Kiwi Income Property may need to sell assets or raise equity to exit management contract

Friday 2nd August 2013

Kiwi Income Property Trust may need to sell assets or raise equity to reduce its debt gearing should a proposal to bring its management inhouse go ahead, according to Craigs Investment Partners research analyst Chris Byrne.

The Trust, managed by a company owned by Commonwealth Bank of Australia, may have to pay the bank A$66 million or NZ$75 million to exit the contract and take management inhouse, according to a report in the Australian Financial Review.

A payment of $60 million to $75 million to internalize the contract would increase Kiwi Income Property's gearing to 35-36 percent from 33 percent at March 31, Byrne said in a research note.

"While not onerous, Kiwi Income Property's covenant is less than 40 percent and it has capex requirements," Byrne said. "This is too close to its covenant and hence Kiwi Income Property may need to divest assets or raise equity in the short term."

Commonwealth Bank plans to exit its property management business by proposing that its three listed property funds set up their own management teams. Exiting its CFS Retail Property Trust Group, Commonwealth Property Office Fund and Kiwi Income Property Trust would make CBA the last major Australian bank to exit its property arm.

Bringing management inhouse is a "good outcome" for unitholders because it better aligns the interests of managers and unitholders, so long as it is at the right price, Byrne said.

External managers have been criticised in the past for expanding property portfolios to boost their fees, rather than enhance returns to unitholders. Argosy Property Trust, DNZ Property Fund and AMP Office Trust have brought management inhouse in recent years.

Commonwealth Bank, which owned 91.8 million units in Kiwi Income Property Trust at March 31, will probably look to divest its units in line with its strategy of exiting the listed property sector, Byrne said. Should Kiwi Income Property Trust seek to raise further equity to help fund the management payout, this would increase the potential supply of units, he said.

The bank's proposal was still in its infancy and a committee has been set up to consider it, Mark Ford, chairman of Kiwi Income Property's management company, told the annual meeting of unitholders last month.

Kiwi Income Property's units increased 0.9 percent to $1.15, and have fallen 0.9 percent so far this year.

BusinessDesk.co.nz

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