Little gain in Capital for shareholders

By BRIAN GAYNOR

It has been a difficult week for Capital Properties' 24,200 shareholders. Yesterday, they had to front up with either 50c or 57c for the final instalment on their investment receipts.

This was a painful exercise in view of the company's depressed share price, inadequate communication with shareholders and a board seeking a 25 per cent increase in directors' fees.

The company's poor performance does not warrant a fee rise and there could be widespread opposition to the motion at the annual meeting on July 25. Because of the company's shareholder structure, there is a strong possibility that the proposal can be defeated.

In November 1998, the Government sold Capital Properties to the public.

The company originally owned nine large properties in central Wellington, which have mainly Government agencies as tenants.

A total of 119.4 million shares, representing 100 per cent of the company, were bought by investors through an instalment receipt process.

The first instalment of 50c was paid in November 1998. Yesterday, the original retail investors who had held onto their shares paid 50c on the second and final instalment.

Remaining shareholders were required to pay 57c.

There were two big attractions to the issue for individual shareholders: They were able to buy shares at 100c each compared with 107c for other shareholders; and the full dividend was paid on the instalment receipts, giving shareholders an annual gross dividend yield of 23.1 per cent for the March year.

The float was a big success, attracting more than 29,000 shareholders with 22,000 holding less than 5000 shares. A total of 22,450 individual shareholders have held onto their original holding.

The recently released annual report said it was common for instalment receipts to decline in price before payment of the second instalment. However, there was no hint of this warning in either the investment statement or prospectus.

Capital Properties' share price stayed above its 50c issue price until it expressed an interest in acquiring Shortland Properties.

Last July 26, Kiwi Income Property Trust announced a takeover offer for Shortland at 71c a share. A month later, Capital Properties made a counter-offer for the Wellington-based property group at 75c a share. The components of this bid were 33c in cash and 42c in the form of capital notes. The notes had a coupon rate of 8.5 per cent per annum.

On September 17, Capital Properties raised its offer from 75c to 76c, the cash component went from 33c to 34c and Shortland's directors recommended acceptance of the bid unless a better offer was received. On December 3, Kiwi threw in the towel.

Capital Properties was the victor and its asset base increased by 107 per cent.

The directors of Capital Properties had said they would consider acquisitions but there was no indication that the group would double its size in just a year. Nick Wevers and his management team had limited experience in the private sector and the more sensible approach would have been to consolidate the newly listed company before undertaking a big expansion.

The offer for Shortland Properties had an immediate negative impact on Capital Properties' share price falling below 50c. Yesterday, it closed at 84c.

The second instalment has been a contributing factor to the share -price slump but the Shortland acquisition and the company's confusing and inadequate communication with shareholders have also had a big influence.

The annual report attempts to put a positive spin on the company's poor performance.

Chairman Colin Beyer highlighted a net surplus after tax of $13.1 million yet the statutory section of the report reveals that the company had a net deficit of $6.6 million. This deficit includes a decrease in property values which is consistent with accounting standard SSAP-17.

The net deficit and a dividend payment of $10.7 million have had a negative impact on the company's reserves. Capital Properties' net tangible assets per share was only 91c on March 31 compared with a prospectus forecast of 107c.

The net asset backing is the main criterion determining the company's share price yet Mr Beyer and Mr Wevers make no reference to this in their report to shareholders.

A controversial aspect of the report was the statement: "An investment in Capital Properties should be considered from an income-yield viewpoint rather than from a capital-growth perspective."

This is inconsistent with claims in the prospectus that Capital Properties offered both income and capital-growth potential.

The annual report went on to say: "The takeover of Shortland provides the prospect of significant improvement in future earnings that will in time be reflected in increased dividends. The intention is to utilise increased earnings to reduce debt. Directors will only consider increased dividends once debt is reduced." Why did Capital Properties make a takeover offer for Shortland, and take on additional long-term debt, if it is not capital-growth oriented?

Why do the chairman and chief executive now say the company is looking for further acquisitions?

What is the attraction of investing in an income stock when increases in earnings will be used to repay debt?

There are similarities between Capital Properties and Contact Energy. They are both former Government-owned companies that attracted huge public support for their sharemarket floats.

The issues were extensively promoted but directors seem to have forgot shareholders once their money was banked.

Capital Properties' communications have been inconsistent and poor, shareholder numbers have fallen from 29,000 to 24,200 and the share price has slumped.

Contact Energy's attitude to shareholders, its communications and share price performance have improved since the proposed directors' fee increase was defeated at January's annual meeting.

The four Capital Properties directors, Mr Beyer, Michael Cashin, Peter Coote and Tim Saunders, might adopt a more consistent and effective communicative policy towards shareholders if their fee increase is also rejected.

The notice for the July 25 meeting in Wellington has the justification: "The directors consider the proposed 25 per cent increase in directors' fees is appropriate in light of the increase of over 100 per cent in the value of the assets [after the acquisition of Shortland Properties] under management and the resultant increase in workload."

The workload has increased but should directors' fees be based on asset growth or the change in net asset backing per share?

In the March year, Capital Properties' net tangible asset backing fell from 105c to 91c a share. More than 9c or 67 per cent of the decline was attributable to Shortland's properties yet the new acquisition was included for just four months.

Small and medium-sized shareholders have the opportunity to stop the fee increase because Capital Properties has a wide spread of shareholders' base and no major holder. The 40 largest shareholders own just 14.9 per cent of the company, easily the lowest percentage of any listed company.

A rejection of the fee increase would not cause any financial hardship for directors but it would send a strong message that shareholders are unhappy with many aspects of the company's performance.

There is a lesson to be learned from Contact Energy.

The successful opposition to the utility company's proposed fee increase gave directors and management a wake-up call. There has been an improvement in Contact Energy's communications and its share-price performance.

Disclosure of interests: None.