million, a more than respectable valuation for a company whose entire operations consists of providing management services for one company.

Atlas Estates itself does not have managers only several external directors whose compensation is minimal, so that the management fees can be considered to be salary costs. Nonetheless, the amount of NIS 137 million, for less than three years, for a company that has not yet generated value for its investors, is overdone.

Now it is all clear

When a company like Atlas Estates, which does not have much cash, pays fees to a management company, both in good times and bad, one can possibly understand why its share lost 91% in the past year, and its market cap sank to $20 million.

True, there is a credit crunch, and many real estate firms are suffering from it, yet it remains difficult to believe that the agreement between Atlas Estates and its management company did not raise any red flags among the investor community.

A response from Ron Izaki was not received by web-posting.

Published by Globes [online], Israel business news - www.globes-online.com - on January 5, 2009

© Copyright of Globes Publisher Itonut (1983) Ltd. 2009

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