Archive | Babcock

Babcock & GPT pull European listed fund

Published 10 December 2006

Investment & advisory firm Babcock & Brown and real estate group the GPT Group, both based in Sydney, withdrew their proposed listed pan-European retail property fund on Thursday, saying the proposed initial public offering “would not have sufficiently realised the full value of the initial portfolio”.

The fund, announced on 21 November, was to have been managed by their joint venture.

They said they could achieve a better outcome through other capital-raising & structuring options, including through the syndication of equity in the portfolio assets to the direct investment market and/or the creation of a more simplified reit structure, taking advantage of the introduction of new legislation in specific European markets.Babcock & Brown chief executive Phil Green said: “We are very confident of the high quality & values of the properties in the portfolio. In light of the market’s response to the proposed IPO, and given the depth of the direct market interest in quality assets with a strong defensive cashflow profile such as these, we will pursue alternative options and expect to see the assets bedded down in a long-term managed structure during 2007.”GPT chief executive Nic Lyons said: “The withdrawal from the IPO process does not alter the joint venture’s strategy to create & grow a funds management business. This move simply reflects both GPT and Babcock & Brown’s determination that an IPO at this time was not going to achieve an optimal outcome for the joint venture in the proposed structure. We continue to work on a number of initiatives within the joint venture and remain focused on the creation of long-term enterprise value.”

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Attribution: Company statement, story written by Bob Dey for this website.

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Grant Samuel’s GPT assessment has wider relevance, and Lend Lease critique raises serious questions

Published: 14 May 2005

Grant Samuel’s independent assessment of the proposed General Property Trust restructure package is relevant well beyond the interests of those directly involved.

And Lend Lease Corp’s document setting out its opposition to the GPT package is equally instructive in terms of:

prospects for some of Australia’s biggest retail property players
prospects from investing elsewhere in the world, and
what listed property trust investors are sold & how they’re sold it.

This article is split into 3 pages:

this opening page, covering some general issues
considerable comment from Grant Samuel on the GPT proposal, and
a damning critique from Lend Lease.

You can reach the other pages by clicking here: Page 1, Page 2, Page 3

After staving off a “merger” offer last year from its manager, Lend Lease, GPT was then subjected to an underpriced takeover bid from Stockland Property Group, which failed miserably.

Now GPT is trying to enter a new path of its own choosing – internalising management, selling off 3 assets to Westfield Group for $A744 million and entering a $A1 billion European investment joint venture with Babcock & Brown.

Westfield owns 6.5% of GPT, which it will be allowed to vote and which could be crucial to success at the 2 June meeting on the internalisation proposal. Lend Lease belatedly came up with a proposal to stymie the transaction, which would see it lose a significant management contract. It wants the Westfield and Babcock & Brown parts of the deal dropped, alleging they’d be bad for GPT unitholders, yet is prepared to go along with internalisation.

The switch from an external management contract (which was all the rage not so long ago) to internal management (now it’s fashionable again) will be done by stapling the investment in the trust with investment in GPT Management Holdings Ltd. In last year’s Lend Lease merger proposal; the securities of Lend Lease & GPT would have been stapled, with the management of both owned through the investment in Lend Lease.

Stapling gives investors a say in who’s on the board and an overview of management, 2 things which investors in New Zealand listed property trusts don’t have.

GPT’s latest manoeuvre throws up features – good, bad, debatable – worth examining, because what Australian property trusts do affects New Zealand investors, whose investment futures are increasingly determined from Sydney or Melbourne.

Australians on the NZ scene

The New Zealand listed property scene is now dominated by Australian owners – Commonwealth Bank (Kiwi Income), ING (Dutch investment bank ING’s Australian office, in partnership with ANZ Bank, currently merging ING & Urbus), Macquarie Goodman, Multiplex. AMP’s New Zealand branch is involved in the AMP NZ Office Trust & Property For Industry Ltd, but Multiplex is its partner in the office trust manager and Stockland Property Group owns a chunk of property (including the Botany Town Centre) in partnership with AMP Capital Investors NZ Ltd.

Centro Property Group, a Melbourne-based listed group with large syndication interests in Australia & the US, has its own New Zealand property network. It incorporated Centro NZ Shopping Centre Fund Ltd, Centro Property Manager (NZ) Ltd & Centro Fund Manager (NZ) Ltd on 1 March, after establishing CPT Custodian Pty Ltd & CPT Manager Ltd in February 2004.

Westfield Group, New Zealand’s biggest mall owner, is a player in the GPT proposal, as an investor able to vote on the proposal and also as the buyer of 3 major shopping centre assets – plus management contracts – if the proposal proceeds. Lend Lease says the sale of those assets will diminish GPT’s returns and its ability to perform in the retail sector in the longer term.

Lend Lease, which retrenched around the world after some investment disasters, particularly in the US, has much less of a presence in New Zealand now than the one it built up through construction company Civil & Civic NZ Ltd and later through Bovis Lend Lease Pty Ltd.

This group of stories:

Page 1: Grant Samuel’s GPT assessment has wider relevance, and Lend Lease critique raises serious questions

Page 2: Grant Samuel questions European deal but doesn’t put it down, says Westfield price fair

Page 3: Lend Lease chiefs say GPT package less rewarding & riskier


Earlier stories:

11 May 2005: Lend Lease tells GPT unitholders to vote no

10 May 2005: GPT split from Lend Lease gets nasty

22 March 2005: GPT’s European investment venture outlined

4 March 2005: Stockland still under 1% of GPT as bid closes

17 February 2005: GPT plans global venture with Babcock & Brown, internalised management, to sell interests in 3 malls to Westfield


Websites: GPT internalisation proposal

General Property Trust

Lend Lease

Babcock & Brown


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Grant Samuel questions European deal but doesn’t put it down, says Westfield price fair

Published: 14 May 2005

This article is split into 3 pages:

the opening page, covering some general issues
considerable comment from Grant Samuel on the GPT proposal(this page), and
a damning critique from Lend Lease.

You can reach the other pages by clicking here: Page 1, Page 2, Page 3

On the European joint venture with Babcock & Brown, Grant Samuel had this to say:

Most of the assets have inherently low income growth. Much of the anticipated “super” return on investment comes simply from the use of high leverage. While GPT’s leverage will remain relatively unchanged on an accounting basis, on a “see through” basis it will increase from about 30% to as much as 45% assuming the initial contribution is fully invested today (although the joint venture debt will be non-recourse to GPT). There may also be an increase in GPT’s cost of debt
GPT is potentially paying $A50 million of “goodwill” to Babcock & Brown although there are conditions attached and it must be judged against the value of the potential deal flow from Babcock & Brown and other benefits of the joint venture
There are a number of other features of the joint venture agreement which may be regarded as less than ideal (eg, margin on preferred capital, extent of potential fees payable to Babcock & Brown, scope of exclusivity)
GPT’s management team has limited experience in investing outside of Australia. It will inevitably be dependent to a large degree on the expertise & judgment of Babcock & Brown management. However, Babcock & Brown’s real estate platform in continental Europe, where the initial focus for the joint venture will lie, has only been in place for a little over 2 years and therefore has a relatively limited track record in terms of ultimate realisations of investments in the region, and
There is inevitably a risk of breakdown in the relationship between the 2 parties. GPT and Babcock & Brown each have their own distinctive cultures & different objectives. However, as the joint venture is essentially an asset-owning entity, the consequences of such a breakdown are not likely to be materially adverse.

Westfield sale benefits “less clear”

“The benefits of the Westfield sale are less clear. The sale price is slightly above the recent independent valuations of the properties and reflects an overall current yield of about 6%.

“GPT is receiving a “fair” price. The sale & reinvestment of the funds into the (potentially) higher-yielding joint venture is expected to improve distributions/unit by about A3c/year (13%).

“Nevertheless, it is not necessarily attractive to sell (even if only partly) such prime assets with proven long-term performance that would be difficult to replace. Further, it is potentially dilutive of both GPT’s overall asset quality (which could impact yield) and the premium to net tangible assets at which GPT trades.

“It is not the role of an independent expert to usurp or second-guess investment (acquisition or realisation) decisions or strategies which are normally the prerogative of management & directors and which are, in any event, judgments about an uncertain future. Notwithstanding that, Grant Samuel believes that the joint venture represents a sensible investment decision with reasonable prospects of achieving the objective of enhancing GPT’s growth profile. At the same time, risk will be increased and there is no certainty that the higher returns will be achieved.

“Clearly, there are some compromises within the overall package such as the Westfield sale. Trade-offs are inevitable in most transactions. Even if some investors do not like some of the individual elements of the restructuring, it is not possible to cherrypick between them. The independent directors of GPT management have effectively put up a complete package for approval.

“Based on a yield of 7.2-7.6% for calendar 2006, GPT units would trade at around $A3.61-3.81 if the restructuring is implemented, materially above the level at which Grant Samuel expects that GPT units would trade in the absence of the restructuring or any other corporate activity.

“Grant Samuel’s opinion is subject to no superior proposal being put to GPT unitholders.”

Some restructuring probably inevitable in current market

In its section on key conclusions, Grant Samuel said that, “in view of changes in the market during the past 18 months, a restructuring of GPT is arguably inevitable. The listed property trust sector has seen a dramatic restructuring since 2003. Several key themes have emerged:

The previous dominance of the “external management” model has been superseded to the point where virtually all of the major trusts except for GPT are now internally managed
There has been a significant increase in the extent of overseas property assets (predominantly in the US) owned by listed Australian property groups
A number of groups now encompass property investment and an array of other property-related activities such as property management, development management, development (as principal) and, in some cases, construction, and
Size, scale & liquidity have become critical factors in a rapidly consolidating sector. While the sector is now dominated by Westfield Group, the top 10 groups all have market capitalisations in excess of $A3 billion.

The restructuring represents a response to these changes in the market environment:

It internalises GPT’s management
GPT will now have a meaningful component of overseas assets in its portfolio; and
Future growth is enhanced.

After the restructuring, GPT is targeting higher income growth (albeit with additional risk) through:

the Westfield sale & the deployment of $A900 million of capital funds (and possibly more) into the potentially higher-growth joint venture, and
the ability to enter new operating businesses more aggressively.

“At the same time, it is important to distinguish the restructuring from the previous proposals for GPT and from some of the other recent transactions. Both the Lend Lease proposal and the Stockland offer would have involved GPT unitholders having a material exposure to higher-risk development & construction activities.

“In contrast, under the restructuring, GPT investors will remain almost entirely exposed to passive property holdings, albeit with a new exposure to offshore markets, more trading of properties and with greater financial risk (through the joint venture).”

Internalisation “clearly beneficial”

Grant Samuel said internalisation was clearly beneficial for unitholders, from both strategic & financial perspectives. “The strategic benefits include the following:

It eliminates the inherent conflict of interest between unitholders & the manager. While satisfactory investment performance is necessary, the external manager has a greater incentive to grow assets even at the expense of investor returns
Unitholders will now have a direct vote on all “corporate” matters (board composition etc) in the same way shareholders in a conventional company do. As a unitholder in GPT today, the only lever is the threat of termination of the management agreement, and
it facilitates GPT’s ability to enter new trading businesses, such as funds management, which could enhance GPT’s growth profile. Previously, such intentions have been inhibited by both structural (taxation) issues and by the conflict with Lend Lease’s other activities. In general, as an independent entity, GPT will now have complete strategic flexibility. In this respect, the stapling provides a superior structure to the establishment proposal.

“GPT Management has estimated that the internalisation will produce annualised net savings of

about $A19 million, equivalent to 0.9c/unit. This saving represents the elimination of fees payable to Lend Lease less the costs that GPT will have to bear in managing its own business (and does not include the impact of any potential payment to Lend Lease to facilitate the transition).

“This increase in earnings & distributions/unit should enhance the value of GPT units by about A12-14c relative to the status quo. The main risks & disadvantages for unitholders relate to:

transition arrangements which are still being discussed with Lend Lease. If no agreement is reached, GPT will need to put in place all of the personnel, support systems & other capabilities necessary to manage GPT. However, a transition plan has been prepared. Even if there is limited co-operation from Lend Lease, there is unlikely to be a material adverse impact on unitholders (although there may be some temporary disruption). Nevertheless, there are clearly some risks in the transition process
ongoing control of operating costs, particularly employment costs
loss of preferred access to the Lend Lease development pipeline. However, while this has been valuable in the past it is likely to be less important going forward, and
the possibility of Lend Lease exercising pre-emptive rights in relation to GPT’s residential investments of Rouse Hill & Twin Waters.

“The joint venture is designed to enhance risk-adjusted returns to GPT unitholders without changing fundamental investment characteristics. The strategy principally revolves around using leverage and exploiting positive yield gaps.”

Management had been seeking better earners for a while

Grant Samuel said GPT Management had been seeking opportunities for some time to invest in assets that would provide higher income growth. It had considered a wide range of alternatives (in addition to the Lend Lease proposal), including entering businesses such as residential development. “To date, it has struggled to find sufficiently attractive opportunities within the Australian market and other strategies such as entering the US market have drawbacks.”

The joint venture was designed to provide a “growth engine” without fundamentally changing the nature of the investment for unitholders. The investment in the joint venture is to be limited to the greater of $A1.26 billion & 15% of GPT’s assets (although the exposure would be higher if based on the underlying joint-venture assets). The primary focus of the joint venture will be on generating high returns on equity from investment in established assets.

The joint venture is targeting a return on ordinary equity in excess of 15%, which corresponds to a return for GPT on its initial investment (if fully invested) of about 10-11%.

Joint venture “an opportunistic investor”

Grant Samuel said the joint venture was intended to be “an opportunistic investor looking to generate a high return on equity. Despite the composition of the initial portfolio (and the assets currently under consideration by the joint venture), it is not necessarily a European investment strategy. It happens that, at present, the opportunity is in Europe because that is where the current gap between yields & interest rates is the largest. However, if market conditions change there is no reason that the focus of the joint venture could not shift to the US or Asia (although it would depend on available Babcock & Brown or other resources).”

Very differently from a long-term holder of large commercial assets, as GPT as been, the joint venture will be a trader. It may also undertake some development activities and it would be the vehicle for developing funds management activities in Australia.

Grant Samuel says of the initial European portfolio: “While not ‘prime’ assets in Australian terms (eg, trophy office blocks in Sydney or Melbourne or regional shopping centres), the initial property portfolio comprises established assets with robust cashflows & some upside, consistent with the objectives for the joint venture.

“The German economy has been in the doldrums for most of the last decade (largely as a result of ongoing costs of unification & structural inefficiencies) and the Euro zone is widely regarded as a low-growth economic region. While this is true:

Germany is an advanced economy and is currently the 3rd-largest economy in the world
the German economy is showing some signs of starting to recover (albeit slowly) and structural reforms are beginning to be implemented, and
attractive returns on equity can be generated even in low-growth economies through selection of the right properties & efficient structuring.

“Being an investor in Europe rather than the US will differentiate GPT from many other listed Australian property investment groups. In addition, an attraction of Europe is its more diverse, fragmented & much less securitised market, which is likely to offer more opportunities than the well trawled US market.”

Lend Lease’s chiefs couldn’t see merit in disposing of high-class Australian shopping centres to buy old German apartments, but the proposed GPT switch to opportunity investing & trading is similar to the direction Trans Tasman Properties Ltd has taken in moving out of Australian office at the top of the cycle to seize other openings in Hong Kong, and some in New Zealand.

Grant Samuel said most of the European assets consisted of residential apartments. “Institutional ownership of residential property is largely unknown in Australia (where home ownership is amongst the highest in the world). However, residential is a well recognised (and highly regarded) asset class in other markets such as Europe & the US.

“Indeed, there have been substantial levels of activity in the German residential sector over the past 3 years, with portfolios totalling more than €15 billion & more than 500,000 apartments having been acquired by a mixture of private equity funds, investment banks, institutional investors & others.

“Unitholders may also be wary of this investment in view of the age of the buildings, the target market, their location & the recent history of weak rental growth. The properties were generally built between the 1930s-60s, are essentially affordable housing estates and are mostly spread across smaller regional cities.

“Nevertheless, it is still a low-risk income stream as a result of:

extremely broad diversification of the income base (across thousands of individual tenants)
relatively low rental levels in terms of affordability (with indirect government support in some cases, and
high replacement costs relative to value limiting any increase in supply.

Grant Samuel also saw opportunities with other assets. “The newly opened Prague shopping centre has scope to increase rents once it stabilises and to benefit from yield compression as the Czech Republic integrates more fully into the European Union. Equally, it must be recognised that there are some risks (as there are with all equity investments):

there are demographic issues (eg, falling populations in some areas) but these will impact only over the longer term and there are mitigating factors such as an increasing number of households (smaller or split families) & reducing supply (some lower quality stock is being demolished)
there is downward pressure on residential rentals in some locations
there is a significant amount of capital required to be spent on “catch up” repairs & maintenance. While these costs are reflected in the acquisition price, the capital spend may not generate an adequate return on capital
there is a presence of asbestos contamination in some of the apartment buildings but GPT’s consultants regard the risk of a material impact as low.

Some aspects “less than ideal”

Grant Samuel said some aspects of the joint venture were less than ideal, such as the effective $A50 million goodwill payment. Also:

GPT is providing the bulk of the equity funding for the joint venture. It will earn a return on its preferred capital contribution (78% of its investment) equivalent to 9% in Australian dollar terms. The preferred capital is effectively mezzanine debt. This margin is at the low end of margins that mezzanine lenders in the Euro zone would typically require in relation to assets such as the initial portfolio. On the other hand, it should be recognised that GPT’s overall total expected return on ordinary equity is only about 10-11%
the net effect of the structure is that Babcock & Brown is likely to earn a much higher rate of return on its equity investment than GPT. At the same time, it is contributing more than just capital. It is providing the deal flow and is contributing the initial portfolio at a price below the assessed independent value
if Babcock & Brown sources an asset for the joint venture at a price below “market value”, as assessed by an independent valuer, it is able to “mark up” the asset and receive a fee equal to the difference (up to a maximum of 5% of the purchase price, except where Babcock & Brown has owned or controlled the asset for more than 12 months). This may substantially reduce one of the key attractions to GPT, being Babcock & Brown’s ability to “buy well” rather than just paying market value for assets. GPT will, however, have effective veto rights over each acquisition and can judge each case on its own merits, and
the joint venture’s exclusive access to Babcock & Brown’s global deal pipeline is circumscribed insofar as it only applies where non-Babcock & Brown Australian capital is to be raised. Babcock & Brown can effectively cherrypick the best deals However, Babcock & Brown has incentives to ensure the joint venture continues to receive attractive opportunities.

Questionmarks on Westfield deal

Grant Samuel said the sale to Westfield was at a fair price but might not be the optimal strategy if it could be considered separately from the restructuring. It exceeded the recent independent valuations of the 3 centres by 1%.

“The overall exit yield (current net income/sale price) is less than 6%, which is below the yield at which GPT currently trades (about 6.2%). The reinvestment of the sale proceeds into the (potentially) higher-yielding joint venture is the largest contributor to the uplift in distributions/unit. However, the Westfield sale raises a number of issues:

sale of low-yielding assets and replacement with higher-yielding assets may increase short-term earnings but does not necessarily add value. Inevitably, overall asset quality is diluted and there may be some offsetting adverse impact on yield
the 3 retail assets are high-quality assets with proven performance over a long period of time. It would be very difficult to find replacement properties of equivalent quality (assuming capital was available). The net effect is a reduction in a unitholder’s exposure to the retail property sector
GPT, along with most other listed property trusts, trades at a premium to net tangible asset backing. Before the announcement of the initial Lend Lease proposal, the premium ranged between 5.8-18.8%, with an average of 11.5%. It is possible that this premium may, in part, be due to differences between property valuers (who must reflect specific risk) and sharemarket investors who may require a lower rate of return because they can diversify risk. A meaningful proportion of that premium is likely to be attributable to GPT’s portfolio of retail properties. Accordingly, any sale of GPT retail assets would need to be at well above valuation in order to avoid the risk of effectively diluting GPT’s premium to nta
an internalised GPT would have had day-to-day management control of the properties & their development. It will cede this role to Westfield, which will assume the role of property manager and will be the developer for any refurbishment or extensions (subject to agreement for Sunshine Plaza)
the sale of the 50% interest in Penrith Plaza & Woden Plaza may detract from the value of the remaining 50%, and
each party has pre-emptive rights if the other wishes to sell although there are no “change of control” provisions.

Grant Samuel acknowledged the restructuring wouldn’t appeal to all unitholders, particularly those who:

do not place significant value on having higher growth in income in the medium term (and higher risk) and would prefer the current low-growth, secure domestic focus. Others may be concerned about the increased risk (financial, currency etc). For these unitholders retention of the assets to be sold to Westfield would be more attractive than the joint venture, and/or
are not interested in offshore diversification. Some unitholders are easily able to achieve that kind of diversification themselves and there is certainly a legitimate argument that investors are able to achieve diversification more efficiently than corporations. For these unitholders, a potentially more attractive alternative (and one that is theoretically available) would be to reject the restructuring and subsequently to encourage the board of GPT Management to undertake an internalisation alone. The restructuring is not a “must do” transaction.

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Lend Lease chiefs say GPT package less rewarding & riskier

Published: 14 May 2005

Lend Lease Corp group chief executive Greg Clarke & chief financial officer Roger Burrows made a 50-page presentation to analysts in Sydney on 11 May, on why they believed GPT’s investors shouldn’t support the internalisation structure, particularly the sale of prime retail assets to Westfield Group and entry into a European investment joint venture with Babcock & Brown.

This article is split into 3 pages:

the opening page, covering some general issues
considerable comment from Grant Samuel on the GPT proposal, and
a damning critique from Lend Lease (this page).

You can reach the other pages by clicking here: Page 1, Page 2, Page 3

Not much to us, but…..

While the Lend Lease chiefs said the GPT internalisation “is of limited consequence to Lend Lease,” they proposed in their vote-no option that Lend Lease, as GPT’s responsible entity, would manage GPT at cost from 1 July until an “unencumbered alternative internalisation” was completed by the end of the year, forego performance fees and not exercise pre-emptive rights on 2 developments, Rouse Hill & Twin Waters.

What Lend Lease has offered is a route to internal management without the need to sell 3 assets at a discount and without switching the money from those mall investments into a predominantly residential European portfolio, which Lend Lease raised doubts about in terms of quality, risk & future investment value.

Mr Clarke said the sale of assets to Westfield would be at a discount to market, not through a competitive process, further value would be transferred through management & development agreements & pre-emptive rights and those assets were going to GPT’s largest competitor.

On the joint venture, Mr Clark said:

the fees payable to Babcock & Brown were excessive
the relative returns on investment heavily favoured Babcock & Brown
returns would be generated from 100% leverage of assets rather than quality property investment
the potential for excess total returns (including capital growth) was questionable
the forecast increased distribution/unit would arise from short-term underwriting & branding fees and didn’t reflect returns from long-term property investment
the proposal wouldn’t enhance long-term distribution/unit growth as the joint venture investment was capped at 15% of GPT’s total assets
acquiring up to $A5.6 billion in overseas property assets within 18 months “does not represent ‘controlled expansion’ into offshore markets”
gearing would be increase substantially, from 30% to as much as 45% on “see through” basis and S&P had indicated a downgrade from A+ to BBB+ or A-
the proposal would dilute any premium for control.

“Investors will exchange 15% & 20%-plus returns for 10-11%”

Roger Burrows, Lend Lease’s chief financial officer, said Woden Plaza earned GPT more than 15%/year over the past 5 years and the other 2 malls more than 20%/year. He said the proposed joint venture offered returns of 10-11%, “with a significant proportion of that flowing from financial engineering.

“It appears to us that the transactions have been structured to produce apparent short-term earnings growth. Almost 10% of GPT’s forecast 2006 earnings are based on a short-term underwriting from Babcock & Brown and the branding fee from Westfield. In our view, there is a significant risk that GPT’s earnings will decline in 2007.”

Mr Burrows said malls returned an average 17% over the past 5 years compared to 9% from office. Penrith & Sunshine were GPT’s 2nd & 3rd-best earners, Woden 9th. In a comparison of Australian regional shopping centres based on moving annual turnover/m², Mr Burrows said Penrith & Sunshine were 3rd & 4th ($A7172 & $A7206/²), Woden 6th ($A6960/m²).

Burrows says sale will seriously weaken GPT in retail

He said their sale would weaken the strategic importance of GPT’s retail portfolio and it would mean GPT wouldn’t have a strategic regional shopping centre management platform: “The largest regional centres in which GPT is invested will be managed by others – either Lend Lease or Westfield. Given the mature nature of the Australian retail sector, there is very limited ability for GPT to rebuild this platform.”

Mr Burrows’ next statement is particularly interesting in light of the Lend Lease & GPT behaviour over valuations in 2004. Lend Lease tried to take over (“merge with”) GPT on a basis which included a number of old valuations during a rising market. When Stockland made an offer a few months later, those old (2003) valuations were suddenly updated, making the Stockland bid look even worse than it already was.

This week, Mr Burrows said: “We know that many others in the market share our concerns that these 3 centres are being sold below their true value. Given other comparable transactions, it is clear that GPT could have obtained a far higher price if it had conducted an open market sale process.”

This contrasts with GPT’s view in its meeting memorandum this week: “GPT has achieved sale prices for 50% of its interests in 3 retail assets which are the most attractive (in yield terms) of any retail asset it has ever sold. This has been achieved arguably at the high point of the property cycle with interest rates at historic lows, which have risen further since the proposal was announced on 17 February. Increasing interest rates typically reduce property asset prices.”

The sales to Westfield have been done on the basis of valuations dated 31 December 2004. Westfield is to get half the GPT interest in each. In GPT’s annual report, the 3 centres are shown as:

Penrith Plaza, 100% owned by GPT, book value $A704.9 million, December 2004 valuation $A672.8 million (Penrith Plaza alone, $A688.1 million including Riley Square), current cap rate 5.75%
Sunshine Plaza, 50%, book $A281.8 million, valuation $A264.75 million, 6%
Woden Plaza, 100%, book $A484 million, valuation $A470 million, 6.25%
Total book value $A1470.7 million, valuation total (including Riley Square) $A1422.85 million.

Mr Burrows estimated these sales would give rise to a higher tax liability this year – A12.8c/unit – from an $A258 million capital gain.

By giving Westfield management & development rights, Mr Burrows said GPT would forego an implied development & construction margin, which on Westfield’s portfolio this year was forecast at 14.6%, next year 23.1%. Westfield would also get a pre-emptive right over GPT’s remaining ownership interests in these 3 centres. Mr Burrows said this would reduce GPT’s ability to maximize long-term value.

Joint venture in a hurry to make risk-laden investments

Under the “very aggressive” acquisition programme for the joint venture, Mr Burrows said $A4 billion would have to be invested in just 18 months. “That represents up to half of GPT’s existing portfolio built up over the past 30 years. You then overlay the fact that the GPT board & management team will be

required to approve these investments in geographies & markets in which they have little or no experience or track record. Alternatively, if they do not secure sufficient acquisitions, GPT’s earnings will decline post-2006.”

Babcock & Brown was upbeat about the prospects for its German investments when the joint venture was announced in February, saying there was scope within the acquisition portfolios to add value and a ready institutional market to sell upgraded residential properties to.

Lend Lease’s view is, at best, highly sceptical: “The majority of assets to be acquired are German apartments that have had a track record of underwhelming capital growth over the past 10 years. In addition, the outlook for these assets in general points to continued underperformance, with oversupply and poor underlying demand dynamics.”

He said the apartments had a history of weak rental growth, there was downward pressure on residential rentals in some locations, and some of the residential blocks had asbestos contamination.

The Cologne Technology Park was 19% vacant, its value was underpinned by a €18 million rental guarantee from the previous vendor to support vacancies & near-term lease expiries, no minority discount was applied for the 30% ownership interest, estimated rental growth rates were only 1-2%/year and the 6% initial yield was significantly lower than for most Australian office portfolios.

At the Galerie Butovice, vacancy was 15% and that was subject to a short-term rental guarantee, while the Royal Ahold lease on the supermarket & 67% of office space had no rental increases for the first 5 years.

Mr Burrows added 2 points from Deutsche Bank Research at the end of March:

During the mid-90s incentives were provided to developers to increase supply & quality of the accommodation in West Germany…creating an oversupply
“Our economist expects Germany to have one of the lowest rates of population growth in Europe, with the population of Germany to peak by 2012 and then decline by up to 10% by 2050.”

Mr Burrows said the joint venture contained a poison pill & the wrong incentives for GPT: “It is difficult for GPT to reject any investment by the joint venture proposed by Babcock & Brown,” he said:

Refusal to continue to invest in assets proposed by Babcock & Brown triggers a termination right
Babcock & Brown can terminate the joint venture on change of control of GPT
Babcock & Brown has first right to acquire assets it introduced to the joint venture at “market value” on termination (about $A600 million premium to asset backing implicit in Grant Samuel’s GPT valuation would disappear), equating to A30c/unit premium for these assets in GPT’s unit price not being sustainable in a takeover
GPT provides 90% of funding but has no effective veto over investment decisions.

This group of stories:

Page 1: Grant Samuel’s GPT assessment has wider relevance, and Lend Lease critique raises serious questions

Page 2: Grant Samuel questions European deal but doesn’t put it down, says Westfield price fair

Page 3: Lend Lease chiefs say GPT package less rewarding & riskier


Earlier stories:

11 May 2005: Lend Lease tells GPT unitholders to vote no

10 May 2005: GPT split from Lend Lease gets nasty

22 March 2005: GPT’s European investment venture outlined

4 March 2005: Stockland still under 1% of GPT as bid closes

17 February 2005: GPT plans global venture with Babcock & Brown, internalised management, to sell interests in 3 malls to Westfield


Websites: GPT internalisation proposal

General Property Trust

Lend Lease

Babcock & Brown


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Lend Lease tells GPT unitholders to vote no

Published: 11 May 2005

Lend Lease Corp’s alternative to the breakaway package proposed by General Property Trust’s board is to advocate a “no” vote by unitholders.

The “no” vote doesn’t exist in politics but it does in business. A recent New Zealand example of its use occurred in the votes on 2 candidates for the Dorchester Pacific Ltd board. Shareholders voted one on and rejected the bid of another. They could have elected both, or neither.

But even if GPT unitholders vote against the package, which would include the sale of 3 properties to Westfield Group and entry into a $1 billion joint venture with Babcock & Brown, Lend Lease still offered to grant GPT management independence by the end of this year.

Lend Lease is the trust’s manager, a point of conflict when it came to deciding which entity should employ staff under the breakaway proposal.

Lend Lease said the sale to Westfield would be at discount values, and in the Babcock & Brown venture GPT carried a disproportionate level of risk with lesser rewards.

Lend Lease also offered a short-term palliative: it wouldn’t charge incentive or performance fees from 1 July if unitholders agreed on its internalisation scheme in place of the one now before them.Lend Lease also said it was indefensible that Westfield should vote its 6.5% holding on the current proposal when it clearly had a vested interest in the outcome.

Earlier stories:

10 May 2005: GPT split from Lend Lease gets nasty

22 March 2005: GPT’s European investment venture outlined

4 March 2005: Stockland still under 1% of GPT as bid closes

17 February 2005: GPT plans global venture with Babcock & Brown, internalised management, to sell interests in 3 malls to Westfield

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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GPT split from Lend Lease gets nasty

Published: 10 May 2005

General Property Trust’s proposed split from Lend Lease Corp has turned distinctly acrimonious, more so since GPT posted out its explanatory memo yesterday for a 2 June meeting seeking unitholder approval for an $A1 billion venture with Babcock & Brown.


GPT’s internalisation group accused Lend Lease of not playing ball over future employment of people, all Lend Lease employees under the past setup, required to continue running the GPT business
Lend Lease said GPT was trying to steal its staff
GPT made payment & preferred-supplier offers, now withdrawn
Lend Lease put an ultimatum on Friday, then said it would remove Nic Lyons & his senior management team from GPT
GPT Management Ltd’s board responded by saying Mr Lyons retained his job, the Lend Lease appointee to replace him wouldn’t be doing that – and enough key staff had elected to go with GPT.

GPT issued its memorandum on 2 May and, until Friday, said it thought the transitional arrangements were going smoothly. But Lend Lease said GPT had sought unqualified support for a venture it believed wouldn’t be in unitholders’ best interests

Lend Lease managing director & chief executive Greg Clarke said the Lend Lease board believed the package wasn’t in unitholders’ best interests “primarily because it has tied to it the sale of interests in 3 of GPT’s key retail portfolio assets to Westfield and the establishment of a highly geared joint venture with Babcock & Brown.”

Mr Clarke said Lend Lease had discussed alternatives with several investors and would outline “an appropriate internalisation model for GPT” on Wednesday, 11 May. This model would avoid the asset sale to Westfield and the Babcock & Brown joint venture, and wouldn’t involve a Lend Lease takeover.

In today’s GPT statement, Mr Lyons reckoned that after a weekend of staff presentations the trust had come out on top in the recruitment battle – by today it had 23 key retail employees spanning retail development, property management & leasing, and the 4 key portfolio managers – all saying they’d go with GPT if the internalisation is approved.”This includes the current general manager retail, national retail development manager, chief operating officer of the retail business & the portfolio managers for the office, industrial, hotel & tourism and the master-planned urban community portfolios. On that basis, GPT is confident of having all key management roles filled at the time transition takes place.”Mr Clarke said GPT had wanted Lend Lease not to try influencing the vote or opposing the outcome, but GPT wasn’t prepared to agree a fair & equitable initial allocation of resources & staff.

Websites: GPT internalisation proposal

General Property Trust

Lend Lease

Babcock & Brown


Earlier stories:

22 March 2005: GPT’s European investment venture outlined

4 March 2005: Stockland still under 1% of GPT as bid closes

17 February 2005: GPT plans global venture with Babcock & Brown, internalised management, to sell interests in 3 malls to Westfield

12 February 2005: The good, the bad & what you want to believe at Lend Lease

24 January 2005: GPT pulls out overdue revaluations to show how bad Stockland offer is

18 November 2004: Lend Lease merger with GPT blocked

9 November 2004: Stockland upsets the Lend Lease applecart

8 August 2004: GPT’s independent directors agree to new Lend Lease merger terms

28 July 2004: GPT’s independent directors reject Lend Lease merger offer

25 May 2004: Lend Lease proposes merger with General Property trust to create $A10 billion business


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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GPT’s European investment venture outlined

Published: 22 March 2005

General Property Trust investors have been given an outline of the kinds of European investment their directors are leading them into after rejection of the Lend Lease Corp and Stockland Property Group takeover bids.

GPT announced a global investment joint venture with Sydney-based investment & advisory firm Babcock & Brown Ltd in February, as the Stockland takeover bid was still struggling to make 1% of GPT units.

GPT unitholders will get an explanatory memorandum in late April for a meeting in May on the board’s proposal to internalise management. The $A1 billion joint venture and sale of 3 shopping centres to Westfield Group are part of the package.

The 2 prospective partners issued a 54-page presentation on the European investment proposal yesterday, indicating:

scope within the acquisition portfolios to add value
a ready institutional market to sell upgraded residential properties to, and showing
a global chart of major real estate markets to demonstrate the capacity for growth in European listings (click on thumbnail to open chart), and
a 2nd chart indicating the current favourable European spread between yields & the 5-year swap rate (click 2nd thumbnail to open chart).

Several European countries, including the UK, are working on reit (real estate investment trust) programmes to enable a significant lift in listed property.

German residential focus

One of Babcock & Brown’s target markets is German residential portfolios. It says Germany is a nation of renters, with only 43% home ownership.

In Salzgitter, North-western Germany, Babcock & Brown paid €290 million at an 8.4% yield (pre-capex) for a portfolio of 13,476 one- & 2-bedroom apartments, about 25% of the city’s housing stock, rented for about €4/m²/month. Occupancy was 84.5%. The housing stock will be upgraded and Babcock & brown will consider selling sub-portfolios to wholesale buyers.

In Kiel, Northern Germany, Babcock & Brown has bought a portfolio of 1400 units for €40 million with another €2 million expected for capex. Its yield would fall from 6.5% to 6% post-capex. Occupancy is 88%. Again Babcock & Brown will look at sub-portfolio sales.

The initial AMB Generali portfolio in Western Germany contains 2700 units in 9 cities, to be bought for €130 million. The initial yield is 6.5%, falling to 6.1% post-capex. Occupancy is 95%. Average net rent is €4.68/m²/month.

Retail, office & business parks

In the hypermarket sector, Babcock & Brown said its focus was on long-term leases (average 10 years) providing a stable 75% of cashflow. The brand-new (opening 18 March) Galerie Butovice retail & office development in Prague is in the initial portfolio, bought for €106.8 million at 8%, with 95% occupancy precommitted. A Royal Ahold supermarket will take up 13,941m² of the 37,475m² retail space, and Ahold has committed to 70% of the 9154m² of office space for its central European headquarters.

Also in the initial portfolio is a 30% interest in a technology park in Cologne, bought for €70.6 million on a 6.2% yield, 99,500m² net lettable area, 90% occupied. In France, 2 Parisian business park developments are under consideration.

Websites: Babcock & Brown

General Property Trust


Earlier stories:

17 February 2005: GPT plans global venture with Babcock & Brown, internalised management, to sell interests in 3 malls to Westfield

17 January 2005: Babcock & Brown spends €483 million on European real estate


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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GPT plans global venture with Babcock & Brown, internalised management, to sell interests in 3 malls to Westfield


Published: 17 February 2005

General Property Trust made 3 significant announcements today:

It proposes to internalise management, currently run by failed suitor Lend Lease Corp Ltd
It will form an $A1 billion global strategic joint venture with Babcock & Brown, for which 90% of the money will come from GPT, and
It has signed conditional agreements to sell its interests in 3 shopping centres to the Westfield Group.

Internalising management

Lend Lease failed in a bid last year to merge with General Property Trust and has been highly critical of the subsequent Stockland Property Group bid for GPT.

GPT used some very belated revaluations in January to highlight how bad the Stockland bid was. Some of those revaluations should have been done before Lend Lease made its bid, which would have changed the calculations for that, as well as changing balance date comparisons.

Global joint venture

Babcock & Brown said the new joint venture would “pursue real estate investment, trading & development opportunities worldwide and seek to establish a listed & wholesale real estate funds management business in Australia.”

That’s what Lend Lease was doing 4 years ago, until it came badly unstuck, retreated then tried to regroup with its GPT merger proposal.

Babcock & Brown managing director Phil Green said: “The joint venture with GPT will combine Babcock & Brown’s global origination capability & investment structuring expertise with GPT’s strong asset management skills and provide Babcock & Brown with an ideal strategic partner to pursue global real estate opportunities.”

GPT will contribute $A700 million of preferred equity yielding 9%/year and $A200 million of ordinary equity. Babcock & Brown will contribute $A100 million of ordinary equity for a 50% equity interest in the vehicle.

“The terms agreed with GPT make it unlikely that Babcock & Brown will receive the $A50 million capital uplift unless GPT receives a 10% internal rate of return on its total capital contributed over the first 3 years,” Mr Green said.

The joint venture will initially acquire $A1.1 billion of assets from Babcock & Brown’s existing European portfolio. Mr Green said it had identified another $A1.3 billion of opportunities, including more investments in Europe and development opportunities in Australia, New Zealand & Europe.

The joint venture will start with borrowings at 65% of total assets and will have a 75% limit.

Babcock & Brown will earn market-based financial advisory fees for introducing future investments which are acquired.

Funds management joint venture

Mr Green said the joint venture would establish a real estate funds management business, managing both listed & wholesale products in Australia.

The Australia-listed Japanese real estate fund, which Babcock & Brown announced on 31 January it was considering, will be excluded from this part of the joint venture. But Babcock & Brown sees potential to combine the Tourism Asset Holdings Ltd hotel portfolio, which it acquired in 2001, & GPT’s hotel & tourism assets into an $A1.8 billion listed hotel trust.

Babcock & Brown has undertaken to provide GPT with investment opportunities forecast to contribute A1c/unit to GPT earnings this year, A2.75c/unit in 2006. If Babcock & Brown can’t find enough good buys it will provide income support, but it won’t be guaranteeing the performance of the investments.

The Babcock & Brown deal requires approval from GPT unitholders. They’ll get a memorandum in late April for a meeting in May.

Peter Joseph, chairman of GPT’s independent directors, said the deal with Babcock & Brown should increase 2006 distributions by 16.5%. GPT would maintain gearing at 31.3%.

Westfield deal

The deal with Westfield Group is subject to unitholder approval of internalising management & the Babcock & Brown joint venture.

Westfield has entered into conditional agreements to acquire GPT’s interests in 3 shopping centres for $A842.4 million (according to Westfield), $A744 million according to GPT (I think the difference is in the Penrith development costs mentioned below):

50% of Penrith Plaza in Sydney for $A425.4 million, including payment for development costs on the current expansion
50% of Woden Plaza in Canberra for $A262 million net of acquisition costs, and
25% in Sunshine Plaza, Maroochydore, Queensland, for $A155 million, also net of acquisition costs and subject to pre-emptive rights by Australia Prime Property Fund.

That represents a weighted average sale yield below 6% on passing income and a premium to independent valuations commissioned in December.

GPT will convert those proceeds to its Babcock & Brown joint venture, which it said would provide higher-yielding investments.

Westfield will get the management contract on the Sydney & Canberra malls.

Westfield secured a 6.53% stake in GPT on 19 November, 2 days after the vote that sank Lend Lease’s merger hopes, but with an interest in the stake at the time of the vote.

Lend Lease response

Lend Lease said in its response to the proposal to internalise management: “As the owner of the responsible entity for GPT, Lend Lease has supported the GPT independent directors in their review of alternatives to the current takeover offer for GPT by Stockland Group. Lend Lease has also been assessing such options and continues to do so.”Lend Lease respects the GPT independent directors’ decision to put their internalisation proposal to unitholders for consideration. However, Lend Lease has reserved its position at this time and will remain an actively interested party as the proposal, and any others that may yet emerge, are assessed by the market.”In any event, Lend Lease & GPT agree that there remain many opportunities to work together, whatever the outcome of the current proposals. To that end, the 2 organisations intend to maintain a co-operative & mutually beneficial working relationship.” Given GPT’s announcements, you would have to say a Lend Lease involvement in its future would be extremely remote.

Earlier stories:

12 February 2005: Pleased as punch at GPT – just don’t believe the numbers

1 February 2005: Babcock & Brown to check out Japanese property investment

24 January 2005: GPT pulls out overdue revaluations to show how bad Stockland offer is

17 January 2005: Babcock & Brown spends €483 million on European real estate

18 November 2004: Lend Lease merger with GPT blocked

25 May 2004: Lend Lease proposes merger with General Property trust to create $A10 billion business


Websites: Babcock & Brown

General Property Trust

Westfield Group


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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