NPT bristles at biggest shareholder's opposition to Kiwi Property deal

The Majestic Centre in Wellington is one of the properties at the centre of the deal. Photo / File

NPT has gone on the offensive in trying to undermine opposition to a proposed deal with Kiwi Property Group by its biggest shareholder, Salt Funds Management.

NPT shareholders will this month vote on a deal to buy two buildings from Kiwi Property for $230 million, raising $93.9m to partially fund the deal and issuing shares, giving Kiwi Property a 19.99 per cent stake at 61 cents apiece. The larger property investor would also buy NPT's management contract for $6m.

Salt Funds principal Matthew Goodson has come out opposing the deal, calling it an "unacceptable transfer of value from NPT shareholders to KPG", of which the fund manager also holds a stake. At issue is the changing market conditions that have seen NPT's decline in share price since the deal first emerged in December, while the price being paid for the Wellington properties has stayed the same. NPT shares were trading at 65 cents when the Kiwi Property deal was announced, but have since dropped to 59 cents.

"It makes no sense to buy physical assets at 100 cents in the dollar yet issue equity at 78 cents in the dollar, that's just silly, no property investor would do that," he said. "Kiwi are then proposing to buy back into NPT at what will be a very significant discount of at least 20 per cent - in effect, they're receiving quite a premium for their properties."

NPT has pushed back against Salt Funds' assertions, saying they were at odds with independent advice and the qualified support for the deal from major shareholders including Salt Funds. In a table of responses to Goodson's second open letter, NPT says the initial 68 cents price assumed in December was to provide a comparison against a rival bid by Augusta Capital which has since been withdrawn, and that the lower offer price reflected the lower price of $48m Kiwi Property would pay for the stake compared to the $53m price tag initially mooted.

What's more, NPT says the $230m price for the buildings is $5.8m below the $235.8m valuation as at December 31, including Kiwi Property's commitment to bring a car park at the North City Plaza in Porirua up to standard and some more work on the Majestic Tower office block in downtown Wellington, which makes up the difference on nominal terms.

Kiwi Property's March 31 assessment for the properties puts a value of $119.4m on Majestic Tower and $110.5m on North City Plaza. The Wellington office block has undergone major earthquake strengthening in recent years, with Kiwi Property spending $84m on the upgrades. That's seen Majestic Tower's value rise from $61.3m in March 2013, whereas North City Plaza has increased at a more modest pace from $99.5m.

NPT responded to Goodson's criticism over the lower earnings-per-share gain of 9 per cent from the deal, saying that was down to the lower share price which would mean more shares would need to be issued to raise $93.9m of equity, which would be sold at 58 cents apiece.

"The only thing that has changed materially since the KPG proposal was discussed with Salt is the proposed rights issue price - initially assumed at $0.68 per share to be consistent with the assumption in the Augusta proposal, even though all parties openly acknowledged that the actual rights issue would be lower than that," NPT said. "All market participants would expect the rights price to be at a discount to the market."

Salt Funds has owned 16.9 per cent of NPT since June 24, 2016, and is the property investor's biggest shareholder.

NPT has been the worst performer among the listed property investors, with the shares falling 6.3 per cent so far this year, followed by Investore Property, which was down 3.7 per cent. Kiwi Property has fared better, up 1.8 per cent so far this year, although still behind the S&P/NZX All Index's 4.1 per cent gain since the start of 2017.

Goodson says the decline in NPT's share price implies the issue price of 58 cents is "far too optimistic" and will lead to even more shares needing to be issued, further diluting the earnings per share growth.

"The proposal's been brought forward at the wrong time and they're just trying to push something through for the sake of doing something," he said. "If NPT's board was strongly aligned with shareholders, they just wouldn't consider this."

Goodson said his strong preference is for NPT to externalise its management contract to bring down the cost of managing the assets and "carry out intelligent acquisitions and investments in property so the market begins to re-rate it". The second best option would be to sell off the assets and return capital to investors, while the third best outcome is the Kiwi deal, he said.

"Hopefully we'll see a proposal that makes sense," he said.

While Augusta, which owns 9.6 per cent of NPT, withdrew its rival plan for NPT, the firm will still put forward resolutions to dump NPT's board and install its own directors at the special meeting.

Goodson said Salt Funds currently intends to vote in favour of installing a new board, although that could change.