Arrow's $4.5m of share would help NPT's plans

Friday 30th March 2001

By Chris Hutching

National Property Trust unitholders will today vote whether to give the go-ahead for a takeover of Christchurch shopping centre owner Southway Properties.

If the deal goes ahead it will result in Eastgate Shopping Centre becoming the flagship asset in the trust's portfolio.

To help fund a redevelopment plan for Eastgate while ensuring National Property Trust remains within trust deed debt-equity ratios, construction company Arrow International would help fund the revamp by subscribing for 4.5 million convertible preference units at $1 each.

Arrow director Bob Foster said it was fairly common for construction and development companies to fund projects for a client.

A report by accountancy firm Grant Samuel says the dilutionary effect of the shares issued to Arrow will depend on market conditions prevailing at the time of conversion in March 2004.

Grant Samuel says the bid of 10 National Property Trust units for 11 Southway shares is fair to Southway's 89 shareholders and offers an opportunity for growth and increased earnings as part of National Property Trust.

Southway's shareholders met on Wednesday to approve the merger-takeover, which will give them 29.5% of shares in the merged entity.

The liquidation costs relating to Southway, including termination payments, are forecast at $1 million with National Property Trust's transaction costs of $300,000. Southway's corporate overheads of $1.2 million a year will be reduced after the merger.

In return for the additional responsibilities it will carry, the National Property Trust management company, headed by executive chairman Paul Dallimore, will enjoy a near doubling in fees income of $300,000 a year in addition to the $443,000 paid in the year to May 2000.

The manager has agreed to waive any performance fee arising from the increased asset base but in return will not suffer any loss from future devaluation of assets.

Since 1998, Southway's annualised pre-tax return per share has been between 5%-6%, contrasting with National Property Trust's yields of 10% except for last year when it fell to 9.3 cents a unit because the trust issued more units to redevelop Birmingham Dr industrial site and to buy NZI Hse in Christchurch.

Grant Samuel values Southway at between $12-$14 million.

Southway owns Eastgate, valued at around $20.5 million, and Hornby Shopping Centre, valued within a similar range.

Southway's liabilities to WestpacTrust total $21.9 million, representing a high gearing ratio at 58% compared with National Property Trust's 41%.

National Property Trust's plan is to sell Hornby and redevelop the Eastgate centre.

The anchor tenant at Eastgate, The Warehouse, has already taken an option to build a bigger store.

Other liabilities are related to head leases held by Southway.

While there appear to be benefits for Southway unitholders the advantages for National Property Trust unitholders are less spectacular.

Grant Samuel is forecasting an eventual rise in yields to around 10.5%.

However, during the development phase the returns are forecast to be about 9.5%.

Additional trading liquidity is expected to narrow the discounted unit price compared to net asset backing of 91c.

The discount is 8.6% but in May 2000 was at a high of 23%.

This week the units were trading at 84c, reflecting the market's view of the merger.

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