$53m F&P lease-back may be a record

(from left) Greg Goldfinch of Colliers, Brett Butterworth of F&P, Andrew Hooper of Colliers and Greg Reidy of Direct Property Fund. Photo / Supplied

Colliers International is claiming to have negotiated "the biggest single industrial asset transaction in New Zealand's history" with Fisher & Paykel Appliances having announced a deal with Direct Property Fund to sell and lease back its head office and manufacturing facility in East Tamaki.

The agreement involves the unconditional sale and lease-back of part of the Fisher & Paykel Appliance campus, covering 14.4ha and more than 62,000sq m of office and manufacturing facilities. According to Greg Reidy, managing director of Direct Property Fund, it is partly thanks to the recent economic environment that the opportunity was identified.

Reidy says that in late 2008 and early 2009 Direct Property Fund undertook a strategic review of its business and the property sector which revealed three factors. "Firstly, we noted the absence of our traditional competitors as purchasers in the market place. Secondly, we noted the increasing availability of high quality properties for sale. Thirdly, interest rates were at an all-time low.

"This presented an attractive opportunity for our company to invest further in additional properties which would ultimately enhance our dividend yields, while further diversifying our risks. Accordingly, we made the decision to raise new capital to enable us to take advantage of the current market and improve cash flow for shareholders."

Reidy sees the transaction as a defining moment for the property fund. "The downturn is proving to be a good time to buy. We believe that the current economic environment will provide further opportunities to acquire properties from willing vendors, offering the opportunity for solid returns. We are getting a look at acquisitions that may not have existed before."

The fund was formed in November 2003, and is now coming up on its sixth anniversary. Described by Reidy as "a very simple property owning company", the unlisted fund has grown strategically, with its shareholders generally New Zealand-based.

"We are unlisted and intend to remain so for the time being," says Reidy. "We take great care to manage our capital base, providing our shareholders with as close a surrogate to direct property ownership as possible. The performance of the fund is simply directly linked to the performance of the property portfolio."

As at March 31, Direct Property Fund had assets of $341 million, of which 80 per cent are industrial and 20 per cent are "city fringe" commercial.

The group owns 37 commercial properties, with the portfolio 100 per cent occupied and a weighted average lease term of 6.6 years. Now including Fisher & Paykel Appliances, assets total $383 million with an average weighted lease term of 7.6 years.

The company has funded its growth via regular pro rata rights issues to shareholders and intermittent placements. Reidy says that investors in Direct Property Fund include people who have looked at investing directly in commercial property, but have found that their funds will only extend to one, or possibly two properties. "They are also people who have considered an investment in property via the sharemarket but feel that an investment in a listed property company, whilst providing some property exposure, is not a pure-play property investment," he says.

Fisher & Paykel Appliances says it put its global headquarters at East Tamaki on the market as part of a planned global strategy to release capital tied up in properties. "We always planned to release cash for the establishment of our factories overseas and product development," says Brett Butterworth, vice-president of corporate planning, for Fisher & Paykel Appliances which appointed Colliers International brokers Greg Goldfinch and Andrew Hooper to manage the process.

Goldfinch says Colliers and Fisher & Paykel Appliances have been working together since 2006 when the agency managed the $10 million sale of the whiteware giant's Springs Rd distribution centre followed by the $6 million sale and lease-back of the product and machinery plant at 1 Ross Reid Place.

Subsequently, Colliers managed the October 2008 sale of 43,000sq m of East Tamaki land owned by the company and the $21.4 million sale of the company's Dunedin facility to Fonterra in November 2008. Colliers then found and placed Fisher & Paykel Appliances into its new call centre in Dunedin earlier this year.

"We have progressively helped Fisher & Paykel Appliances with property matters, to the point that we are now effectively their specialist property advisers," he says. "We started work on this latest project over a year ago, looking at the potential to sell individual titles versus a group parcel for the Springs Rd site. We decided that the whole parcel approach was the most logical from a sales perspective, with all the titles in one line."

Fisher & Paykel Appliances then placed five separate industrial buildings on its 14.4ha site up for sale as a package of properties. The campus is Fisher & Paykel Appliances' biggest manufacturing plant in terms of staff comprising 900 employees.

The buildings house Fisher & Paykel Appliances head office, product development team, customer care call centre, refrigeration manufacturing, sheeting, recycling plant and spare parts operation. The recycling plant recycles appliances from around the North Island. The main office building houses management and senior executives, global IT, HR, procurement, finance and accounting, the main cafeteria as well as refrigeration manufacturing.

Goldfinch says the property was one of the first manufacturing plants set up at East Tamaki in the 1970s. "It is a classic owner-occupier property and Fisher & Paykel Appliances is renowned for erecting high quality buildings, maintaining them and establishing attractive grounds for employees."

Goldfinch explains that the sales process required establishing lease structures to enable the lease-back portion of the deal to come to life. "The structure evolved since the first discussions, but this has been manageable as both the vendor and the purchaser had a high degree of trust and faith in each other throughout the process.

"From day one, both parties were very upfront with each other about their positions, which created an instant trust and bond and led Fisher & Paykel Appliances to have faith that Direct Property would raise the required capital and complete the transaction. "The fact that Fisher & Paykel Appliances was happy to deal exclusively with Direct Property for a long period also reinforced this."

Reidy says that from the beginning Direct Property could see solid value in the transaction, pointing out the favourable impacts to its shareholders. "Our prospectus highlighted that the acquisition would see our portfolio weighted average lease term increase from 6.6 to 7.6 years, and the purchase yield of 9 per cent would compare favourably to our portfolio valuation yield of 8.08 per cent."

On September 9 the part of the site comprising Fisher & Paykel Appliances' refrigeration manufacturing facility, head office and the former laundry manufacturing building was sold unconditionally for $53 million with an October settlement date.

A payment of $49.25 million will be paid on the settlement date, with the balance of $3.75 million payable within six months.

To fund the deal, Direct Property raised $17 million via a rights issue and placements, according to Reidy. The fund also sold two properties in Auckland and Christchurch worth a combined $15.9 million to generate further capital, on the basis that the assets would be replaced with a stronger one.

A further $21 million is required to complete the purchase of the remaining three buildings. "Our company has emerged with this transaction," says Reidy. "We are probably no longer under the radar, and are now one of the few buyers of large industrial property out there at present."

Hooper says Colliers International has noticed companies are no longer so preoccupied with owning real estate and would rather focus on investing in their core business.