Richard Inder: Property battle packed with complications

Kiwi Income Property Trust looks to be on the back foot in its battle with AMP for control of government landlord Capital Properties.

AMP, which acquired a 15.7 per cent stake in Capital this year, set the pace on Thursday, when it offered $1.42 a share for the entire company, a bid which values Capital's equity at $343 million.

The move comes at an inopportune time for Kiwi, which acquired its cornerstone 19.4 per cent stake late last year. For a start, Kiwi's manager, Kiwi Income Properties, is still embroiled in disputes with Kiwi investors.

The first was over Kiwi's planned $538 million Sylvia Park development in Auckland. Investors claimed Kiwi was taking on too much risk and getting an insufficient return.

Under pressure, Kiwi's manager has waived fees on the project until it produced a 7.5 per return. The project management fee was also cut to the lesser of 3 per cent or total costs. Meanwhile, the manager has also faced criticism over the fees for Kiwi's investment in Capital.

A group of investors led by activist fund manager Brook Asset Management has now obtained sufficient shareholder support to hold a special general meeting in November to discuss the management of Kiwi and Sylvia Park.

With such discontent bubbling, Kiwi's manager will be reluctant to add fuel to an already volatile situation by engaging in a contested takeover battle for Capital.

Secondly, it is not clear Kiwi has the firepower. Kiwi has committed $363 million to the first stage of Sylvia Park.

That leaves it with an ability to raise around another $150 million in debt - well short of the $343 million needed to match AMP's takeover offer. It could issue more shares. But as the existing ones are trading at $1.15, below its March net asset backing of $1.27 a share, an issue would result in a wealth transfer to new investors.

It could make up the balance by bidding for Capital with another entity, perhaps with Colonial First State Property, owner of Kiwi's manager.

But such a move adds another level of complexity to an already complicated situation.

It is not clear that a move by Kiwi on Capital even makes sense. Kiwi's gross yield on its units is 7.4 per cent, well ahead of the 7 per cent yield implied by AMP's takeover offer of $1.42 share.

A higher bid will result in even lower returns.

Kiwi could make an investment case by hawking Capital's development opportunities, the tight Wellington property market, the cost savings that come through managing a larger portfolio and the growth of the government sector, the portfolio's principal tenant.

But once again, that story will not go down well with Kiwi's many investors, who believe that the Sylvia Park development is quite enough for the moment.

AMP has none of these concerns.

Its offer is 4 per cent higher than the highest price at which Capital's shares have ever traded and it is almost 40 per cent higher than the share price before it and Kiwi joined the share register.

Capital's share price, now at around $1.41, also seems to indicate broad investor support for AMP's bid.

Certainly with two major investors on the share register, the chances of another bidder entering the fray look slim.

AMP is making the acquisition through a property subsidiary AMP Property Portfolio, which faces none of the investor difficulties Kiwi faces. Finally, AMP Property Portfolio, has a large war chest. Its investment rules allow it to raise its gearing to 50 per cent and yet it is still well below that level.

Still, setting aside the possibility of Kiwi making a counter offer, it has some strong cards to play and could yet decide to bargain for a higher price.

The stakes combined would take AMP within cooee of the 50 per cent it needs to cement its position. Mopping up the largely retail base after this acquisition would be relatively easy.

It will have already valued Capital. However, as it will need the support of other investors to press its case, it will first wait to see the independent appraisal of the offer, which is due out later this month.

Meanwhile, it is also sitting on a $12 million paper profit on its stake in Capital.

A graceful exit may soothe some investor discontent, even if it fails to answer criticisms of its initial tilt at the Wellington company.