Archive | Management contract values

Calan bid puts different perspective on management rights

Published 27 January 2006


ING Property Trust’s $1.25/unit bid for Calan Healthcare Properties Trust puts a new perspective on the value of the management of listed property entities.



After Kiwi Income Property Trust began its bid for Capital Properties (NZ) Ltd at the end of 2004, Capital put its internal management operation on the market and also talked up the value of the contract as a component of the share price.


Kiwi went to court and Capital withdrew the management rights from the market. Subsequently, the unlisted AMP Property Portfolio Investments Ltd has acquired majority control of Capital, but hasn’t yet reached the trigger point for compulsory acquisition.


Capital & Trans Tasman Properties Ltd were the only New Zealand listed property entities with internal management structures. Capital’s chief executive, Chris Gudgeon, reckoned last September the difference between the company’s $1.9 million cost of internal management and what an external management company was likely to take out was $4.9 million – a total $6.8 million, 260% higher.


Capital’s chairman at the time, Colin Beyer, said the company could have netted $35-40 million from sale of the management rights – in the region of 7.5-9% of portfolio value before a major revaluation, 6.5-7.5% after.


Nobody has mentioned the management contract so far in the ING bid for Calan, but there is one. All the trust’s directors are actually on the board of Calan Healthcare Properties Ltd, owned by directors Martin Lyttelton & Brian Freestone, in partnership with former executive Chris Donahoe on one side, and Richard Ord on the other.


On the Capital Properties basis, the Calan management contract would be worth 8-11c (6.5-9% of $1.20/unit asset backing) – but, unlike at Capital, this time not to unitholders. That’s the value Calan’s managers have at stake as ING bypasses them and attacks the register.


It’s a value which would ultimately be transferred to ING (NZ) & Symphony Group, as joint owners of the ING trust’s manager, if the ING trust completed a takeover of Calan units.


Success for ING in its takeover bid would make it the first occasion the manager of a listed entity has been thrust aside in an ownership & management transfer


That exercise could have numerous consequences for the management rights industry – on value and on structuring a document to fight off control or establish value if it’s going to head out of your domain anyway.


ING offered to buy 9.7% of Calan, to add to the 10.3% held as funds under management by ING (NZ) Ltd. After discovering an overseas ING entity had been negotiating for several months on one Calan asset, which Calan hasn’t said but which I presume is its Melbourne hospital, that ING entity has walked from its negotiations and the ING trust relaunched its bid yesterday, getting 1% of its target 9.7%. In the initial afternoon’s play it had picked up 3%.


Calan’s board has appointed Macquarie NZ Ltd as financial advisor and Bell Gully as the trust’s legal advisor and if, following the stand in the market, a written offer is made for all the remaining units, an independent appraisal report will be commissioned.


You could argue that unitholders should have their own representative outside the Calan management company, and their own advisors because of potential conflicts with the position of the management company in a full takeover.


That might be far-fetched, but the possibility of conflict between the management company’s & unitholders interests exists in this unusual takeover scenario.


Earlier stories:


26 January 2006: ING seeks 20% of Calan as precursor to full bid


21 September 2005: Capital Properties blunt about cost of external management 


4 April 2005: Portfolio premium the next Capital aim


4 April 2005: Capital pulls management rights from sale and Gudgeon pushes portfolio premium


26 November 2004: Capital Properties puts management rights on the block


 


If you want to comment on this story, write to the BD Central Discussion forum or send an email to [email protected].


 


Attribution: Company statements, talking to typewriter, story written by Bob Dey for this website.

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Management rights – who’s right?

Published: 19 February 2005


Kiwi Income Property Trust’s management company took umbrage when Capital Properties NZ Ltd put its management rights on the block just a week after Kiwi bought 19.9% of Capital last November.



Perhaps, in the ensuing dispute, the value of Kiwi’s own management contract – and analysis of that value – will get aired a little more than happened when the trust’s founders first sold half of it to Lend Lease Corp and, in sale of the other half, the whole contract went to Colonial First State Property of Australia (now part of the Commonwealth Bank empire). I’ve never dug into the Colonial price, vaguely remembered a figure of $53 million but recently saw the deal priced at $57.75 million.


Internal versus external management is an issue which hasn’t been fought hard over in New Zealand. And although there have been bids for & sales of the rights to manage listed property entities, it’s all been behind closed doors.


Investors in the listed entities haven’t been party to any of these transactions:

Kiwi Income founders Richard Didsbury & Ross Green’s initial sale of half their contract to Lend Lease
Their subsequent sale of the other half when Lend Lease wanted out and the whole package went to Colonial
The Hodge family’s sale of its Urbus Properties contract to ING NZ & Symphony Group
Sale of the Property For Industry Ltd management contract by Willis Bond to AMP Capital Investors (as it is now)
Sale of half the AMP NZ Office Trust management contract by AMP in New Zealand to Ronin (AMP in Australia)
Subsequent & consequent sale of Ronin’s 50% to Multiplex
Paramount Properties (Symphony Group)’s sale of half the Paramount (now ING) Property Trust management to ING NZ.

In the proposed merger of Urbus & ING, unitholders in the enlarged ING will be asked to separately approve cancelling the Urbus management agreements after the merger vote. As investors aren’t going to be given an option of keeping the Urbus agreements – or of extending them across the whole of the enlarged ING trust – it will simply be a matter of cancellation, not of comparing what ING management said were more expensive Urbus contracts and allowing investors to choose what they think is the best option.


Management is a private industry


All of these management contract deals have been transactions in a private industry. You can look at the disclosed figures and try to work out likely yields & values, but the ordinary investor has little chance of evaluating the merits of one management group against another, or of in-house management against an external contract.


I think this inherent lack of transparency works against the interests of the listed property sector. New Zealanders’ innate suspicion that someone might be getting an unfair advantage sets investors against a management which doesn’t disclose its position fully.


In Australia, on the other hand, there have been serious battles over management rights and the cost of management has been an issue in takeovers.


The cost of management, in the end, may not be a huge issue to smaller investors here, who have no influence over market share price or any aspect of the entity they’ve chosen to put their money in. The issue just above – unfair advantage – may as a general perception knock a few percent off the sector’s overall pricing, but will also not influence the general run of business.


But should that be so? And will it remain so?


You would like to think large institutions which invest in these property entities would do their best to keep costs down, values of the listed entities up. But large institutions also run listed entities themselves, and in New Zealand there’s never been a strong institutional push against immediate self-interest in favour of a stronger, more transparent, more robust market long-term.


The reasoning of Kiwi Income Properties Ltd chief executive Angus McNaughton, then, in fighting Capital Properties’ board’s decision to put Capital’s management rights on the market, becomes highly interesting.


He said:

The proposal to sell management rights represents an abrupt & fundamental departure from Capital’s longstanding structure & strategy, and as such should be put to all shareholders for approval
Capital has consistently promoted its internal management structure as a highlight to investors. It is critical to the value of its shares and the key reason for its claimed lower cost structure.
While moving to an external management structure may result in a one-off payment to Capital’s shareholders, it is also likely to result in reduced future distributions & a lower share price
These are important issues that Capital management has not highlighted to investors.

In effect, in my view, Mr McNaughton is also saying there that the market has built the value of the management contract into the share price – or the share price wouldn’t fall after a sale.


If that’s the case, Capital chairman Colin Beyer is wrong in his assessment on Friday, when he questioned why Kiwi had chosen not to bid for Capital’s management contract: “Our view is that this is because Kiwi Income Properties Ltd’s clear preference is to have Kiwi Income Property Trust’s unitholders pay for the management rights as part of a possible future takeover of Capital Properties (if one ever emerges).


“In this way Kiwi Income Properties Ltd are seeking to acquire the management rights for nothing, at the cost of Kiwi Income Property Trust’s unitholders, who derive no benefit from the profitable management fee arrangements.”


To extend Mr McNaughton’s view, if sale of one asset – the management rights – is done at an appropriate price, and leveraged use of the proceeds increases portfolio value, the market should also recognise the value in a portfolio gain. The share price would recover.


This is a dispute where institutions & analysts could help the market to an informed conclusion.


It raises an opportunity for them to lead a debate and highlight the positives. My bet is that that won’t happen, but I’d be happy to be proved wrong.


Other stories:


21 January 2005: Kiwi Income to review management fees, waive fee from Capital


28 September 2004: NZ assets a major feature of Multiplex bid for Ronin


12 August 2004: ING & Symphony complete Urbus management rights purchase


30 June 2004: Hodges sell Urbus Management


31 March 2004: Urbus management review, ING raises stake, 18.8% of notes convert


18 December 2003: Ronin to take most of National Provident’s AMP NZ Office stake, half of trust management


19 August 2003: ING takes over Paramount management


15 February 2002: Colonial buys Kiwi Income management company


 


If you want to comment on this story, write to the BD Central Discussion forum or send an email to [email protected].

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