Goodman Property Trust's response to plummeting property valuations was to sell properties to cut debt and maintain its conservative gearing.
It has sold more than $100 million worth of property since March 2008 out of a portfolio valued at $1.5 billion at 30 September 2009, when its gearing was 35.5% — well below its 45% banking covenant and at the bottom end of its 35% to 40% target. That was in stark contrast to its major peers,
Kiwi Income Property Trust and
AMP NZ Office Trust which chose to raise fresh equity instead, $65 million and $201 million respectively.
Analysts attribute the difference in approach to the fact Goodman’s management contract is structured to keep the manager’s interests more in line with its investors’ interests. Kiwi and the AMP’s management contracts are based on a percentage of total assets, which encourages them to increase the size of their portfolios rather than sell assets, although to be fair to Kiwi it has sold two properties worth $38 million in 2009 (its portfolio was valued at $1.83 billion at 30 September).
After an outcry from unit-holders, in October 2009 the AMP trust announced a review of its management fee structure “aimed at enhancing the alignment” between manager and investors’ interests.
Goodman’s manager is paid a base fee of 0.5% of total assets up to $500 million and 0.4% thereafter. It is also entitled to a performance fee based on total returns to investors and relative performance compared to the other listed property vehicles.
While both Goodman and Kiwi have taken steps to diversify their debt to reduce their reliance on bank funding following the tighter credit conditions, their approach has again been very different. Goodman is issuing $150 million of plain vanilla five-year senior bonds whose investors will rank equally with the trust’s banks. By contrast, Kiwi is issuing up to $125 million in five-year mandatory convertible notes, which are unsecured and subordinated to Kiwi’s banks. They will convert to equity on maturity, diluting the interests of existing equity holders.
Reflecting the higher risk, the Kiwi notes will pay 8.95% interest against the 7.75% coupon on the Goodman bonds.
Although investors prefer Goodman’s fee structure, there is still some concern about the potential for conflict of interest between the trust and the wider Australia-based Goodman Group.
That’s particularly on the development front. For example, the trust bought its 50% interest in the Highbrook Business Park in Auckland from the Goodman Group in November 2007 for $97.3 million.
Lance Reynolds at UBS New Zealand has estimated Goodman Group paid about $84 per square metre in June 2004 while the sale price to the trust was at about $225 per square metre. The price increase at least partly reflects the development of services as well as the fact property prices soared through that period.
John Dakin, chief executive of Goodman New Zealand, says in the trust’s early stages it didn’t have the balance sheet to support such large developments and was piggy-backing on the Goodman Group’s larger balance sheet. Dakin says the need for such joint ventures is receding “as the trust becomes far more self-sufficient”.
In August, Goodman Group cut its stake in the trust from 28% to 17%, realising A$72 million from a placement to institutions. First NZ Capital analyst Jason Lindsay says the sell-down was widely expected and the removal of the overhang could be viewed as positive for the stock. Certainly, it had been well known Goodman Group was strapped for cash.
Development of Goodman’s landbank, which Lindsay estimated to be slightly on the high side at 13% of the portfolio at 30 September, is certainly adding value to the portfolio.
The company expects its Ingram Micro development in Wiri, announced in September — the building of a purpose-built 10,355 square metre warehouse and office facility costing an estimated $12.7 million — will provide a 9% initial yield.
Lindsay says yields greater than 9% are achievable for the type of industrial property Goodman builds while his colleague Jeremy Simpson at Forsyth Barr says because of the downwards pressure on building costs, the Ingram Micro yield may be higher than forecast.
Buffy Gill at Goldman Sachs JB Were estimates construction costs have dropped between 10% and 15%. She says the five development projects completed in the six months ended September added $1.2 million in rental revenue for that period and will add about $3.2 million to annual revenue.