Brian Gaynor: Motion carried but investors' point made

Angus McNaughton was a relieved man after Kiwi Income Property Trust's extraordinary general meeting.

The proposal to raise the trust's borrowing capacity from 35 per cent to 40 per cent of gross assets, which required a 75 per cent majority, was passed by 249.6 million (80.4 per cent) to 61.0 million votes.

The positive outcome was achieved after McNaughton, who is chief executive of Kiwi's management company, had undertaken a media blitz and made a number of meaningful concessions to unit holders.

McNaughton contacted this column on Thursday, January 20, to say he was making an important announcement the following day and would like to meet to discuss the content.

He said the announcement was partly in response to criticism in this column regarding the payment of a management fee on its 19.9 per cent Capital Properties stake and the non-alignment of unit holder and management company interests.

He indicated he would like Saturday's column to cover the announcement but this could not be done because of a prior commitment. A meeting was arranged for last Wednesday.

On Friday, January 21, Kiwi announced that its management company would waive the Capital Properties fee and review the fee structure (the trust's annual management fee is 0.85 per cent of gross assets up to $750 million and 0.65 per cent after that).

After the announcement McNaughton called the Business Herald to reiterate that the Capital Properties fee was not justified and the proposed restructuring of the management fee was a major development.

He reported he had spoken to a number of institutional investors and they were happy about the management fee review and would vote in favour of the increased borrowing at the extraordinary meeting.

McNaughton said it would be an internal review although there would be input from external sources including key institutional shareholders.

Later that day Shane Solly, a senior investment manager at ING, told the Business Herald that he supported the increased borrowing limit (ING is Kiwi's largest unit holder with 67.9 million units or 9.6 per cent of the trust).

He stated that the corporate governance of large New Zealand listed property stocks was generally good and "ING's due diligence process ensures that manager interests are aligned with the interests of ING's investors".

The last comment is difficult to agree with because management fees in New Zealand are based on total gross assets whereas investors are more interested in dividends and unit price performances.

Solly's comments were unusual because ING rarely takes a public stance on shareholder issues although it is a major player in the listed property sector as an investor in fund management operations. The financial institution has a 50 per cent interest in ING Property Trust and Urbus Properties' management companies and its fund management operation controls over 75 per cent of ING Property Trust, 8.0 per cent of Urbus Properties and 9.6 per cent of Kiwi Income Property Trust.

On Wednesday (January 26) McNaughton had a one-on-one discussion with this columnist.

He was upbeat about the performance of the trust and the prospects for the big Sylvia Park development in South Auckland. He admitted he should have waived the management fee on the 19.9 per cent Capital Properties stake as soon as the purchase was completed and the notice of the extraordinary general meeting should have been more detailed.

McNaughton couldn't be specific about the management fee review as the terms of reference hadn't been decided and the board hadn't discussed it.

He gave the clear impression that a quick decision had been made regarding the Capital Properties fee and management fee review to secure institutional votes at Thursday's meeting (the arrival of proxies representing more than 50 million votes against the motion would have stirred the management company into action).

At the extraordinary general meeting a number of shareholders argued that they invested in Kiwi as a low-risk property trust and did not want it to take on more debt, particularly now..

Simon Botherway of Brook Asset Management asked the directors to issue a statement outlining the development risks at Sylvia Park.

The directors believed that 40.8 million shares held by Commonwealth Bank of Australia's life insurance and fund management operations could vote in favour of the motion even though the CBA group owned the management company and would receive additional fees if the extra borrowings were used to buy assets.

This raises an important issue regarding the potential conflict of interest when organisations with fund management activities own property management companies.

The corporate body usually owns the management company while shares or units in the listed entity, which are controlled by the fund management or life insurance divisions on behalf of outside investors, can be used to protect the interests of the management company.

If the fund management arm of the organisation that owns the management company has a large shareholding and has unrestricted voting rights then the management contract is entrenched.

Sean Wareing, the new Sydney-based chairman of Kiwi's management company, made a commitment to the meeting that an outside party would undertake the management fee review although he wouldn't confirm that this review would be made public.

Geoff McWilliam, one of CBA's top property executives in Australia, told the meeting that the interests of management companies and investors had been aligned in Australia and this was one of the objectives of Kiwi's upcoming review.

After the meeting McWilliam confirmed that property trusts in Australia had moved to a combination of fixed and performance fees to align the interests of management companies and investors. He gave an example of CBA's CFS Gandel Retail Trust that has a fixed fee of 0.45 per cent of gross assets and a performance fee based on a percentage of the excess return over a gross sharemarket index (unit price plus dividends).

A 0.45 per cent fixed fee would reduce Kiwi's management fee by more than $3 million, excluding the performance component.

Kiwi could move to this fee structure although McWilliam smiled and suggested that the external review may recommend a higher fixed fee.

Kiwi's extraordinary meeting was an important victory for institutional and individual investors even though the motion was carried.

The arrival of a large block of negative proxy votes forced the management company into giving some meaningful concessions because a 75 per cent majority was required. A turnout of 310 million votes or 44 per cent of the capital was high for an extraordinary meeting held in January on a relatively unimportant issue.

But the fundamental problem regarding listed property vehicles - the widespread use of external management companies, and their potential conflicts of interest - still has to be addressed.

One of the problems is that financial institutions with interests in management companies, fund management and life insurance have potential conflicts of interest.

Shane Solly and ING have demonstrated in relation to Kiwi Income Property Trust's extraordinary meeting that financial institutions may be more interested in maintaining the status quo than supporting overdue reforms that would enhance unit holder wealth.

Disclosure of interest: Brian Gaynor is an executive director of Milford Asset Management.