Jenny Ruth: Taming the beast

St Laurence Property & Finance (SLPF) is a rather ugly and complicated beast but that reflects its origins and its management intends to simplify it over time.

The company was used last year as a vehicle to improve the lot of investors in 12 St Laurence syndicates.

While money from "mum-and-dad" type investors poured into property syndicates through the 1990s, by the end of the decade a downturn in the commercial property market showed just how flawed and inappropriate to its risk-averse investors the syndication structure was.

Typically, the unlisted syndicates owned only a few buildings, often just one. When the downturn hit, capital values started dropping dramatically and many syndicated buildings proved to be "over-rented", tenants were paying rents above market levels, inevitably leading to tumbling values as the leases neared expiry, not to mention falling rentals when leases were renewed.

The outcome was inevitable: instead of the steady, reliable income streams the mums and dads thought they had bought, payouts were slashed or cut altogether and redemptions suspended.

Former syndicator Waltus was the first to come up with a solution: tip all its syndicates into a single publicly traded company, Urbus, which is now in the process of being taken over by ING Property Trust Holdings.

While that at least provided investors with liquidity, the trouble with its solution was that the fortunes of its syndicates varied dramatically. While the value of some buildings collapsed to less than half their original value, others, notably the Albany Power Centre, improved in value. Naturally, the investors in the better-performing syndicates didn't want exposure to the poorer properties.

A number of investors had wanted to stay with their original investment but after most of the syndicates gained 75 per cent votes in favour and, despite a messy court battle, the merger was forced through.

St Laurence avoided the acrimony the Waltus scheme generated by making its scheme voluntary. If its investors wanted to stay put, they could. In the event, an average of 86 per cent of its investors across the 12 syndicates accepted the merger proposal.

SLPF was an existing vehicle set up in 2000 as an active property investor, developer and financier.

A major incentive for the syndicate investors included that St Laurence had $5.25 million of its own funds already invested in SLPF, which would rank behind the mandatory convertible notes in SLPF they were offered. They were also offered the notes at a 10 per cent premium to net-asset backing.

The notes convert to ordinary shares in December 2008 when they will account for 94 per cent of the company's equity but, in the meantime, carry a 9 per cent annual interest payment. And St Laurence can't pay itself dividends greater than that 9 per cent level in the meantime so the syndicate investors will share in any equity gains.

St Laurence is also committed to listing SLPF once the notes convert - the present bond issue will be listed on the NZDX, St Laurence's first involvement with the exchange. The former syndicate investors stake could be diluted if St Laurence decides to exercise 20 million options at $1.15 each - the notes were issued at $1.

As the prospectus for its up-to-$70-million bond offer shows, this has left the company with 12 subsidiaries which aren't fully owned. SLPF's stakes range from 74.4 per cent of Strategic Omega to as much as 93.6 per cent of Aorangi Property Fund.

St Laurence chairman Kevin Podmore said that with hindsight, quite a few of those who didn't accept the merger proposal now wish they had. "One of the things we will be looking to do in the new year is to make another offer to sign up those syndicators," he says.

The merger transformed SLPF's balance sheet. The total group's equity at September 30 last year jumped to 24.5 per cent of total assets from just 3.7 per cent a year earlier while the "borrowing" group, which excludes the former syndicates, saw its equity jump from 8.7 per cent of total assets to 31.5 per cent. The trust deed prevents it from returning to such a highly geared state.

The former syndicates' assets don't directly back the bonds to be issued, but the size of SLPF's stakes gives it effective control over them. The book value of the formerly syndicated properties is $139.1 million and, at September 30, $53.8 million in mortgage funding was secured over these assets.

The bonds will rank behind only prior charges which totalled $14.8 million at September 30 compared with the borrowing group's $58.2 million in net equity and $184.6 million in total assets. In September 2003, SLPF's largest loan accounted for between 90 per cent and 99 per cent of equity but, a year later, its largest loan was only 11 per cent of equity.

The reason for the bond issue is to further de-risk SLPF. Part of the proceeds will be used to repay $16 million of its debentures which mature this year and to gain longer-term funding - the bonds are for a five-year term while its debenture terms typically range from two to four years. At September 30, it had $84.5 million debentures on issue but repaid $6 million that matured in October.

SLPF's lending is at the riskier end of the spectrum as can be seen in the fact that its average interest rate on its $63 million loan portfolio at September 30 was 14.2 per cent. It specialises in lending to property developers. However, the average loan term was less than 12 months.

In short, SLPF is borrowing longer to lend short which will help lower its risk factors.

But SLPF isn't just a finance company. It also owns and manages a number of properties, including those formerly owned by the syndicates and also participates in property development directly through joint ventures. It owns 30 per cent of Elrond Holdings, which owns and runs retirement homes and hospitals and dabbles in property-related equities. It owns stakes in the National Property Trust and Sir Selwyn Cushing's Rural Equities, which owns 41 per cent of New Zealand Rural Property Trust.

As Podmore says: "We act in a fairly opportunistic way to try to take advantage of opportunities as they occur."

With Rural Equites, SLPF paid an average of about $1.70 a share for its 15 per cent stake compared with the $2.60 net asset backing. While there could be a problem in realising that net asset backing, Podmore is content to sit on the stake. "We believe our interests are alligned with Sir Selwyn's," he says.

Grosvenor Financial Services Group hasn't rated the bond issue but it rates SLPF's existing debentures G6, based on the accounts to March 2004. That means: "Ability to meet current obligations dependent upon favourable economic and/or business conditions, concerns about security over the longer term."

The bond issue isn't being underwritten but lead manager First NZ Capital has an incentive in that it will receive 0.5 per cent in fees for the first $20 million raised and 1.5 per cent for anything above that.

St Laurence Property & Finance

Chairman: Kevin Podmore.
Size of bond issue: up to $70 million.
Maturity date: July 15, 2010.
Interest rate: either fixed at 9.25 per cent or floating at 2.25 percentage points over the 90-day bank bill rate.
Results: the group made a $3.37 million net profit in the six months ended September last year, up from a $1.19 million profit in the same six months a year earlier.
Total assets: $255 million.
Total equity: $62.4 million.
SLPF was formed in 2000 to actively invest in property, property-related securities and property development and to finance property developments by other parties.