Augusta Capital Ltd outlines the rationale for its change in focus from direct property ownership to funds management in the notice of meeting to approve sale of the Finance Centre properties in Auckland to a new company, Heng Yue Ltd.
The $96 million sale price is broken into 4 components – $30 million for Augusta House (the former Brookfield House at 19 Victoria St West), $25 million for the Finance Centre retail, $11 million for the Finance Centre podium & $30 million for the Finance Centre carpark.
Shareholder approval is sought at a meeting called for Monday 25 July (2pm, Pullman Hotel). On approval, Heng Yue will be required to pay a 10% deposit, with a second deposit on 1 June 2017, but settlement will be spread through to 2019. First settlement is scheduled for 1 October this year (podium retail), followed by the podium on 1 April 2018 and the last 2 components on 1 April 2019.
Each agreement depends on the others, but the meeting notice acknowledges that this spread of payments poses a risk for Augusta, particularly if market conditions deteriorate. Augusta has committed to $1.16 million of capital works to see the sale through. It needs to replace the Durham St tower cladding, podium canopy & podium retail roof, and also envisages spending $3-5 million on maintenance while it retains ownership.
The sale has been done through Queen City Law, with no real estate agency involvement, and the law firm will take away $2.5 million + gst in fees on completion for legal & strategic advisory services.
The buyer, Heng Yue Ltd, is ultimately wholly owned by David (Duoyu) Bei, a New Zealand resident. Mr Bei holds other property interests in New Zealand, notably in land subdivision, through related companies.
Augusta’s focus shift
Augusta intends to reduce its long-term directly held portfolio to zero by the 2020 financial year, but to hold up to $59 million of property on a co-investment or warehousing basis at that point, allowing management to control the timing of new syndicate offerings to the market.
The focus on funds management has cost Augusta its PIE (portfolio investment entity) status, but has enabled it to negotiate new banking covenants – loan: value ratio up from 45% to 55%, net rental interest cover of greater than 1.75 times, weighted average lease expiry of greater than 3 years, group ebitda interest cover of greater than 2.75 times, Augusta Funds Management ebitda of greater than $2 million. All will be renegotiated as Augusta sells down the Finance Centre properties.
Syndicators in the past have had to reach a degree of selldown to proceed with a syndication, but Augusta’s ability to warehouse properties has enabled it to time syndication and increase the value of syndicates to include the latest cbd developments. Since 2012, Augusta has warehoused properties in the $15-25 million range.
For the future, it says, “The additional balance sheet capacity will be deployed in a very fluid manner. Capital will be used in one initiative and then recycled for use in other initiatives.”
For smaller syndications, Augusta was able to underwrite transactions itself, but for the bigger new syndicates it’s had to go to third party underwriters, at a cost of $2.75 million in the last 2 years.
“Additional balance sheet capacity provides a greater ability to underwrite and not forego fees paid to third party underwriters. The ability to use the available capital and reduce borrowing for underwriting commitments may also lead to a reduction in funding costs associated with underwriting (such as bank line fees).”
Augusta wants to be able to establish ‘seed’ funding & management investment capacity and develop new sector-specific investment funds. In its explanation of the Finance Centre selldown it says: “Augusta has aspirations to be New Zealand’s leading diversified property fund manager and a clear market leader in property syndication, with proven ability to structure & execute innovative new property funds, and tangible international growth options.”
17 June 2016: Augusta gets new sale agreement on Finance Centre complex
Attribution: Company release.