Investors unhappy with property trust structure

Institutional investors are so angry at last week's announcement of the imminent sale of Calan Healthcare Properties Trust's management that one has ditched its holding.

Another has decided to buy investment real estate directly and gradually cull NZX-listed property trusts from its portfolios, meaning one of New Zealand's biggest fund managers will buy, develop and manage its own properties directly in future.

Heads of funds with billions of dollars under management see deep problems in the listed property trust sector and predict any new launches of listed property trusts will fail, given widespread agitation against the trust structure.

Resentment about the deal for ING Property Trust's manager to buy Calan's management is running high among the major fund managers, who have described the sector as having a "gouge-and-grab" mentality that constantly puts unit-holders on the back foot.

What they are most angry about is that on the eve of mounting a full takeover for Calan, predator ING was secretly negotiating to buy the management.

On January 31, ING said it was planning to launch a full takeover bid for the trust, having gained 15 per cent, but on March 9 it said it had a conditional deal to buy the management.

If the deal goes ahead, that will effectively give ING control of the listed entity without the bother of having to make a market stand, pay out existing unit-holders or declare any aspects of the deal.

It is also thought that Calan could be delisted. ING would need to gain full control and make a full takeover offer to all unit-holders. It could then make a case against running two separately listed property trusts.

Property entities bought by ING in the past few years that have since been delisted include the $453 million Urbus Properties and Paramount Property Trust, renamed ING Property Trust in 2003.

Both are now merged into ING's real estate empire here.

The institutions are so disillusioned with the listed property sector, they are agitating for an overhaul and believe last year's major rule change did not go far enough.

But ING Property Trust chairman Mike Smith said the critics of the ING/Calan deal failed to understand the nature of the trust structure, which separated ownership of the investment vehicle from ownership of the management.

"There's nothing wrong with what's happened here - there's a management contract and unit-holders, and they are separate with a separate value," Smith said.

The management sale needed no unit-holder approval or price declaration. After the deal was announced, the Shareholders Association called for the listed property trust structure to be outlawed. Research director Oliver Saint said the sale highlighted the weakness of the trust structure.

Smith believed the trust model should not be abandoned because it offered investors advantages they could not gain from buying into companies.

He said Calan's independent directors would be elected by investors, trustee approval would be needed before any big deals went ahead and a debt ceiling level placed on the trust was a further safeguard for investors. ING had changed its corporate governance and Calan would benefit from those moves.

"There are many pluses from a governance point of view in trust structures," Smith said.

ING had made no decisions about delisting Calan and several conditions had yet to be satisfied. Due diligence had also yet to be completed.

Calan chairman Bruce Davidson agreed the deal would be good for Calan investors. He and Smith said the price paid for Calan's management was subject to a confidentiality agreement but those close to the deal said it was close to $8 million, equivalent to about 4 per cent of the value of Calan's assets.

Shane Solly, of Goldman Sachs JB Were, said Calan's fortunes had improved lately under Miles Wentworth, chief executive of the trust's manager.

"The management sale was not unexpected. While more recently Miles Wentworth has done an outstanding job, the underlying management company had been fractious and delivered a mixed outcome for unit-holders," Solly said.

Mark Lister, of ABN Amro, said a takeover was likely. "It remains to be seen whether this leads to any further amalgamation proposal, although you may recall that, in the case of Urbus, ING first acquired the management company, then a merger proposal followed," he said.

SALES GAME

* Early 2002: Kiwi Income Property Trust's manager sold to Colonial in Australia for $56 million.

* December 16, 2003: Colonial First State Property Trust's manager sold to Australia's Macquarie Goodman for $5.75 million.

* July 2005: Urbus Properties taken over by ING Property Trust and delisted.

* December 2005: National Property Trust's manager sold to St Laurence Group for an amount thought to be about $12 million.

* February 2006: AMP Property Portfolio gains 90 per cent of Capital Properties and its internal management structure for $357.6 million and is now buying the remaining 10 per cent.

* March 2006: ING Property Trust announces a conditional deal to buy Calan Healthcare Properties Trust for about $8 million. No figures disclosed.