Jenny Ruth: ING puts work into earnings

The mum and dad type of investors in the original Waltus property syndicates who stayed on for the ride through their various permutations have ended up in a far more comfortable place than I would have predicted back in the late 1990s.

Back then, a downturn in the commercial property market showed just how flawed and inappropriate to its risk-averse investors the syndication structure was. And how particularly unsuited they were to their risk-averse and unsophisticated investors.

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 and vacancies when leases came up for renewal.

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.

Waltus, then controlled by the Hodge family, 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.

Then in mid-2004, the Hodge family sold their rights to manage Urbus to a joint venture between ING and the Symphony Group, which managed the listed ING Property Trust, formerly Paramount Property Trust.

A little over a year later, the ING trust completed its scrip takeover of Urbus.

It bought into Paramount's management company in August 2003 and, later that year, folded 71 properties valued at $282.7 million into Paramount from two superannuation funds ING managed. The trust paid for the properties with $100.7 million in cash and 182 new units in the trust.

ING Property Trust Management managing director Andrew Evans, who has worked for ING for some eight years, said his company had been thinking of establishing a listed property trust, in keeping with ING's practice globally, for some time.

While it could have achieved that through a float of the properties already under its management, Evans said the trustees of the MFL and SIL superannuation funds didn't want to go that route. But they were keen to offload their direct property holdings and free up cash to invest elsewhere.

"They wanted the ability to grow and leverage up the returns of the direct property assets. They didn't have any debt, and clearly most listed companies have debt to enhance returns at a sensible level," he says.

An ability to grow the property portfolio and liquidity were also major issues for the funds, which selling the properties into the trust solved.

ING assumed practical management, administration, financial reporting and corporate governance responsibilities relating to the trust.

Evans says that doesn't mean Symphony is just a passive shareholder in the management company but is involved at the strategic level and in sourcing appropriate properties for the trust to buy.

When the trust first listed, it was granted the first right of refusal over Symphony's future developments and the right to some of the development profits if it buys any properties, but has no requirement to accept any such properties. That right continues and ING is also working on developing similar relationships with other developers.

Since it became involved, ING has been active in managing the portfolio now totalling 96 properties valued at $809.7 million at September 30.

The annual report shows that ING sold 34 properties for $92.6 million between December 2003 and March 31 this year, all but one at greater than book value, testimony to the buoyant property market. Those properties sold were the smaller, lesser quality buildings in the portfolio with little growth prospects. It had also bought three buildings for a total of $64.4 million in the same period.

Evans says the bottom line requirement for any acquisition is that it enhance earnings per unit.

After gaining control of Urbus, ING identified another 15 properties that it didn't want the trust to keep. By the time it reported the trust's first-half results last month, four of these had been sold for $24.1 million, an average 17.8 per cent above book value. The other 11 properties have a $42.8 million book value.

ING has also been active on the redevelopment front and in ensuring a high level of leasing. At September 30, its buildings were 99 per cent leased with a weighted average lease term of 4.9 years.

Another reason for the former Waltus investors to feel comfortable in ING's hands is the way it dealt with the Urbus management contract.

While the terms of that contract were more generous than that of the ING trusts, clearly it would have been unnecessarily complex administratively to continue operating the combined trust under two separate management contracts.

ING offered the trust a deal to cancel the Urbus contract for a one-off payment of $13 million. Independent expert Grant Samuel valued that contract at $15.5 million.

The share price performance since the Urbus takeover should also be cause for satisfaction.

The Urbus shareholders received 0.98 ING units for every Urbus unit they held. At the current $1.18 unit price, their units are worth $1.156, 18 per cent more.

The original Paramount investors ought to be relaxed too: their annualised return to September 30 has been 15.5 per cent.


Who, what, where

* ING Property Trust headquarters: Auckland.
* Profile: The trust owns a diverse portfolio of 96 commercial, industrial and retail properties, 73 per cent located in Auckland and the rest elsewhere in the North Island.
* Market capitalisation: $619.6 million.
* Latest results: The trust reported a 29 per cent rise to $14.3 million in first-half net profit.
* Management: ING Property Trust Management, headed by Andrew Evans.
* Major shareholder: The ING-managed MFL superannuation fund is the largest single shareholder with 32.3 per cent.