Salt Funds urges NPT shareholders to reject offer

The Majestic Centre is one of two Wellington properties at the centre of the deal. Photo / Mark Mitchell

Salt Funds Management has urged NPT shareholders to vote against an offer from Kiwi Property Group that would see Kiwi take over its management contract, sell it two Wellington properties and end up with a cornerstone stake.

Next month, shareholders will vote whether to back the deal, which would see Kiwi Property sell the North City Shopping Centre in Porirua and Majestic Centre in downtown Wellington to NPT for cash and shares worth $230 million, with NPT raising $100m of new equity as well as a $50m issue to Kiwi Property for a 19.9 per cent stake to help fund the deal. Kiwi Property would pay $6m for the management contract of the enlarged portfolio, which it would more than recoup within three years of collecting fees of about 0.5 per cent of assets under management, reaping an annual $2.1m.

NPT would fund the acquisition by borrowing $87m and by making a pro-rata entitlement offer of new shares to eligible NPT shareholders to raise approximately $94m. In materials explaining the Kiwi Property offer, the board based its forecasts on a one-for-one rights issue at 58 cents per share. The shares last traded at 60 cents.

In a letter to NPT directors and shareholders, Salt Funds managing director Matthew Goodson said the deal "represents an unacceptable transfer of value from NPT shareholders to KPG" and the fund manager, which is a substantial shareholder of both NPT and Kiwi Property, is strongly opposed to the deal and urges all shareholders to vote against it.

Salt Funds has owned 16.9 per cent of NPT since June 24, 2016, and held 5.3 per cent of Kiwi Property as of January 16 this year.

"After sharply underperforming its NZ property peers in recent years, NPT is now proposing a 1/1 raising at a deep discount to NPT's net tangible assets," Goodson said. "Many retail shareholders will not be able to afford to participate and will, therefore, be heavily diluted by Kiwi Property Group and other new investors at this deep discount."

Goodson said NPT had net tangible assets of 73.77 cents per share as of September 30, compared to the mooted rights issue price of 58 cents.

"What property investor would buy assets at 100 cents in the dollar yet issue equity at 78 cents in the dollar?" Goodson said. "Kiwi Property Group is selling its properties at net tangible assets as at December 31, 2016. However, they intend to purchase 19.9 per cent of NPT (over half of which will be those very assets), at a massive 20 per cent discount, based on the current NPT price. In effect, Kiwi Property Group is receiving well over fair value for its assets."

The fund manager said NPT has struggled due to internal management of a sub-scale property portfolio, with costs far too high meaning dividend yield had been too low.

"Almost any deal that grows scale would be strongly accretive," he said. "However, this proposed deal is only 7 per cent accretive to forecast dividends per share despite the payment of $6m for the management rights, a lower expense ratio over a larger portfolio and an increase in cheap debt. This is an unacceptably low level of dividend accretion relative to what should be achievable."

Goodson also said that the deal should require approval from at least 75 per cent of shareholders at it was an extraordinary transaction, not an ordinary resolution requiring just 50 per cent approval, and this was a "most disappointing approach in the modern era of New Zealand corporate governance."

The deal will cost a "remarkable" $4.4m in the "unlikely event" it proceeds, he said, while querying why directors will incur $1.5m in costs if the deal fails given "the very high risk of non-completion."