Fund revamps draw criticism

By ANNE GIBSON

Syndicators with nearly $800 million worth of real estate announced fund revamps last week that have received a mixed reaction in the industry.

Auckland's Dominion Funds, which owns property worth nearly $400 million, proposed a deal for investors in eight of its 31 funds.

The funds own two to three properties each and Dominion wants to amalgamate them into a new structure, Dominion Income Property Fund. It intends to roll up other funds later.

Hard on its heels, Wellington's Urbus Properties announced last week that it would buy property from nine syndicates managed by associate Waltus. Urbus intends to apply for Stock Exchange listing before March 31 and provide investors with liquidity and the ability to trade, getting over some of the usual stumbling blocks of syndicated property investment.

But are these changes a good deal for the mainly elderly, retired people investing in these funds?

Dominion is part of Doug Somers-Edgar's Money Managers financial advice business, based in Albany. Its deal involves $128 million worth of real estate, mainly fringe-city office, industrial and retail properties in Auckland, Hamilton, Wellington, Christchurch and Dunedin.

Urbus is the controversial offshoot of the Lower Hutt-based Hodge family's 2000 restructuring of 27 Waltus property-owning syndicates, which were headed for trouble if they did not amalgamate. The $227 million deal drew entrenched investor opposition but was eventually voted through.

The controversy has faded now that the new outfit has been renamed Urbus and had time to grow up a little. After only 20 months, Urbus claims to have exceeded everyone's expectations, reporting a $15.1 million after-tax operating profit for the year to March. On Wednesday, it released a six-monthly result to September 30, showing an unaudited after-tax operating profit of $8.2 million, not including revaluations.

The Urbus roll-up involves $157 million worth of real estate. Chairman Denis Thom said Urbus wanted to buy the property assets of nine Waltus syndicates. It would then own $380 million worth of real estate, a size that would make it worthwhile to seek full listing.

Kiwi Income Property Trust chief Angus McNaughton backed Dominion.

"The proposals are certainly positive for Dominion and their investors, as the larger vehicle should provide greater stability in terms of distributions, greater liquidity and greater sector and geographic diversification."

Others in the industry were more sceptical and criticised the deal but refused to be named, believing that could jeopardise their jobs or clients/investor base.

The critics attacked the setup at Dominion, but were more flattering about Urbus. And they had more questions than answers.

"How did Dominion determine which of the syndicates they were going to amalgamate?" asked one adviser. The answer to that lies partly in lease expiry terms, which average just five years in the buildings the eight syndicates own, providing a certain impetus to the proposed deal.

But the adviser was less than convinced.

"Has it got anything to do with the fact that Money Managers put many of the mums and dads into the original syndicates and will presumably advise the same people to vote in favour of the amalgamation?" he asked.

"If it's good enough for those eight, what about the balance of the syndicates?"

Others were worried about the $950,000 merger costs, lawyers' fees and High Court payments, to be funded from working capital and savings in the eight entities - money which could otherwise perhaps have been distributed to the elderly investors.

"If I was a unit holder, I'd be very concerned if I was being asked to approve something that has a significant monetary value to the property manager while at the same time costing me," said one critic, referring to the management contract structure on the new product.

"Is the management agreement fair? Are the fees fair? The management contract has considerable value to the promoter as it locks in a revenue stream for the duration of the management term, but who is benefiting from the contract and whose interests are being served? Do the unit holders get any benefit from this? Somehow I doubt it."

The directors of the new structure are Dominion chairman Alastair Burkitt and directors Paul Duffy, Doug Somers-Edgar and Richard Lynch. All but Duffy were associated with forming the original eight funds and the critics asked why investors should back these people twice.

Independent directors should be appointed to bring objectivity to the deal and safeguard investors' interests, as a "significant potential for a conflict between the interests of the promoter/manager and unitholders" exists.

Others in the industry criticised the original structure, saying syndication created a dilemma, which Waltus had tried to resolve in 2000 and should have done before now by amalgamating the rest of its investment vehicles.

Waltus was advocating the advantages of scale and risk reduction, yet left some of its syndicates "out in the cold" said one analyst.

Just how investors feel about the deals will become more obvious next month when they vote. Dominion investors meet at 9am on November 7 at Ellerslie. Urbus investors meet at 1pm on November 20 at Wellington's Westpac St James Theatre in Courtenay Place.

Dominion Funds

Urbus