By Jenny Ruth
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Thursday 23rd March 2006 |
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Sharechat: Can you explain what was exactly was happening when apparently two different ING units were interested in Calan?
Andrew Evans, managing director of ING Property Trust Management: A little bit of background: the ING group is one of the world's largest wealth managers with over a trillion New Zealand dollars in assets under management and staff in 50 countries and each of those business units operate quite autonomously from each other, especially when they're in a business sector they're competing in. As I understand it, ING Real Estate Australia had been in discussions with Calan Healthcare Properties for some time in respect of a transaction involving the Australian assets. ING Real Estate Aussie had signed a strict confidentiality agreement which meant that they couldn't advise us or let us know they were in discussions with Calan. The first time we found out was after we made our market stand in January. ING Australia got a partial release from their confidentiality agreement to advise us that they were in discussions. The Chinese walls do work because we're in competition with them. It definitely caught us by surprise, very much unawares. What it does signal very clearly to the market is that the Chinese walls do work. When there are two competing businesses, they do compete on an equal footing.
SC: Did they decide to withdraw?
AE: When we made our announcement, they withdrew and I don't know the reasons why. We weren't allowed to have discussions with them. They made their own judgement.
SC: What was wrong with Ferrier Hodgson's valuation of Calan?
AE: For us, their valuation has no connection to reality. I know I've used some pretty strong words in the past, but other parties totally independent of ING Property Trust, including analysts, have offered a similar view to ours. There are a number of factual errors in Ferrier's valuation and also some of the data used is historic and this has distorted some comparisons they've used. Ferrier's report didn't provide any yield analysis which is a key measure for investors when investing in real estate entities. Also, they did make the comment that their assessment of value is very sensitive to the weighted average cost of capital (WACC) but they didn't provide any supporting evidence as to how they arrived at their WACC or any sensitivity around the WACC they adopted. The overall result of those issues is a value which fails to take into account a number of material factors and over-states the value of Calan by a significant margin. I would add that market activity subsequent to the Ferrier report and our withdrawal of our offer seemed to support the view that Ferrier's valuation was a bit fanciful, which is a real shame for unitholders.
SC:Is the ING management company having to pay more for the Calan management rights than if the takeover bid had been successful?
AE: We just have to be a little bit precise here about exactly the two interests that are involved. We see this as being two separate transactions by two separate parties. The purchase of management control was by ING New Zealand and the Symphony Group and the takeover offer was made by ING Property Trust. ING and Symphony had to calculate what they thought was the worth of the Calan contract and negotiate that with the owners of the Calan contract. With the separate transaction, ING Property Trust had to assess the value of the Calan units based on all the usual criteria - the quality of the assets, the quality of the earnings, distributions, futur5e growth prospects, amongst other things as well as recognition that there's a management contract in place. In the trust's opinion, the value of the units was $1.25.
SC: Is ING paying more than the one year's payment that would have been needed to terminate the Calan management contract?
AE: You're correct, it was more than a 12 months termination payment - we are subject to a confidentiality agreement. But that in itself doesn't mean that ING Property Trust could offer to pay more for the Calan units.
SC: Is a further takeover bid for Calan likely and would it be along the same lines as the Urbus takeover?
AE: When ING Property Trust made its market stand it stated it thought there were benefits for all the Calan unitholders to be in a larger, broader trust. ING Property Trust still believes that's the case. However, any merger of the two would have to be at a price that's realistic. ING Property Trust wasn't prepared to has the price up as was suggested in Ferrier's report so we withdrew. The trust has taken its strategic holding of 10%. It still likes the assets. It still likes the quality of the earnings derived from them. It still likes the idea of diversifying the risk across a wider portfolio. It wouldn't agree to pay a price that isn't accretive for unitholders. There are no plans. The directors have said they're happy with their 10% strategic holding in Calan and that's where it's at.
SC: Calan's independent directors emphasised its specialist management capability. What is happening to the Calan management team?
AE: If you look at ING Property Trust, they operate across a variety of sectors including industrial, retail and commercial with over 350 tenants, each of which has their own specific occupancy and operating requirements. The management team at ING are extremely skilled at managing properties and working with tenants to meet their occupancy requirements. It's acknowledged that healthcare properties aren't in ING's portfolio, but the philosophy of looking after your tenants to meet their needs doesn't change. I'm very comfortable that ING has the skills and expertise to manage the Calan portfolio. Where we need additional resources or skill sets to assist us in the management of the portfolio, we will look to bring in additional people but also draw on the resources and expertise that lies within the broader ING group. As to the Calan management team, we've had preliminary discussions with them.
SC: Is it possible some Calan people will come across to ING?
AE: We're in preliminary discussions and time will tell but we wouldn't be discussing it if it wasn't.
SC: What's holding up the unit purchase plan? How willing do you think unitholders will be to participate? Do you intend to buy out those with smaller holdings?
AE:It has been a long time. The unit purchase plan is currently with the regulators for review. We expect it will be imminent in coming through that process, at which time we will be able to announce the terms of the unit purchase plan. This is an attractive opportunity for existing investors to increase their holdings in the trust. We would also point out that when the placement was done at the end of last year it was over-subscribed by institutional investors. We're pleased to be able to offer retail investors the opportunity to participate in a similar manner to the institutions. There's been no announcement in regard to small parcels but we do note that participating in the unit purchase plan means investors will be able to increase their holding in the trust at an attractive price.
SC: Why did you decide on the changes to the governance practices? Was there pressure from unitholders?
AE: No, we were under no pressure at all from our investors to make any changes. Clearly, the board had been aware through the media and the various announcements of the Kiwi situation, but the board had been looking at this for some time. While our key focus is driving value for unitholders, and whatever we do that will remain our focus, we are aware of the issues raised publicly about unitholder rights. Even though our unitholders are supportive, we didn't want to be complacent and therefore decided to take a leadership position. That leadership position, we believe, will set a benchmark for other trusts in terms of their governance.
SC: What do you think of criticism that the changes don't go far enough to eliminate potential conflicts of interest between the management company and those of unitholders?
AE: I would say that rather than looking at the corporate structure, whether it be a company or a trust, it's the integrity, the expertise and the conduct of the directors that's of far greater importance. I would add that if the directors have their own agenda, irrespective of whether it's a corporate company structure or a trust structure, they will pursue that agenda. I think the trust structure is appropraite for real estate investment over the longer term. Unitholders have the in-built protections cast in stone through the trust deed. A manager can't come in and unilaterally change the investment criteria, what the trust invests in or debt levels without unitholders' approval. I believe this preserves the integrity of investments for investors. What they first purchase is what it will be over the long term.
SC: Why is the trust still buying properties worth less than $10 million? (The Porirua industrial building)
AE: As a general rule, the trust's strategy is to acquire assets with a value above $10 million. However, for strategic reasons or other reasons, if it's good for our unitholders, if it's value accretive, we will look at assets less than $10 million. The specific asset is adjoining an existing asset. We could see some further long-term value add by acquiring a building that's directly adjacent to an existing asset. Whilst we've got a policy in place, it's not so rigid that we wouldn't do something if it's for the benefit of our unitholders.
SC: How many properties are still earmarked for divestment and what is the progress on selling them?
AE: We've got a total of 19 properties earmarked for disposal and three of those are subject to unconditional sale contracts. The book value of those properties on the disposal list is around $68 million and typically these are the smaller assets that don't fit the long term goals of the trust. A number of these properties have some value re-engineering to be completed before they're sold and so we're not in any great haste to put them out to the market. We will take a far more controlled approach and determine when optimum value has been achieved and then look to dispose of the property at that time.
SC: Does the trust have set criteria governing asset purchases, re-developments and disposals? (Yield targets etc)
AE: The investment policy in last year's annual report which effectively sets the ground rules for acquiring assets is to invest primarily in a diversified portfolio of good quality, well-tenanted properties and to actively seek to grow the income of the trust through active management of the existing portfolio as well as acquisitions. Effectively, the criteria must be that they're income earning and that they fit within the definition of good quality, however that might be defined. The trust can also invest in bare land up to 5% of assets.
SC: Given the ING trust's origins, do you have many disgruntled unitholders left?
AE: It's hard to know. I speak to our client services people who answer the phones and they haven't had any calls for a long time. If there are disgruntled unitholders out there, they're not calling us.
SC: How involved is Symphony in the trust's affairs these days?
AE: Exactly how it works is that Symphony is a 50% shareholder in ING Property Trust Management Ltd which is the manager of the ING Property Trust. ING is responsible for effectively the property management and the administration of ING Property Trust, doing all it's financial accounts, dealing with the trustee, dealing with the regulators and dealing with our unitholders. Symphony's role is to work with ING on the strategic direction and growth, acquisitions and disposals. Effectively, ING puts its corporate arms around the property trust and runs it. we have the expertise in running property vehicles and we both work on the broader strategic direction.
SC: How sensitive to an economic and property market downturn is the trust, particularly as regards those properties earmarked for sale?
AE: The properties that we've earmarked for disposal are small value assets and there's no limit to the amount of liquidity in the market at the current time. We've got two properties of the three I mentioned before that are under contract that we just recently had a marketing campaign (for) and we've been very, very pleased with the results. The significant buyer depth still remains in the market, despite the increases in the OCR. There's still this huge appetite for investment in real estate. The ING Property Trust portfolio itself has a huge amount of breadth and depth with over 100 buildings and 350 tenants so it's a very defensively positioned portfolio. Our largest single exposure accounts for only 3.9% of our total rent roll. Even that is one tenant in four different locations with four different lease expiry dates. Our single largest tenant only accounts for 2.6% of the total rent roll of the portfolio. That's a strong illustration of the very defensive characteristics of the trust.
SC: Are you looking to growth the trust further? What would be its optimum size?
AE: Growth isn't what we focus on. What we focus on is accretion to unitholder wealth. If there are opportunities out there, we will continue to pursue those if they're in the best interests of unitholders.
SC: But isn't ING looking to grow assets under management?
AE: That's correct. That's how we're rewarded and that's probably part of the conflict everybody talks about. If we were only concerned with growing assets under management we wouldn't look at an optimal portfolio and we wouldn't have sold $126 million worth of property over the last 18 months. Our actions actually belie the statement that all we want to do is grow assets under management. We're active managers and we actively review the portfolio on a very regular basis. If a property doesn't fit our long-term goal or it's just a mature asset, we have no hesitation in moving it on.
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