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The relaunched Augusta Property Fund was always going to be an inferior offer because the coronavirus crisis tanked the planned purchase of one of its two properties.
Instead of a $152.8 million fund owning a big-box retail centre in Albany and a medical centre in Hamilton, the offer is going ahead with just the medical centre and the fund's estimated set-up costs, including equity and borrowings, will total $58.5 million.
The equity component that investors are being invited to pay will be $35.5 million as opposed to the originally planned $90 million.
Augusta had already raised most of the money sought for the original offer, launched in February, but had to return it in late March because the crisis had changed conditions so drastically.
The shopping centre couldn't function at that point because of the nation's lockdown and nobody knew then how long the lockdown would last.
Mark Francis, chief executive of the manager, Augusta Capital, is expecting many of those same investors will want in on the replacement offer.
But this offer isn't underwritten – the manager and two other companies had underwritten the first.
The fund will suffer from the same problems that apply to most such syndicates, including a lack of diversity in the underlying asset and it being an easy product to buy into, but much more difficult to sell out of.
Selling will be dependent on the fund's ability to redeem units or the ability of the manager to match buyers and sellers.
Past experience has shown that can be well-nigh impossible, particularly at times like this when properties values are falling – the medical centre was valued at $55.2 million at June 30, down from the previous $56.7 million valuation prepared in November. The fund is paying $55 million.
The product disclosure statement plainly states that Augusta's ability to attract new investors will heavily influence the availability of redemptions.
"If the fund does not make a continuous offer following this PDS, redemptions will likely not be available."
But investors may well be lured in by the prospect of higher interest rates than the very low returns bank term deposits currently offer – well below 2 percent, even for five years.
The Augusta fund is pitching a pre-tax annual return of 6 percent.
That interest rate is one of the few aspects of the relaunched fund that have improved – previously, the estimated pre-tax annual dividend was a still handsome 5.75 percent.
As with the earlier offer, that interest will be paid monthly and must look particularly juicy to retirees casting about for better returns than the banks offer, while at the same time protecting their nest-eggs.
The "safe as houses" cliche seems to lure generation after generation of mum-and-dad investors into such property-based investment vehicles, just as soon as the memory of the last go-round fades.
Anybody remember Waltus and Dominion Funds which went sour in the early 2000s?
In both cases, the managers created a swag of mostly single-property syndicates over a number of years that went bad for various reasons, including losing tenants, over-paying for properties and being too indebted.
Eventually, each of the two groups of syndicates were rolled into single entities and listed on NZX to provide sufficient liquidity for existing investors to sell out, albeit at whopping discounts to their original investments.
These entities formed the basis of what are now NZX-listed companies Stride and Argosy.
As I've written before, scratch the scab of just about any corporate scam in New Zealand or Australia over the last three decades or more and there's a good chance property is at the bottom of it.
I'm not suggesting any illegality here, but it's curious how often the investors, typically the most vulnerable and least savvy, often called mums-and-dads, end up short-changed while the managers collect fat fees.
In the Augusta case, notwithstanding the setback the covid crisis caused, the manager still has ambitions to grow and diversify the fund through future property purchases and other measures including development.
In theory at least, each property it adds should reduce risk, so long as it doesn't load too much debt into the fund.
And it does start with a degree of diversity in that the Anglesea Medical Centre has 28 tenants – many syndicates rely on a single tenant.
The medical centre's largest tenant, Pathology Associates, will account for about 13.5 percent of expected rents in the year ending March 2022 and the top three tenants will account for about 30.4 percent.
There are the three main buildings on the 12,573 square-metre site, other smaller buildings and 375 car parks.
The manager has noted the relative low site cover of about 30 percent and its flexible zoning permitting a broad range of potential uses and building heights.
"Both of these points bode well for potential refurbishment and reconfiguration opportunities," the PDS said.
Francis acknowledged that the experience of investors in products such as the Waltus and Dominion funds has given syndication a bad reputation. But he said times have changed due to the advent of the Financial Markets Conduct Act 2013 and the new regulator, the Financial Markets Authority.
These days, syndicators have to be licensed and Augusta Capital is, he said.
"Those days are long gone when it was easy to syndicate … the bar has been lifted."
The fact that Augusta Capital is listed on NZX does mean that the manager, if not its syndicates, comes under greater scrutiny.
With the takeover offer from ASX-listed Centuria Capital going unconditional and having passed 76 percent, the company may not remain NZX-listed for much longer.
Francis said there remains a loophole in the law that allows some syndicators to continue operating without a licence.
Rather than classing their investment vehicles as "managed investment schemes," as Augusta does, such operators class their vehicles as companies.
"We operate in a much higher threshold of quality control. It's frustrating to have to watch others that are not at that same level. Structure shouldn't matter.
"That seems to cut right across everything the FMA is trying to achieve," Francis said.
Queenstown-based Mitchell Mackersy and Auckland-based Maat Consulting are examples of firms offering and managing mostly single-property investments – and mostly with single tenants – that are structured as companies, rather than as managed funds.
But the FMA clearly doesn't regard that as a loophole.
"An investment company can legitimately be used as an alternative collective investment structure in place of a MIS," an FMA spokesperson said.
Both structures have disclosure and financial reporting obligations under the act and, for example, are subject to fair dealing requirements, including that offer documents and advertising can't be misleading or deceptive, he said.
"The FMA has previously clarified that certain property investment companies will be designated as MIS if shareholders in the company have reduced powers and the manager of the investment property is 'entrenched,'" he said.
That's when the manager is entrenched to such a degree that it is "impossible or impractical to terminate" the management contract, the spokesman said.
"If the FMA has concerns, or becomes aware of concerns, regarding a property investment offer, including the way the investment is portrayed in advertising, we may raise this with the business directly or take the appropriate regulatory action."
That's not to say investors in the Augusta fund won't be able to remove the manager, although that would come with considerable sting.
The PDS outlined that if investors do vote to remove the manager, the fund will have to pay "a fee equal to 30 percent of the aggregate fees paid to the manager by the fund in the preceding five years before termination."
The fund's trust deed said the manager can be removed either by the supervisor, Covenant Trustee Services, or a vote of investors on a special resolution – that requires 75 percent of units owned by those voting to be voted in favour for the resolution for it to succeed, and the trust deed said the quorum required is owners of at least 25 percent of units.
(BusinessDesk)
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