By ANNE GIBSON
The problems of investing in a single property with one tenant was one of the main reasons Wellington's Waltus Investments persuaded investors to roll their money into a much larger multi-property company.
Fourteen roadshows, held last month from Kaitaia to Invercargill, were the forum where Waltus directors explained to investors the dangers of staying with the 29 property syndicates.
They argued that compounding the $238 million worth of retail, industrial and commercial properties - with $93 million worth of debt - into one single company would give much better value to everyone.
Not only would the banks look more favourably on the company when re-mortgaging came up, but investors would get better cashflow from the strength in numbers. The investors would diversify their risk from, say, one shop in Palmerston North or supermarket in Masterton to an entire spread with around 46 buildings and many tenants.
It was a highly unusual situation: the rules were being changed on investors part-way through the game. They had bought into the syndicates between 1989 and 1996. The syndicates each owned a property and promised good returns with a cash-up at the end of a decade or so.
But just a few years into the deal, Waltus turned around and said the market had gone bad. The holdings should be changed to notes and shares and the syndicates rolled into one, the directors advised.
A series of 29 meetings of each Waltus syndicate was held in Wellington on Tuesday to put the Waltus plan to 5000 investors, who live mainly around the upper North Island. Few people turned up. Most voted by mail.
Many retired folk invested with Waltus, drawn by the tangibility of property and the promise of returns which in some cases were 16 per cent a year.
Said the wife of a Wairarapa farmer: "I liked to take the grandkids to the Woolworths in Taupo and tell them I own a bit of that - maybe only five bricks, but at least a bit."
The couple had invested in the attractive Regalia, which had been returning 16 per cent a year. The Waltus syndicates own properties which range in size from a $1.9 million Mangere building to the Waitakere Plaza shopping centre, worth $28.4 million, in Henderson. But most of the properties were more like the $6.5 million Woolworths in Taupo or the $4.8 million Farmers store in Rotorua. They had names which reflected their location or uses: Fenton for the Rotorua supermarket, Distribution for the Mangere property, or Waikato for the $7.9 million KPMG Building in Hamilton.
None of the properties were Wellington or Auckland prime CBD skyscrapers. They tended to be in places like Palmerston North or Tauranga.
But the directors outlined deep underlying problems with all of the properties. These hinged around a lease running out soon or occupation to a single tenant like a supermarket or department store operator. Refinancing would be needed on the mortgages soon, the properties needed money spent on them and they exposed investors to a single risk rather than diversity.
All this begs the question of just why Waltus ever bought the properties and why the investors could have ever been persuaded by their investment advisers, accountants or Waltus staff that they were any good to begin with.
But persuaded most of them certainly were.
"You weren't saying such negative things eight years back," complained one investor at this week's Wellington meeting to Waltus director Shane Hodge. He replied that the outlook had changed and was not so rosy.
It was indeed an odd spectacle this week: Hodge, Waltus financial controller Hamish Plimmer and chairman Warwick Hawes each reiterating deep underlying problems with their properties. Real estate companies are hardly known for their ability to call a dog a real mutt. They accentuate the positive, seizing on any predicted market improvement, the strength of their portfolios compared with their competitors, perhaps the niche they are in.
So why were the Waltus directors so brutal with these particular properties? The answer lies mainly in the need to persuade investors to vote in favour of the merger. The threat of falling returns in the present structure was the stick being used. The carrot was the idea of all banding together to take the good with the bad.
Not everyone was convinced. About half a dozen advisers and investors lobbied the financial media for weeks before the vote, attacking the Hodge family, its management company and the new structure. Among other issues, they complained of the loss of tax writeoffs with the conversion and the fact that investors from good syndicates would be asked to prop up bad under the new structure.
These were not the sort of people who usually contact the media. They were accountants, advisers and investors mainly in small rural areas, often retired with a nest egg which they believed was sound.
Business Herald analyst Brian Gaynor condemned the deal, too, as did other journalists, who found themselves on the receiving end of the Hodge family's wrath. Gaynor criticised the Hodges for remaining firmly in control and renegotiating a lucrative management deal, which would yield them 10 per cent of the annual rent for a new lease and 7.5 per cent of the value of any refurbishment: "The strong companies are being asked to save the weak and protect the Hodge's management contract," he wrote on August 5. He predicted that shareholders in the stronger syndicates would vigorously oppose their inclusion in the new company.
In the end, he was wrong. There was scant opposition at meetings of strong syndicates like Regalia, with every meeting running within the 15-minute time-frame, one down to as little as six minutes.
Only Auckland financial adviser and National Radio commentator Murray Weatherston fought the battle for the small shareholder. He played devil's advocate, assuming the sole mantle of investment watchdog, barking at the gate of the house of Hodge.
Weatherston left the meeting on Wednesday with a vow: to watch the Waltus share price. His reason? Based on the present market, Plimmer had predicted a discount of no less than 3c for the $1 shares to be issued soon. If the new shares slip below 97c, Weatherston will be on the Hodge's case.
Weatherston was surprised the deal went ahead, given the behaviour of the Waltus directors on the day. He asked almost the same three questions at each meeting to do with the loss of tax write-offs, the discount to net asset backing at which the new shares would trade, and the prospects of refinancing or re-tenanting the properties.
But first, Weatherston objected to Waltus trying to stop any debate on the issue at the meetings. Hawes claimed there wasn't time and enough had been said on the issue.
The entire show became farcical when the four Waltus staff at the top table outnumbered the audience two to one towards the end of the day.
The Hodges got their way in the end: investors in 27 of the 29 syndicates said yes. Only Ascot (owner of the BNZ Bulk Store in Ascot Rd, Mangere) and Colonel (owner of KFC's head office in Penrose) opted out of the deal.
All the others thought the deal was a good one.
Only time will tell.
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