Stakes high as property funds buy out managers

Argosy owns the $77.5 million Albany Mega Centre near Westfield Albany. File photo / John Sefton

A $46.5 million cash payout awaits ANZ National Bank if it successfully pushes through management sales of two listed trusts with $1.4 billion worth of real estate assets.

The bank stands to make $32.5 million from selling Argosy Property Management, which runs the listed Argosy Property Trust, and $14 million from selling Vital Healthcare Management, which runs Vital Healthcare Property Trust.

Yesterday, Vital issued a briefing from independent directors Bill Thurston and Graeme Horsley saying any unit holder moves were also likely to need Australian Foreign Investment Review Board approval, due to Melbourne assets.

Professional fund managers said yesterday they liked the idea of aligning owner/investor interests via the sale proposals which will be put to the vote in the next few months. But they said Argosy is far too high at $32.5 million.

"It's all touchy-feely in terms of how they're putting it to the market. But really it's about money and what they're going to make out of it. The bank needs to recoup the lost revenue stream they will forgo for years by selling, but in one hit," an Auckland institutional investor said.

Another sceptic said questions were raised about the true value of independent reports due out soon which one investment specialist said never criticised the deals.

The listed trusts own large portfolios of diversified properties. Argosy has the $77.5 million Albany Mega Centre near Westfield Albany and Vital owns the $19.9 million Greenlane Ascot Central five-level specialist building and the $84.7 million Ascot Hospital.

Shane Solly of Mint Asset Management said changing control in the management companies was only one step in improving governance practices and enhancing return prospects for investors.

Mark Lister, head of private wealth research at Craigs Investment Partners, said clients owned significant stakes in the two businesses, particularly in Vital.

"In principle, we like internal management and are supportive of the property trusts' moving in this direction. External management has generally led to a better outcome for the management company, rather than the unit holders," he said.

"The incentives are misaligned with many of the managers looking to grow their assets under management for the sake of simply getting bigger - because their fees are based on how big they are - rather than with a view to increasing earnings and dividends per share, which is what unit holders want.

"The boards of directors also tend to represent the manager, rather than the trust. We are interested to see how this governance structure will change under a internal management.

"Despite the benefits of internalisation, it is not a foregone conclusion that any proposal will be supported, as the managers are never going to give away that lucrative future income stream for free. Hence the $14 million or $32.5 million that unit holders will get for the privilege of turning their investment into an internally managed vehicle.

"So the unit holders win on the one hand, and lose on the other. One of our jobs will be to decide if the benefits outweigh these costs."

Another fund manager said institutional investors favoured internalisation to external management.

It creates alignment of interests or removes a misalignment of interest between the managers' desire to grow and thereby their fee base, versus unitholders' desire to get a stable and growing, distribution stream, he said.

It also removes fee leakage in terms of base management fees, performance fees, leasing fees, acquisition and disposal fees and it provides operational leverage to investors because the cost of managing a property vehicle does not grow in proportion to its asset base, he said.

Vital's manager's shareholder is OnePath (NZ), wholly owned by ANZ Bank. OnePath is also the shareholder of Argosy's manager.

At December 31 Vital's investment properties were valued at $517.5 million. In November Argosy said its portfolio of 81 properties was worth $946 million. The deals are conditional on unit holders' and trustees' approval.

MANAGEMENT SHAKE-UP

Vital Healthcare Property Trust
* Owns 14 properties worth $500 million+
* Market capitalisation: $326 million
* Trading at $1.12 per unit
* Once called Calan Healthcare Properties Trust
* June 17: Unitholder roadshow invites issued
* July 8-14: Roadshows held around NZ
* August 9: Special meeting, Eden Park
* August 31: Target settlement date

Argosy Property Trust:
* Owns 81 properties worth $900 million+
* Market capitalisation: $422 million
* Trading at 77c per unit
* Formally ING Property Trust
* Timetable: Yet to be released