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Colonial return to investors 10.45%

Colonial trust ahead of prospectus, until revaluations counted

Colonial First State Property Trust has performed above prospectus expectations (excluding the impact of revaluations), has not suffered the volatility affecting technology stocks, but remains a discounted stock.

The trust was listed on 3 June 1999. In its first 10 months, earnings before tax were $10.431 million ($13.483 million forecast in the prospectus) and after tax $8.549 million ($11.331 million). Before revaluations, the trust’s profit was $12.251 million, giving the edge over the prospectus figure.

Unitholders will receive a 2.7316c final distribution, including a 0.3316c imputation credit. That equates to an annualised gross yield of 10.45%, (the prospectus forecast was 10.3%).

Colonial’s writedown of 1.73% takes the portfolio from $199.72 million (at the time of the float, with expectations on two Auckland buildings not then completed) to $196.26 million at the March 2000 balance date.

Less cbd exposure

The trust’s general manager, Lloyd Cundy, compared the writedown favourably with those of listed property stocks with heavier cbd concentration and in an environment where rising interest rates tend to disadvantage property investment.

” The trust is fortunate that it is not highly exposed to cbd office markets, which have been marked down on the back of weakening yields and vacancy concerns,” Mr Cundy said today.

The trust has no vacancy and Mr Cundy said refurbishment of two major assets, the South City shopping centre on Colombo St, Christchurch, and Aurora (now Unisys) House in Wellington had been successful. “Turnover in the centre has increased over 60% since the refurbishment was completed,” he said.

But the trust continues to trade at a discount to asset value. The $1 units opened last June at 93c, compared to asset value of 96.65c. Now they’re at 86c, after dropping in April to 79c, compared to asset value of 95.96c. That’s a 10% discount on asset price, and 14% on float price.

Mr Cundy said the discounted price was not a true reflection of the trust’s performance. “Investors’ preoccupation with seeking high growth from shares, and an environment of rising interest rates, has seen the listed property market remain out of favour with many investors.”

But he said the unit price was largely unaffected by recent global sharemarket volatility, reflecting quality underlying rental income. That turbulence in global technology stocks “has highlighted the benefits of a reliable income-producing stock as part of a diversified investment portfolio.”

Head office, new buildings’ values drop

Colonial’s Wellington head office was on the market in 1998 with a $27.5 million price tag but went into the trust at $20.8 million, with an independent (CB Richard Ellis) valuation of $21.5 million. Now the valuation is down to $19.5 million.

The three buildings acquired from Symphony, all on strong yields below 10%, have all been dropped slightly in value — $23.65 million ($24.5 million in the prospectus) for the IBM Centre, $18.3 million ($18.8 million) for Passport United House on Carlton Gore Rd, Newmarket, and $16.8 million ($17.1 million) for its neighbour, Public Trust House.

Unisys House and Chambers in Wellington have had $1.5 million knocked off their valuation to $39.3 million, but the South City shopping centre’s valuation has been raised $1.56 million to $24.66 million.

Despite the reasonable return, Colonial must again suffer some uncertainty because of the takeover of parent company Colonial by Australia’s Commonwealth Bank.

The trust was the outcome of institutional takeovers in the first place, packaging buildings acquired through NZI Life and Prudential after other parts of their portfolios were disposed of, with Colonial’s Wellington head office and the three new buildings acquired on completion from Symphony Group.

Colonial insisted at the time of the float last year that it was not a convenient exit strategy, planning to hold 31%. It ended up taking more through a subscription shortfall to hold 63%, which it has retained. It is reasonable to expect that stake to be cut if Colonial can exit without a loss, but now the aspirations of Commonwealth also need to be assessed.

Commonwealth’s New Zealand subsidiary, ASB Bank, has not been a property investor but has invested well through managed funds for its customers.

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Kiwi Income’s earnings/unit fall though profit up 3.2%

Diluted earnings/unit fall 13.4%

Kiwi Income Property Trust increased net profit after tax by 3.2% to $44.75 in the March 2003 year, but diluted earnings/unit fell 13.4% to 7.55c.

The operating surplus before unusuals & tax rose 7.1% to $52 million on revenue down 1.3% to $71.1 million.

Highlights listed by Kiwi chairman Jim Syme were:

Successful completion of the 1:6 pro-rata rights issue in July 2002, raising $69.3 million for the partial funding of the Northlands shopping centre development in Christchurch
$90.9 million expansion of Northlands, doubling the centre to 40,700m²
Leasing all 54 specialty store tenancies in stage 1 of Northlands 3 months before the scheduled opening in July
Strong leasing across both the trust’s commercial & retail portfolios, increasing average occupancy, excluding Northlands, to 98%
A $2.3 million increase in the value of the Royal & SunAlliance Centre to $204.5 million, with all areas fully leased
An upwards revaluation in the trust’s portfolio by $6.1 million
Refurbishment of The Plaza’s Foodcourt in Palmerston North, yielding 15% on the $1.5 million spent.Kiwi Income will pay a 3.9c/unit gross final dividend, including 3.9c imputation, giving a total gross dividend for the year down 16% at 8.54c/unit.

Mr Syme attributed the dividend cut to the dilutionary impact of the 54.6 million class B units converting into ordinary units and picking up the dividend, plus the rights issue & short-term loss of income from the associated Northlands development.

Debt repayment from the rights issue cut Kiwi Income’s debt:total assets ratio from 29.2% to 22.4%.
in capital expenditure.
Website: Kiwi Income Property Trust

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Newmarket Property Trust net falls 5.5%

Report on strategic options end of April

Newmarket Property Trust’s net surplus after tax fell 5.5% to $1.9 million in the December half on total rent down 5.4% to 4.29 million, and expenses down 4.9%. The trust announced a 3.313c/unit interim dividend, representing a 12.5% annualised return on an average 50c unit market price.

Earnings/unit fell from 2.99c to 2.82c.

“This dividend is slightly below where we expected to be, but market uncertainties slightly delayed our leasing
programme and cash flows,” managing director David Keys said.

New retailer for Country Road space

The trust has leased the 2-level Rialto space to be vacated by Country Road to Ultimo Emporium, “a new high-quality, mini-department store, which will open with their spring/summer release in early September. They have a range of top-quality international brands committed to supply and back the proposal. Country Road will stay on at Rialto until 1 August.

“This is an ideal use, complementary to our leading-edge fashion operators such as Road to Rome, Bendon, Satori, Canterbury & Southern Exchange. We are confident that Rialto Heart of Broadway will remain the fashion centre of Newmarket.”

Mr Keys said the trust had renewed 11 retail leases, entered into 4 new leases, agreed 7 rent reviews & approved a sublease from ANZ Bank, which would see Australian fashion retailer Portmans at Rialto.

“People, including our competitors, have been saying that the northern end of Newmarket is dead and all the action will be at the southern end. We do not agree and have been very focussed on securing our niche as Newmarket’s leading edge fashion centre. The achievements listed above take our weighted average lease term from 2.27 years to 3.91 years.

“We are also working on some ideas to link in with New Zealand’s fantastic fashion designers, many of whom were on show at the L’Oreal Fashion Week in October last year.”

The trust is negotiating a lease renewal for a major AA Centre tenant which Mr Keys said might also achieve commitment for another floor. “There has been a good inquiry level regarding available space in the AA Centre. On the basis of these inquiries we are hopeful that we can achieve full occupancy by the end of the year.”

Mr Keys said the board & management had been reviewing future strategic options for the trust and had undertaken to report back to unitholders by the end of April.

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ANZ Centre valuation drops, makes it over-rented

AMP chief says top end stronger than valuation basis shows

Revaluations in line with market rents can produce a wrong picture of the AMP NZ Office Trust’s portfolio, executive manager Rob Lang feels.

The prime example is the ANZ Centre (formerly Coopers & Lybrand/PricewaterhouseCoopers Tower) in Auckland, valued at $145.5 million for the trust’s June 1998 accounts, down to $142 million last year and down again this year to $136.7 million. The Albert St tower, with 32,791m² net lettable office space on 32 floors, is fully occupied.

“CB Richard Ellis have taken a general market rent and put it into the ANZ Centre. We achieved a rent review by arbitration in April-May which was $230/m², but the market rent is $210. You’ve got a building at the top end of the market — of course it’s going to look out of skew.”

The AMP trust’s managers naturally argue it’s wrong to look at the market as a whole because they manage a portfolio at the top end. But placing a general market rent on such a tower, thereby reducing the valuation, means in theory it remains very over-rented.

Mr Lang said today the ANZ Centre occupied a niche position at the top of the market and would retain it for a while yet.

Overall, he said, “the portfolio’s done pretty well against its peers.”

He said Quay Tower, behind the new PricewaterhouseCoopers Tower being built on Auckland’s waterfront, was another example of a building where the valuation fell, but where rents had improved and leases were extended through tenant restructuring.

From the 16 rent reviews conducted during the year, eight resulted in increases and the other eight, with ratchet clauses, stayed put.

Mr Lang said impacts beyond the trust’s control included the rise in risk-free 10-year government bonds, from 6.5% last year to 6.7%, which he said might be given more weight by stock analysts than by property valuers.

In property market terms, he said the CB Richard Ellis research showed a tightening of both the Wellington and Auckland markets.

In Wellington, CB Richard Ellis’ forecast for average 10-year rental growth is 2.6%, down from 3.9% last year. Mr Lang said that was “pretty low” and should mean the market was at or near the bottom.

Wellington capitalisation rates had also dropped 50 basis points. In two leasing deals, one of them the very large NZ Qualifications Authority signing, Wellington’s prime and A grade vacancy rate was nearly halved.

“In IBM we have four subleased floors and seven expressions of interest. Mobil-on-the-Park is full and the Ministry of Foreign Affairs [an FR Partners project] is fully let except for two floors and two years away from completion.”

In Auckland, CB Richard Ellis’ rental growth rate forecast has held at last year’s level, 3.8%, and the firm is saying the city’s cbd has only two years’ supply of prime office space at an absorption rate of 10,000m²/year. Mr Lang said the market dynamics were changing, but what had not yet been seen as a result of the tightening in prime space availability was robust rental growth.

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PFI hits 100% occupancy

New Australian tenant for Carmont Place & another for Church St

Property For Industry Ltd has achieved 100% occupancy in its $210 million investment portfolio, securing Australian listed company CMI Ltd on a 12-year lease with 2-yearly reviews in 3974m² of office & warehouse at 7A Carmont Place, Mt Wellington.

The property has 2 tenancies earning total rent of $386,000. CMI makes automotive components & accessories. In New Zealand, it’s involved in spring making, metal pressing & wire-forming. A short-term tenant will occupy the space until CMI’s fitout starts in October for a lease period starting next April.

PFI general manager Peter Alexander said the company had also secured direct marketer Deltarg Ltd, a subsidiary of Australian listed company Salmat Ltd, on a 6-year lease at 417 Church St, Penrose. PDL Industries Ltd has a lease running to November 2004 but has vacated the property.

Andrew Hooper & Caroline Cornish of Colliers International represented Deltarg, and Mr Hopper introduced CMI.

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Lu quarantines huge Britomart claim, pursues big overseas deals

Britomart claim to reach court about Easter

Savoy Group’s claim against Auckland City Council over the Britomart project failure will be for more than $100 million and should be lodged in the High Court in about six weeks.

At the same time as councillors have been working towards a lesser, but potentially as expensive, transport interchange for the Britomart site in downtown Auckland and Savoy’s lawyers have been putting together the damages claim, Savoy director Jihong Lu (right) has been involved in a far bigger, and proceeding, transport infrastructure scheme in the Philippines, embroiled in a High Court case over sale of shares in Smartel and is about to launch his group’s formal bid to take over a listed Hong Kong electronics manufacturer.

Meanwhile Savoy Equities, the group’s New Zealand-listed company, hopes to have resource consent in a few weeks for its major extensions to the Hyatt Regency Hotel property. Some Savoy Equities staff have also been employed on the Philippines venture.

The extent of Mr Lu’s active business ventures is ironic, given the state of the Britomart bus terminal, where Savoy companies were to take on a development role, earning potentially large sums from the 11 towers to be built above the five underground transport centre and parking levels.

Pacific Capital Assets was listed to give small investors a stake in that project and in further proposed infrastructure project involvement in New Zealand, Australia and Asia. But that listed company folded with the continual holdups on the Britomart scheme.

The city council canned the project late last year, claiming Savoy had not met its part of the master development agreement, but Savoy claims this was a contrived ruse to meet the political ends of councillors, and a mayor, elected to oppose the scheme.

Britomart litigation

“The amount will be substantially over $100 million,” Mr Lu said of the damages claim over the torpedoed Britomart project. “We’re definitely not giving up.”

Part of the group’s litigation process involves establishing a distinct vehicle within the Britomart Investments subsidiary, while the parent company, Savoy, and rest of the group carry on with new projects.

“I still have a strategy for New Zealand. Just because I’ve been away, I haven’t given up that strategy. I want to make sure the entity for battle is sufficiently quarantined not to backfire on my other business in New Zealand.”

Savoy Equities chief executive Kerry Haycock said the claim against the council would be for breach of contract, damages for costs, loss of potential earnings and conspiracy among councillors “to achieve a certain outcome. That outcome injured us.”

Said Mr Lu: “They also frustrated the ability of the parties to complete. There were market rumours that Jihong Lu wouldn’t come up with the funds. As we started getting the documents in place, they realised, ‘Gosh, he will come up with the money,’ and they pulled the plug. I wasn’t even here at the time the announcement was made.”

Hyatt start

Compared to the long and ultimately fruitless haggling over Britomart, Mr Lu hopes the group’s expansion back of the Hyatt Regency Hotel, along Princes St and flowing down to Eden Cres, will be underway soon.
Savoy hopes to get resource consent in a fortnight for the project, to build the 108-unit Hyatt Residences and extent the hotel’s existing conference facilities.

That would enable Bayleys to open its marketing campaign before the end of this month. Despite the site’s obvious distance from Auckland’s new playgrounds, Princes Wharf and the Viaduct Basin, Mr Lu is enthusiastic about the apartment scheme’s potential because of the ability of hotel operator Hyatt to draw on the corporate clientele it has really not had a place for.

“Hyatt Australia has a very strong marketing programme, but corporate clients can’t stay in the Hyatt here, it’s not upmarket enough. At the moment 20% of our bookings are from the Hyatt organisation, but the apartments will give us much better critical mass to attract more.”

Landplan Pacific is project and development manager on the Hyatt Residences, and Mr Lu said the two parties could be involved together again, with Savoy involved in financial arrangements.

But these projects are small compared to some Mr Lu has become involved in overseas.

The Philippines

Savoy Group, the family business through which Mr Lu controls New Zealand listed company Savoy Equities and also through which he has taken interests in overseas ventures (where Savoy Equities may pick up contracts for its staff but has no other significant interest), has become one of five owners of Fil-Estate Group, “probably the second largest property conglomerate after Ayala Group” in the Philippines, with assets exceeding $US1 billion.

Savoy got its minor stake after Fil-Estate was forced into restructuring, along with the rest of Asia after the 1997 crisis. Mr Lu says the group has emerged strongly: “They’re still one of the largest urban developers in the Philippines, one of the largest leisure and entertainment facility developers. They own six golf courses and are one of the largest landbanking, subdivision, ‘horizontal’ [as distinct from tower] developers, mainly residential.”

But it is involved in one major tower, a project very reminiscent of Auckland’s Britomart. This one is a 47-storey apartment block at Pioneer Grand Station, one of the 10 new stations on Manila’s 17km mass transit extension. Fil-Estate has a 16% stake in the mass transit expansion project.

The line was opened in December. By association through the Fil-Estate stake, Mr Lu places himself in good company, although the project was well under way before he bought in. The mass transit extension is a $US700 million scheme using $US470 million of debt from Mitsubishi, with Sumitomo as contractor.

“Savoy Equities has a full-time team, led by our investment banking team, working in Manila on a retainer and success fee basis,” Mr Lu said.

There is plenty of work to be done. That one station, with 400 underground carparks and a 55,000m² residential tower in Manila’s cbd, is bigger than Auckland’s Britomart was to be.

BW Resources casino

A second Philippines project for Savoy is its investment in gambling and entertainment business BW Resources, headed by Macau’s Stanley Ho, with local partners. Mr Lu was initially chairman when he became involved last August, just after the period in which sharemarket investigators are looking at share price manipulation, but is now deputy chairman.

“We’re reassessing that investment at the moment because it’s too high-profile for us. We’re not involved in management at all at BW Resources, but at Fil-Estate we’re actively involved in management. We have another company, Armstrong Holdings, a listed technology investor, and I’m chairman.”

It is hard to establish Mr Lu’s role in these ventures, if only because of distance.

Hong Kong takeover

In one, though, he has a clear leadership role, and that is Team Concepts, a struggling Hong Kong consumer electronics research, development and manufacturing company which two years ago was penalised by the Business Software Alliance for pirating.

“We’re restructuring the manufacturing business but extending the technology. It has a very strong market position as the world’s second largest electronic learning aids company.

“From 15 March I’ll be the new chairman. I’ll taken a70% shareholding in the company. I’m putting $HK100 million ($NZ25 million) into it through Savoy TC Ltd, registered in the British Virgin Islands.”

Team Concepts was formed in 1978, listed in Hong Kong in 1991, specialises in interreactive toys for ages four to seven and, Mr Lu said, is one of the best researcher in voice-recognition phones. In that field, British Telecom is one of its best customers.

For the failed Britomart project, the team put together to do it came largely from outside Auckland. Development backers were mostly Asian, construction was Germany through Australia and design was Australia. The locals ground them down.

But, as he flits about Asia, Mr Lu recognises that “it’s all relationships. The former partners in Team Concepts said they wanted to transform the company, they knew about my ability, and I want to push something forward.They’ve sold down from 75% to 23%, and since I went in the share price has gone up from 18c to 45-50c. It’s an old sleepy company that needed a bit of momentum,” he said.

“I have many businesses but most are passive investments. At any time I’ll be driving maybe one or two. That’s why I’m upset about New Zealand. I took ownership of Britomart and it cost 3½ years of my time. It got me involved in an environment beyond my control, a football, I got kicked around.

“As long as the project was alive, I was driving it. I’m not interested now, no matter how good the terms are. I lose on projects all the time. I also win, oh yes. That’s my business. I’m an investor, entrepreneur, I take risks, divest. I’ve been very aggressive. Everything I go in, I have a strategy , and if my strategy doesn’t work I get out.”

Mr Lu said he would like to continue living in New Zealand and enjoys working here. “But I can’t afford to stay here for too long — the business is over there. I’m trying to provide management services from here to the businesses in Asia.

“Once we get out of Britomart, we start looking for opportunities and growing the business. But the loss of Britomart isn’t just what’s happened. It’s credibility, perception.”

In the High Court in Auckland over the past three weeks, Mr Lu has been fighting another credibility battle before Justice Fisher, this one with the Malaysian investors who took over SmarTel NZ from him in 1997, a dispute involving options, numerous agreements, and allegations by Lu that the buyers conspired to defeat agreements so they could take control at a far better price. That hearing should end this week with a reserved decision.

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Skycity opens new casino space

Company also announces Adelaide redevelopment

Skycity Entertainment Group Ltd opens its new $25 million casino area, called Play, and Bar3 bar in former convention space on level 3 of its Auckland casino this week. It’s the last casino & casino expansion allowed in New Zealand under current law.

The company also announced the $A20 million 1st stage of an $A70 million redevelopment of its Adelaide casino.

The Play casino will have 15 tables & 223 poker machines, taking Skycity Auckland’s total to 110 tables & 1647 pokeies. Distinguishing it, it will also feature cocktail service to the tables, regular live entertainment and floorshows at random intervals, with a night-club ambience.

Bar3 has been designed by local architect Tom Skyring, who also designed a number of other leading Auckland dining establishments, including Sponge Bar on Ponsonby Rd, Euro on Princes Wharf & Otto’s at the Metropolis.

The new casino & bar will be linked by airbridge (pictured at left) to the $135 million convention centre and Skycity Grand Hotel being built on the other side of Federal St and due to open in April (the convention centre) & 2005 (the hotel).

Official opening of the new casino is Friday night.

In Adelaide, the 3-year 1st-stage redevelopment will see street-front food & beverage outlets, a new bistro-style restaurant, a cocktail bar featuring live entertainment, an upmarket North Terrace bar, private function facilities and new gaming areas.

Stages 2 & 3 involve a potential further investment of $A50 million. Final decisions regarding the extent of investment are conditional on a range of factors, including customer response to stage 1, economic conditions and developments in what remains an uncertain regulatory environment.

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Warehouse earnings up 13.8% despite Australian slip

Sales still surging in February

The Warehouse Group Ltd increased earnings by 13.8% to $59.1 million in the 31 January half, on revenue up 10.5% to $1.021 billion.

The operating surplus before unusuals & tax rose 11.8% to $89.9 million and by 12.4% to $90.7 million after unusuals/before tax.

Earnings/share improved 9.6%, from 17.7c to 19.4c, on equity up 22.7% to $317.7 million. A fully imputed 9.5c/share dividend will be paid, up 1c, or 11.8%.

Warehouse NZ sales rose 11.4% to $699 million, Warehouse Stationery 38.5% to $58 million, & Warehouse Australia 16.1% (in $A) to $A209 million, but 9.5% on transfer to $NZ, to $256 million.

Total group operating earnings before interest, unusuals & tax were $100.9 million, up 9.2%. New Zealand group operating margins were steady at 12.3%.

The Warehouse NZ operating margin rose strongly, from 12.6% to 13.2%, which group chief executive Greg Muir said reflected investment in new merchandising tools & processes which were introduced in the past year.

Big scope for improvement

“We are only just starting to capture the benefits of our investment in new merchandise planning tools in the business and we are excited that over time we can continue to improve our ebit margins in the Red Sheds,” he said.

Warehouse Stationery’s operating margin fell from 6.3% to 1.6%, reflecting $2.2 million of planning & startup costs for the business-to-business sales channel launched late last year. Excluding that, Mr Muir said the Warehouse Stationery operating margin would have been 5.5%.

Australian operating earnings fell from $9.5 million to $7.9 million, including a $200,000 forex translation variance. The 2000 result also included the buoyant pre-Olympic trading period.

Group operating cashflow rose 201% to $64.1 million.

Red Shed space up 6%, Stationery 11%

The Warehouse NZ now has 317,819m² in 77 stores, up 6.2%, & intends adding 11,000m² by the end of July. From August to December it intends opening a 9000m² second store in Tauranga, a replacement store in Alexandra & 4 extensions.

The Warehouse Stationery chain has 40,406m² in 36 stores, up 11.4%, and expects to open one more store by the end of July.

The Warehouse Australia opened 10 stores including 3 replacements in the last 6 months for a total 168,566m² in 118 stores, up 24%. It intends opening up to 7 large-format stores by the end of July.

Mr Muir said February sales were up 14.1%, same-store 11.4%. Warehouse Stationery sales rose 16.8%, same-store 9.1%. Warehouse Australia sales rose 27% in $A, same-store 8.1%.

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Reserved decision on Trans Tasman payout case strikeout call (detailed version)

SEA seeks end to investor John Powell’s “oppression” claim

Justice Hugh Williams reserved his decision yesterday on an application by SEA Holdings NZ Ltd to strike out a claim by Christchurch businessman John Powell & his company, Latimer Holdings Ltd, to be paid out of their investment in Trans Tasman Holdings Ltd at fair value – which they said should be net asset value — under the “oppression of minorities” clause of the Companies Act, section 174.

SEA also wants summary judgment against Mr Powell & Latimer. Whichever way the judge goes, an appeal is a likely outcome of Justice Williams’ Auckland High Court ruling.

Some arguments from the substantive case (still to be heard) were put to the judge in the strikeout hearing, and Mr Powell’s side claimed in a few instances that insufficient information had been provided on certain aspects, thus requiring continuation of the case.

SEA Holdings NZ holds SEA Holdings Ltd of Hong Kong’s stake in Trans Tasman, now above 55%.

Basic facts of the dispute are these:

Mr Powell and Latimer Holdings bought into Trans Tasman in the wake of SEA’s attempt in 2001 to buy all the equity in Trans Tasman, offering debt securities to minority shareholders. At that time Trans Tasman’s net asset backing was 70c/share.

Mr Powell & his company bought 2.9% of Trans Tasman between May 2001-August 2002 – 17.5 million shares at an average 25.2c/share for a total $4.4 million. The market price now is 33c.

When Mr Powell filed his claim, in February this year, for SEA to pay him out of his investment at net asset backing, the share price was 25c and asset value was 55c.

Trans Tasman counsel said in the hearing the share price had risen 48%, from 23-34c, from the time Mr Powell started buying in May 2001 until 15 August 2003 (date of an affidavit, closing point for this calculation). The value of the portfolio had risen to $5.9 million, giving a $1.53 million profit.

From the portfolio average of 25.2c to today’s market price of 33c, the rise in portfolio value is 31% and the gain on paper is $1.36 million.

Through all this period, Trans Tasman hasn’t paid a dividendWindfall potential

The Trans Tasman lawyers (Mr Cooper & senior counsel Brian Latimour), not surprisingly, referred to the potential of a Powell windfall.

“The plaintiffs, who have already made a very substantial profit from their investment in Trans Tasman, are asking the court to order SEA NZ to buy their shares at a price that would give the plaintiffs a profit of $5.2 million or 118% in the period of a little over 2 years since they acquired their shares,” Mr Latimour said.

He added, later in his submission, that “It is not the role of section 174 to allow an investor who has made a poor investment decision to ask the court to ‘correct’ its poor decision by setting a price at which the investor’s shares are to be purchased. That would undermine the fundamental concept that the market determines its own price.

“Similarly, it cannot be the role of section 174 to allow an investor to buy shares in a company with a net asset value above its share price, and then to ask the court to require another shareholder to purchase the investor’s shares at the net asset value.

“If that were possible, the courts would be inundated with claims by investors seeking windfall gains similar to those sought by the plaintiffs in this case.”

Mr Latimour argued that no breach of Trans Tasman’s constitution, the Companies Act or stock exchange listing rules was alleged. He said minority oppression could only arise at a listed company where there was unlawful conduct, and the Powell claim relied on an incorrect interpretation, seeking to extend the concept of legitimate expectations well beyond the proper boundaries the courts have recognised.

Powell perspective

What of the supposed windfall from the Powell perspective?

Stephen Rennie, for Mr Powell & Latimer, said the SEA assertion that they could sell their shares on the market at above purchase price “is an attempt to deflect attention from the true inquiry and is misconceived.

“The purchase price is irrelevant… In this case the complaint centres around continued use of majority voting power to prevent liquidation and to preserve a continuing receipt of cash benefits from Trans Tasman… It is wrong to equate the NZX price with fair price…

“A sale on the NZX effectively transfers the prejudice. SEA NZ can raise the identical argument and never be held accountable so long as the share price remains constant or increases.

“In the meantime, it can sit and choose the appropriate time to make a takeover, or purchase shares itself, and ultimately end up with the assets for less than fair value.”

GPG, which held 3% of Trans Tasman, proposed to the May 2002 annual meeting that Trans Tasman be liquidated.

Mr Rennie told Justice Williams: “The plaintiffs voted in favour of the resolution. For them it was a triggering event. It brought home to the plaintiffs the many problems associated with Trans Tasman & the underlying management. They regarded liquidation as the best option for all shareholders.”

This special resolution got support from 20.6% of total shares, 36% of those voted. SEA, holding 55% of stock, got support from an extra 2%.

Mr Rennie said that, assuming orderly disposal at book value, liquidation then would have raised 59c/share, more than double the 26c share price at the time.

Other Trans Tasman factors

The office property market, and Trans Tasman’s state, began changing about the time GPG began to take strong interest in the affairs of a company which was the successor to 2 beleaguered remnants of the 80s, Robt Jones Investments Ltd and Seabil NZ Ltd.

With a lower debt level, Trans Tasman has turned its attention to development schemes around Auckland’s Viaduct Harbour and to industrial land subdivision near Auckland International Airport.

Its 50.2%-owned Australian subsidiary, Australian Growth Properties Ltd, has sold the bulk of its portfolio. Mr Powell wants the money from cashing up in Australia returned to shareholders (so half would return to Trans Tasman).

Australian Growth hasn’t said what it will do with the money, but Trans Tasman doesn’t want to wind that company up and SEA in Hong Kong has said it doesn’t want to liquidate either of its Australasian listings.

Trans Tasman shareholders will meet in mid-October – Monday the 20th is now the likely date, given timeframes for getting exchange approval and sending out documents – to vote on the takeover and proposals to return capital.

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Australian Growth management deal sets critics in motion again

… and they wonder why they’re discounted

Listed companies, and especially property companies, puzzle in public over the way “the market” concludes their value is lower than net tangible asset value.

One answer is that the discount is for the way the assets are managed. “The market” doesn’t have much faith in management’s abilities to make something greater of those assets than if the assets are left to their own devices, on this reasoning of discounts.

In Trans Tasman Properties’ case, the market has marked the company’s ability to deal with its assets down to a shockingly low level — a share price of 19c at the close on Friday compared to stated asset backing at the June balance date of 73.9c, a 74% discount.

Trans Tasman’s Australian offshoot, the 46.8%-owned Australian Growth Properties Ltd, has caused plenty of annoyance by announcing the sale, for a low price, of its in-house management company, AGP Management Ltd, to SEA Holdings Ltd, its Hong Kong-based ultimate controlling shareholder through Trans Tasman.

Deal wasn’t put to shareholders

The management contract sale was done without being put to shareholders. That kind of behaviour is the sort that helps create price discounts because the investor cannot have faith in directors — a lack of faith which is usually only overcome by superior profit and dividend performance, neither of which AGP has achieved.

AGP, like its immediate New Zealand parent, is a discounted stock with a share price on Friday of A54c. The 1997 issue price was $A1.

AGP, and therefore Trans Tasman, has ensured its hopes of credibility will be mocked by the presentation of an outsourcing report dated 30 June, the approach to outsourcing, and the use of two divisions of the firm which was about to take over auditing its books to provide the independent expert report.

Even if Arthur Andersen’s corporate finance and legal divisions acted entirely properly in carrying out their functions (though the contents of the report summary suggest their view of the exercise might have been somewhat coloured from the outset), and the Chinese walls within the firm are effective, the outsider can too easily harbour doubts about the stated independence.

That kind of doubt turns itself into a price discount.

Chairman’s explanation

AGP chairman Rod McGeoch said in his letter to shareholders the idea of outsourcing management had been under review for some time.

Sir Rodney (as he would undoubtedly like to be known for leading the campaign to get Sydney the Olympics) said in his letter to shareholders the directors had received an outsourcing proposal from SEA in April. It was duly accepted and approved.

The proposal to outsource both corporate and property management was weighed against the market for this work but doesn’t appear, from the letter, to have been put to other management contractors.

If it’s natural for SEA to want to keep the management contract inhouse (and away from others in the industry), why is it not natural for AGP to feel the same?

All the AGP Management staff were transferred, with their management company, from AGP to SEA, essentially no different a position.

Justification for the chief cause of this shift, cost savings, is flimsy.

Coconut shy

Mr McGeoch said “ongoing corporate and property management costs are likely to be less…” He said the Arthur Andersen Corporate Finance summary concluded the implied cost savings at $A224,000 for the current year.

He added: “While it is noted that the forecast for the cost of inhouse management for AGP over the next 12 months is $A3.53 million, actual cost for the last recorded similar period was $A4.44 million in the 12 months to 30 June 1999. Thus, the ongoing contracted cost structure is anticipated to lower overall costs compared to previous periods.”

That is a sickeningly bad paragraph from any company chairman. What it means is this: We have set a budget figure lower than it cost us a year ago, but the same management who come up with the numbers have said they can do it for less if they work from their own office down the street. Sir Rodney!

The Arthur Andersen summary, presented by Corporate Finance director Neil McDermott, shows implied savings for the June 2001 year of $A224,000 and says outsourcing for an indefinite period would provide substantial savings — $A228,000 a year for the first four years.

Outsourcing indefinitely, Mr McDermott says, “we have estimated that the present value to AGP is likely to be in the range of $A2-3 million.”

Unfortunately, in true coconut-shy style, these claims are knocked down just as easily as they’ve been stood up: “We note that AGP Management is entitled to pass on to AGP certain charges and cost reimbursements relating to leasing, sale and property management activities that would, if incurred, reduce the forecast savings set out above.

“The extent of any such fees and costs cannot be estimated reliably. It is therefore possible that the cost savings achieved, both in 2000/01 and thereafter, may be materially less than those indicated above.”

Mr McDermott’s last sentence knocks out the main reason for a change.

Basic fee: 0.8% of gross assets

But, as the change has been made, the next issue to examine is the fee structure of the management contract. Mr McGeoch said in his letter: “The corporate management fee is set at 0.8% per annum of shareholders’ funds and the property management fee is 2% of gross property income.”

Mr McDermott said in his summary the contract “is consistent with current management arrangements in the market place” and “the proposed corporate management and property management fee arrangements are generally comparable with the levels charged by similar sized companies/trusts in the ASX listed property trust sector.”

It is some time since I’ve looked at those fee structures, but given the rationalisation of the sector and the highly competitive nature of the management contract market, it’s hard to imagine the fees would have risen.

The 0.8% corporate management fee alone sets off alarm bells.

PFI made it transparent, and tough

Some comparisons:

PFI negotiated a change in December 1998, from its initial fee structure of 0.85% (plus gst) of portfolio value up to $150 million and 0.65% beyond that level. The replacement structure was complicated, but contained base and incentive components.

PFI continued monthly payments of its fees and set a base component of 0.7% of total assets, plus gst, up to $175 million and 0.35% above that level.

For the incentive component, PFI set a threshold level of shareholder returns for a quarter equivalent to 10% better than the share price at the start of that quarter. It also set a 15% cap, and allowed for an incentive payment of 10% of the increase within that range.

Complicated, precise, and seemingly very fair to both sides.

Kiwi Income at high end, Waltus cuts back basic

Kiwi Income Property Trust started with a base fee of 0.75% of gross asset value plus a performance component of 20% of the average annual increase in net asset value, which was totalling about 1.2% of gross asset value.

In 1997, Kiwi raised the base fee to 8.5% and stopped the performance component. A Grant Samuel assessment of the Kiwi proposal showed a wide range of fees payable in Australia, from 0.6% of gross assets charged by the managers of the Gandel Retail and General Property Trusts, up to 1% at Advance and 1.5% of net assets at Capital.

Syndicate managers are notorious for their array of fees and Waltus, even in the proposal to merge 29 syndicates because of tough market conditions, has maintained many of these specific-event fees, as have AGP’s managers.

But Waltus dropped its management fee last year to 0.5% of gross assets, and in the merger proposal says it will cut back to 0.3% until March 2002.

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