By BRIAN GAYNOR
Investors in the Waltus group of companies face their own Bledisloe Cup battle at Wellington's WestpacTrust Stadium on August 22.
The special meeting of the troubled property group starts at 9.30 am and is scheduled to finish eight hours later.
Individual approval is being sought from 29 companies to merge into one group, and each company has been allocated 15 minutes to discuss and approve the resolution. Given that many shareholders of the stronger companies are opposed to the resolution, the lights could burn late.
Lower Hutt-based Waltus group, which is controlled by the Hodge family, was founded in 1985. Its two main principals are John Hodge and his son Shayne.
In the late 1980s, Waltus began buying properties, backing these into companies and selling the companies to the public. These issuers, also called property syndicates, had several characteristics:
They were normally single property companies. Nineteen of the 29 companies own one building only.
They often had just one tenant. Eleven of the syndicates have one tenant, and four of the tenancies expire in less than four years.
The issuer raised funds from the public through a combination of ordinary shares and mortgage bonds. These were stapled and could not be sold separately.
The minimum subscription was $5000, and normally 500 shares at $1 each, with one mortgage bond costing $4500.
The bonds were usually secured by a second mortgage over the properties and the interest paid on the bonds was determined annually by the directors. They could be redeemed for cash on the initiation of holders after a set period.
The syndicates could borrow additional funds.
But one of the main characteristics of these new issues was their fat fee structure. Waltus received an upfront corporate management fee equal to 3 per cent on the gross value of the properties and brokers, mainly financial planners, were paid 4 per cent on the funds invested. There were additional preliminary expenses, Waltus' annual property management fee and continuing payments to financial planners.
There was no disclosure in the original prospectuses of the price paid by Waltus for the properties. It is unclear whether Waltus sold the properties on to the public issuer for the same consideration.
Many of the early syndicates had little or no borrowings. This was particularly attractive to investors who had been badly burned by the collapse of highly geared listed property companies after the 1987 crash.
It also attracted conservative investors who wanted a low-risk, secured mortgage bond that could be redeemed after 10 years.
But as the years went by, Waltus became more aggressive and geared its new syndicates. This was to Waltus' advantage, as its 3 per cent upfront fee was based on the gross value of assets.
The outcome was inevitable. The combination of highly geared, single-tenanted, one-property companies in a low-inflation environment is a recipe for disaster. Many of the syndicates began to struggle, mortgage bond interest rates were slashed or suspended and property values fell.
The total combined deficit of the 29 companies for the five years ended March 31, 2000, was $19.3 million. These companies now hold properties valued at $231.6 million.
Many of the syndicates are in serious trouble. Waltus has advised that lenders to some of the syndicates are requiring the repayment of debt principal amounts, and that it may be difficult to refinance this debt.
The proposed merger is a rescue plan for the ailing syndicates.
Under the scheme, shares and notes in the new company - Waltus Property Investments (WPI) - will be distributed on the basis of the net asset value of each syndicate at March 31, 2000. There are several features to the proposal:
The ordinary shares and mortgage bonds of the original companies will convert into WPI's ordinary shares and mandatory convertible notes.
A dividend of 9c per share is forecast on the new ordinary shares.
The notes, which convert into ordinary shares, are unsecured. Investors in the original syndicates lose their security and are no longer offered a cash redemption option.
The interest rates and conversion date on the notes vary for each syndicate. Waltus is hoping to attract a positive response from investors in the stronger companies by offering notes with a higher interest rate.
Each syndicate requires 75 per cent approval of the scheme. Syndicates voting against the proposition are excluded from the new company, but the merger will not proceed if companies that vote against the scheme represent more than 10 per cent of the total assets of the participating companies.
The overall tone of the merger document and the Deloitte's report are optimistic, but many of their projections are uncertain.
The new company is expected to distribute up to 100 per cent of operating surplus in dividends, and borrow its capital expenditure and leasing incentive requirements.
The renegotiated bank loan of $93.4 million matures on September 30, 2003, and stringent requirements are attached to the facility. If the property market remains difficult WPI may not achieve its forecasts and the dividend payment and interest rate on the notes may have to be reduced.
Deloitte's report looks at the proposal from a general point of view and does not offer an opinion on each individual syndicate. Some of its opinions are questionable, particularly in relation to the liquidity of the new mandatory convertible notes.
The report says that the new shares and notes will be more liquid, yet the confusion over the different interest rates and conversion dates on the notes will seriously restrict their tradeability.
But a major source of most companies problems is poor management and the Hodge family remain firmly in control. Not only do they still run the show but they have renegotiated a lucrative fee structure:
Annual corporate management fee - 0.5 per cent of total assets (previously 0.3 per cent). For the 19 months to March 31, 2002, this fee will be at the lesser rate of 0.3 per cent.
Purchase fee 1.0 per cent of the purchase price of acquisitions (previously none).
Divestment fee 0.5 per cent of the sale price of assets (none).
Annual property management fee 5 per cent of the gross rental on retail properties and 2.5 per cent of the gross rentals on all other properties (previously between 0.5 and 0.6 per cent of the gross value of assets).
Refurbishment fee 7.5 per cent of the value of any fitout, alteration or addition (not known).
Lease fee 10 per cent of the annual rent payable on a new lease but 5 per cent if an agent is involved (not known).
Rent review fee 10 per cent of the annual increase in rent (not known).
Additional management fees are paid directly by tenants to the management company (not known).
Other services fees at market rates.
The corporate management fee, property management fee and leasing fee are expected to total $2.6 million in the March 2002 year.
Deloitte reports the management company is forgoing another one-off fee of $921,000. It also advises that the new fees are consistent with other property syndicates but it doesn't say whether they are fair and reasonable to WPI's shareholders.
This raises the questions: who are the independent directors of the participating companies? (Only one is named in the merger proposal document.) Did the independent directors try to find a management company with a better track record and lower fee structure than the existing managers?
One cannot avoid the conclusion that the merger proposal would bring ironic tears of joy to old time socialists.
The strong companies are being asked to save the weak and protect the Hodges' management contract.
It will be a big surprise if shareholders of the stronger companies don't vigorously oppose their inclusion in the new company.
* Disclosure of interest: none.
Waltus rescue a testy issue
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