KEY POINTS:
One of New Zealand's largest capital-raising exercises this year has drawn fire for its risks, as unit-holders in listed industrial real estate fund Goodman Property Trust prepare to express their opinions about a radical shakeup of their investment entity.
Jason Lindsay, research analyst at First NZ Capital in Wellington, issued a report criticising many aspects of the trust's expansion and major overhaul.
The trust's unit-holders are due to meet in Auckland on November 30 to vote on aspects of the expansion.
Last Monday, the trust said it would raise $275 million in capital, starting with a two-day book-build to set the market price for the new shares. The money was needed to buy New Zealand property from an Australian associated party, the trust said, and to repay debt.
The capital-raising would push the property trust into the top 10 entities on the NZX 10 index with a market capitalisation of $1.3 billion
The trust has already raised $229 million, leaving only $46 million open for the public offer from tomorrow.
In a report issued last week, called "Bigger, but at what cost?" Lindsay said the deal would change the risk profile of the trust markedly, from an investor to a developer.
The trust's profile had been "creeping towards a more risky vehicle over the past few years, but this transaction increases the development component to well over 10 per cent and closer to 20 per cent if you included commenced developments."
The deal would also increase the number of speculative buildings being developed by the trust which already had a large amount of work, including projects at Greenlane, Penrose and now Highbrook, he wrote.
The transaction proposed to change the trust's incentive fee-structure because the manager wanted to be rewarded for making returns above his peers.
"We never like to see an increase in fees," he wrote, although Goodman's fees were more desirable than many others in the sector.
The transaction could create a perception that Goodman Group - which owns a 28 per cent stake in the trust and controls its management company - was "taking some money off the table" at the peak of the economic cycle, he said.
Anecdotal evidence had suggested capitalisation rates may have bottomed out, which might make it attractive for the ASX-listed stapled security Goodman Group to reduce its direct exposure to the trust.
Lindsay also questioned whether cornerstone shareholders Goodman Group and the Fisher Trust were long-term security holders in the New Zealand trust and said the transaction could dilute earnings.
The trusts unit-holder meeting, at the Langham Hotel, will vote on the Highbrook acquisition because of its related party nature. Investors will also be asked to vote on changes to the trust's performance fee and Goodman Group's involvement as an underwriter.
Lindsay approved of some aspects of the deal.
"We like the following: increased exposure to Highbrook, ability to share in developments margins, no acquisition fees on the transaction, improved liquidity and likely NZX10 index inclusion, solid rental growth forecasts and potentially the final significant capital raising," he wrote.
He did not make a strong recommendation that investors take part in the deal.
"We believe the investment case - relative to the sector - stacks up, but only at the bottom end of the range," he concluded.
John Dakin, chief executive officer of the trust's management, said five out of six analysts had written "overwhelmingly positive" reports, and Lindsay was a lone dissenter, and some aspects of his criticism did not make sense.
"He likes some parts of the deal, like the increased exposure to Highbrook, yet he doesn't like development risk. You don't have one without the other," Dakin said.
The criticism about Goodman Group's role was made with every deal but was completely unfair, he said. The transaction would have only a neutral effect next year but increase net earnings by 2 per cent in 2009, Dakin said.
THE DEAL
Goodman Property Trust wants to:
* Become the country's largest listed property trust.
* Buy a 50 per cent interest in the Highbrook property.
* Raise capital for other new developments.
* Cut gearing ratio from 37 per cent to 31 per cent.
* Lower the hurdle for management fees.
