KEY POINTS:
It is pretty easy - on first blush - to write off the float of the Kermadec Property Fund. But a closer look at the vehicle launched this week and led by Mark Francis, son of the multimillionaire ex-Force and Chase Corp executive Peter Francis, makes for a much harder decision.
The company looks "top of the market". It is the sort of offering one would expect after the hubris created by a property market that has for several years enjoyed a robust economy and a boom in Government spending.
The float comes at a time when the listed sector is short on opportunity. And it is not a portfolio of properties that appeals to the most bankable of tenants - the banks, big accountancy firms and multinationals. The properties are less than pretty and are not situated in trophy locations.
Moreover, the portfolio is not cohesive. It comprises a carpark, an office tower in central Auckland, a couple of warehouses and office blocks on the fringe of the CBD, West Auckland, the outskirts of Manukau.
In short, these are high-maintenance properties with less-than-secure returns.
Portfolio manager, Francis' Augusta Group, named after the US master's golf tournament, has yet to establish its profile.
The nightmare for investors is a version of the following: Kermadec spends up large on a property tenanted by companies likely to walk as soon as the economic squeeze comes. Or perhaps its ambitions for an empire frustrate investor hopes for decent dividends and capital growth.
Now these risks certainly exist. But there are several mitigating factors.
For a start the float price nods its head to the downside. The $1 subscription offers a yield of 8.65 per cent - a figure at the top end of the property sector. And the proceeds will be used to buy properties at a near 4 per cent discount to their independently-assessed value.
Augusta does not have a high profile and Francis, 32, is a whippersnapper compared with the grandees of New Zealand's listed property sector. But this youth could also be an asset. He exudes an entrepreneurial drive and an ambition to see how far he can go.
His company, Augusta, has already arranged $50 million of property syndicates and discontent with its performance is not obvious. Francis notes that 80 per cent of investors who are part of his syndicates have pre-registered for the Kermadec float.
Fortunes are often made from such humble beginnings and Francis says he has every ambition to boost returns and the quality of the portfolio. Although the second tier is right for Kermadec now, Francis says it will go for the A-grade if it sees an opportunity.
He is also not alone. Kermadec is to be chaired by Peter Wilson, a director on Westpac's New Zealand and Australian boards as well as a director of the Colonial Motor Company. The third member of the board, aside from Francis, is former Capital Properties chief executive Nick Weevers.
These are men less susceptible to precipitate action.
The company also has right of first refusal over all non-residential properties developed by Augusta and its associate Starline Group, a vehicle run by Jamie Peters, a relative of Foreign Minister Winston Peters.
An uncharitable reading of this arrangement is that it gives Starline and Augusta a guaranteed outlet for their less attractive developments. But even those concerns should be dismissed.
Francis says the right is mandatory for the developer's majority-owned non-residential properties over $5 million. And Kermadec's decision to buy the properties is entirely at Weevers and Wilson's discretion. Francis will propose any acquisitions to the board and then will step aside.
In a market that suffers from a shortage of opportunities, the potential of this agreement cannot be discounted.
Kermadec's governance is among the best in the sector. It is a company, as opposed to a listed property trust. Shareholders' interests are represented by an independent board, rather than an overworked and underpaid trustee.
The management contract offers some protection against growth for growth's sake. Augusta gets 0.25 per cent of the gross value of the company for the first year of the management agreement and then 0.55 per cent thereafter.
Its performance fee, however, will not kick in until shareholders get total returns (share price growth plus dividends) of more than 10 per cent a year. Augusta's performance fee is capped once shareholder returns reach 15 per cent.
Francis also insists that shareholders' stake in the company will not be eroded by a deluge of new equity issues. Certainly Kermadec will grow by issuing stock and may pay for acquisitions with scrip, but it has a preference for rights issues, which offer some protection against dilution.
Lastly, the quality of the portfolio, should not be underestimated.
The risks of Brookfield House and the other central Auckland office building on the corner of Cook and Nelson Sts need to be carefully weighed. But the others in the portfolio have some attractive tenants. The West Auckland building, for example, although a monument to architectural disaster, houses the Department of Courts. One of the industrial properties is purpose-built for tenant Alto Plastics, while the property in Palmerston North is leased by Coca-Cola.
Perhaps the last word rests with professional investors. In New Zealand this is a small pool made up of six to eight players of any consequence. On many floats they quickly reach a consensus. In the case of Kermadec this has not emerged.
Such disagreement points to an opportunity - and risk.
