Capital Properties defends its ground

Takeover target Capital Properties has hit back hard at predator AMP Property Portfolio, taking issue with predictions of falling returns and inflated real estate valuations.

On Friday, Capital chairman Tony Frankham fired off a letter to Portfolio general manager Stephen Costley for raising fears about the company's prospects.

He also reiterated earlier advice to reject AMP's $1.42 offer.

This was just before Costley told the market he had increased his offer to $1.48 and secured Kiwi Income Property Trust's 19.23 per cent stake in Capital, giving him 36 per cent of the company.

On October 21, Costley wrote a six-page open letter to Capital shareholders about his then $1.42 offer, criticising information released about the company and questioning its long-term prospects.

Costley raised issues about Capital's risks on two large Wellington developments, which were "not committed, costed, consented or funded"; asked questions about how the company was valued; predicted the share price would slump without the takeover offer; and said the company was highly geared. He also issued the decision to extend the term of the offer, after reading media statements from Frankham that more forecasts might be released to the market.

Frankham's response yesterday noted the divergence of opinion in the investment community about revenue and earnings by 2008 but reassured investors dividends would only rise.

Analysts are divided about whether Capital's shareholders should move by November 16 to take up the AMP offer.

ABN-Amro says hold because the offer is too low, as does Macquarie.

Citigroup says sell because the price is right.

UBS agrees, saying the price is above valuation. "The independent directors are concerned to correct any misinformation in the market about a 'revenue hole' for Capital Properties," Frankham wrote. "The independent directors consider that those analysts whose projections support the continuity of the level of the 2007 dividend throughout into 2008 are making a reasonable assessment."

He reiterated statements in the Deloitte independent advisers' report, which found next year's dividend would rise to 10cps and to 11cps by 2007.

He also backed property valuations by Colliers International, Jones Lang LaSalle and CB Richard Ellis, saying these firms were among the most respected in the industry.

Valuations released last month showed Capital's real estate was worth nearly $43 million more than six months ago.

But Costley said at the time he found those numbers difficult to swallow.

Costley had also questioned the Deloitte report, but Frankham said that firm was well-placed to independently assess the fair value of the company's shares. He also defended Deloitte's methodology of assessing the company's worth using a discounted cashflow method, which he said was appropriate because it took into account medium to long-term earnings growth prospects and not just those for the next one or two years.

Frankham said Capital was not highly geared and required no further equity capital. Its share price had out-performed the market but only because of increased earnings potential and rising property values.