Merger of property firms offers profit lift

A proposed $1.6 million NZX-listed real estate business would make more profit than two separate businesses, an analyst says.

Stephen Ridgewell of Macquarie Securities (NZ) predicted higher returns from DNZ Property Fund's hostile takeover of Argosy Property Trust.

"We estimate that the combination of the DNZ and Argosy portfolios will add $1.6 million to $2.4 million to annual post-tax earnings for the combined entities," Ridgewell said.

DNZ, chaired by Tim Storey with Paul Duffy as chief executive, has 50 properties and Argosy, headed by Peter Mence, has 81, so the new business would have 131 properties.

A combined vehicle would be the second-largest NZX real estate entity in New Zealand, with an equity value of nearly $900 million, Ridgewell said.

The profit rise would come from tax gains of about $2 million, increased scale and liquidity which, he predicted, would make the vehicle more relevant to institutional investors here and overseas.

"Increased scale would also, in our view, enhance the vehicle's ability to fund value-adding initiatives in such as the mooted Johnsonville shopping centre redevelopment in Wellington," he said.

Argosy unit-holders would end up with 57 to 60 per cent of the new business on which he put a 12-month price target of $1.35 a unit.

Auckland investor Jon Olsen, whose family interests hold about 780,000 Argosy units, questioned ANZ National Bank-owned OnePath's proposal to sell investors Argosy's management contract to unit-holders for $32.5 million, a deal proposed before DNZ's takeover deal bid.

Olsen wanted to investigate the proposal but questioned whether the same people now managing the trust would remain in place.

"We have a property investment company and we have our own buildings as well as managing others.

"Four years ago, we thought instead of having all our own properties, we would invest in a trust which appears to be doing well, take the strain off our administration here and sit back and watch what happens.

"So, we bought into Argosy for 90c and units went up to $1.50 to $1.60 but now they are down a lot.

"This investment does not compare favourably with our own properties, which is interesting.

"Yes, property values have dropped in the last two years but none of our properties have come back below what we bought them for," Olsen said.

First NZ Capital analyst Jason Lindsay said DNZ and Argosy held "remarkably similar" properties and could be a nice fit.

"Depending on whether the proposed $32.5 million internalisation proceeds or unit-holders of Argosy vote to dismiss the manager for a somewhat lesser 'poison pill' fee of around $12 million, in some ways this is not a concern for DNZ and will be decided by Argosy investors with the benefits of a lower fee being reflected in a higher NTA and therefore more of a share in DNZ on merger," Lindsay said.

"A merged entity will have a higher index weighting - it would roughly be the same size as AMP NZ Office which is within the NZX15 - and would likely have more liquidity."

First NZ is advising Argosy, trading at 83c and Goldman is advising DNZ, trading at $1.31.