Brian Gaynor: Trust needs strong dose of activism

COMMENT

It looks like being yet another frustrating experience for New Zealand Rural Property Trust unit-holders when they meet in Napier on Friday.

At previous meetings there have been numerous calls for the trust to be liquidated, but its directors have refused to take the enlightened approach adopted by Dairy Brands and Tasman Agriculture.

The trust, which is controlled by Williams & Kettle, is trading at a huge discount to its net asset backing and is in dire need of a dose of unit-holder activism. Unless the 3350 unit-holders become more active they could face a further period of below average investment returns.

NZ Rural Property Trust was established as an unlisted entity in 1987 to invest in rural properties. It was an open-ended trust (unit-holders could request redemption of their units at the net asset value) and created considerable controversy when it first suspended redemptions in August 1990 for a 12-month period.

In June 1992 New Zealand Farmlands purchased the trust's management contract for $2.5 million. NZ Farmlands, which also invested in farm properties, was the brainchild of Wellington investment banker Lloyd Morrison. It was formed in 1989, listed in 1991 and the country's main institutional investors owned the bulk of its shares.

Immediately after the acquisition of the trust's management contract, NZ Farmlands changed its name to New Zealand Rural Properties Limited (NZRPL).

In 1993 interests associated with Sir Selwyn Cushing bought out AMP (it owned 23.6 per cent of the listed company) and some other institutions to raise Sir Selwyn's NZRPL holding to 41.1 per cent.

In November 1993 NZRPL purchased a 9.8 per cent stake in Williams & Kettle from Brierley Investments and by mid-1994 it owned 16.3 per cent of the Hawkes Bay stock and station company.

In July 1996 Williams & Kettle made a takeover offer for NZRPL on a combined scrip and cash basis and acceptances were received in respect of 72 per cent of the company. Sir Selwyn accepted in respect of his NZRPL shares and raised his Williams & Kettle holding to 40 per cent.

In January 1999 Williams & Kettle made a successful offer for the remaining NZRPL shares at $1.07 each, giving it full control of New Zealand Rural Property Trust's management contract. NZRPL's shareholding in Williams & Kettle was cancelled following the acquisition. NZRPL shareholders who accepted the scrip and cash offer in 1996 have done much better than those who accepted the $1.07 a share cash offer in 1999.

In 1999 the trust was racked by controversy again as many investors took advantage of the disparity between the market price (the units were traded through the Sharemart facility) and the redemption value. As redemptions were taking up to 12 months to complete unit-holders who needed the cash were willing to sell through Sharemart at a big discount to net asset value. Astute investors purchased these units and immediately applied for redemption.

This was untenable as far as the trust was concerned and in October 1999 unit-holders approved an amendment to the trust deed whereby the trust became a closed-ended instead of an open-ended entity (redemptions were abolished and value could only be realised through the sale of units on the unlisted market).

Directors indicated that they would look at listing the trust on the stock exchange and PricewaterhouseCoopers, the independent adviser, stated: "We believe that greater emphasis must be placed on ensuring that investors have the best possible market in which to trade units, and in this regard we believe it may be preferable if the units were listed on the NZSE. We consider that a listing of the units would improve the marketability and therefore the value of the trust's units."

In November 2001 unit-holders were asked to approve the trust's listing on the NZSE but PricewaterhouseCoopers changed tack and recommended that unit-holders reject the proposal because the cost (between $109,000 and $169,000 per annum) was too high.

Williams & Kettle, which owned 12.1 per cent of the units and 100 per cent of the trust's management company, and Sir Selwyn, who owned 34.5 per cent of Williams & Kettle and was chairman of the management company, endorsed PricewaterhouseCoopers' recommendation and the motion was defeated.

The main problem with NZ Rural Property Trust is its huge discount to net asset value (Nav) and Williams & Kettle's refusal to accept that a stock exchange listing or liquidation will bridge this gap. In 2000 the trust traded at a 50 per cent discount to Nav, 48 per cent in 2001 and it is now 44 per cent below Nav.

By comparison Tasman Agriculture's share price traded at a discount between 13 per cent and 38 per cent from 1999 to 2001 but shareholders received full value when its New Zealand farms were sold.

Dairy Brands, another farm property owner, traded at a discount between 16 per cent and 53 per cent in the 1999 to 2001 period but shareholders received full cash value when it was liquidated.

The other issue is that investors have far fewer rights under a non-listed trust structure than a listed limited liability company.

Non-listed entities do not have the same stringent requirements as listed companies regarding related party transactions and other controversial items. Trusts are also not subject to the Takeovers Code.

In the past two years Williams & Kettle has raised its holding in the trust from 12.1 per cent to 32 per cent and is now proposing to put these units and the management contract into a separate company, called Rural Equities Ltd, and distribute shares in this company to Williams & Kettle shareholders.

It is difficult to understand the rationale behind this decision as the market for Rural Equities shares will be limited.

NZ Rural Property Trust should have been liquidated years ago, as were two other rural property owners, Dairy Brands and Tasman Agriculture.

Units have consistently traded well below asset backing and last traded on the unlisted market at $1.26 compared with the June 30 net asset value of $2.26 per unit.

Williams & Kettle is on a fairly good wicket as it received a $1.93 million management fee from the trust in the June 2003 year. This represents 1.9 per cent of the net value of the trust and 3.4 per cent of its market value. The stock and station company also has commercial dealings with the trust's farms.

Williams & Kettle has not totally discounted the prospect of liquidation but claims it is hamstrung by an IRD opinion. The IRD believes that the trust must pay tax on profits realised from the sale of farms because it has sold too many farms to be considered a long-term investor (this might not be an issue if the trust had been liquidated years ago).

Neither Dairy Brands nor Tasman Agriculture paid capital gains tax when they liquidated their farm holdings.

NZ Rural Property Trust argues that it has strong legal opinions that contradict the IRD's assessment and it cannot consider liquidation until this issue is resolved.

This explanation will give little comfort to unit-holders, 1030 of whom are based in Auckland. These unit-holders, most of them elderly, cannot realise full value for their investment and their estates may be forced to sell at depressed levels in the years ahead.

NZ Rural Property Trust's annual meetings are usually lively events and Friday will be no exception. Unit-holders will want to know why their units are selling at such a large discount to Nav and when the directors are going to approve stock exchange listing or liquidation.

* Disclosure of interest: none

* Email Brian Gaynor