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Investors have little ability to influence the manager

The proposal to close the New Zealand Rural Property Trust for five years brings up some interesting issues about managed funds.

Wednesday, September 29th 1999, 12:00AM

by Philip Macalister

Investors in the beleagued $75 million New Zealand Rural Property Trust have finally got information packs detailing future proposals for the fund.

The manager announced 10 months ago that it was planning to close the trust for five years as part of a strategy aimed at bringing it back to ruddy good health. Since then it has been developing those plans which have included presentations to advisers and unitholders.

Also during that time there has been a development which strengthens the manager's hand in the whole matter: that is MDC Investments has become the biggest unitholder, amassing a 10.5 per cent stake in the business by buying units from other investors who wanted out. The significance of MDC's involvement is that, when combined with interests associated with the manager, it is in a position to exert significant control over the trust.

Under the trust deed it requires a 75 per cent majority to make any significant changes to the trust - such as those currently under consideration.

MDC, together with the manager, now have a block of units totalling about 20 per cent that is nearly enough to determine the outcome of any vote.

Currently the manager's ultimate owner Williams and Kettle is the second biggest shareholder with 7.1 per cent of the units, New Zealand Rural Properties (another W&K controlled company) has 1.3 per cent and Williams and Kettle Staff Pension fund has 1.1 per cent.

The major unitholders in the trust have already shown their unity by indicating they would not support plans to provide investors with a better market for their units by listing the trust on the New Zealand Stock Exchange.

One can only assume this major unitholder block approves of the closure plans to be voted on October 5, therefore making it nearly impossible for the other 4700 investors to influence the outcome.

As consultants PricewaterhouseCoopers (PWC) say in its independent report: "Investors in a unit trust are largely reliant on the action of the manager with little ability to influence the manager. A unit trust does not have the same degree of independent governance that exists in more conventional corporate structures."

Fair and reasonable


PWC, in a report commissioned by the trustee, conclude the closure plans are "fair and reasonable", however they have expressed a number of reservations, and said some key elements of the plan were less than ideal. One of its main concerns is that unitholders are being given a lack of options.

PWC says the choice ranges from either maintain the status quo, or towards the other "extreme" which is the manager's proposal. It says the state of the trust and its structure means the status quo is not an option, and it should be closed, however there were other options to consider, such as an orderly wind-up.

An orderly wind-down of the trust is the base case scenario against which any other strategy should be evaluated, it says.

However the major unitholders "do not favour a wind-down of the trust at the present time and that any resolution to this effect is almost certain to be defeated."

Unitholders could expect to receive between 92 and 99c a unit under a wind up, PWC says. This is about halfway between the net asset value of $1.25 (May 31) and the average secondary market price of 64 cents.

PWC also argue strongly that if the trust is closed investors need to be provided with "the best possible market in which to trade units." It says listing on the New Zealand Stock Exchange would be a better option than continuing to use the secondary market.

However, the manager, while indicating "general concurrence" with this view, opposes such a move citing the trust's small size, its lack of distribution history and the fact that the primary sector is out of favour with investors.

"These reasons are all existing circumstances, that affect investors and the value of their unitholding at the present time, whether or not units are listed on the NZSE," PWC says.

Judging the manager's skills
The manager's proposal is aimed at addressing structural problems with the trust, so it can redirect its attention from selling properties to meet redemption requests, to growing the fund and maximising value.

Unitholders have been given an outline of these plans, along with a set of non-binding policy statements that indicate how the manager intends to run the fund in the future.

Perhaps the biggest question to come out of the report is this: assuming the changes are agreed to, will the manager, Williams and Kettle subsidiary New Zealand Rural Property Trust Management, be able to make them work?

The question for investors becomes: Do you have faith in the manager's ability to deliver better results?

While PWC says the strategy appears credible and realistic, "only time will show whether or not it is successfully implemented."
"Evidence from other investment holding companies demonstrates that sound operating performance at the individual asset level does not always translate into incremental value for investors, often because of structural impediments."

It says one of the problems is that most to these types of funds in New Zealand tend to trade at discounts. Currently NZRPT units trade on the secondary market at 64 cents which is a 50per cent discount on NAV. PWC says this is significantly higher than that primary sector averages and significantly above the property sector averages (see table).

COMPANY

Capital-isation

Premium/

(discount)

Evergreen

63.1

(34.2)

Opio

8.2

(64.5)

Nuhaka

21.2

(43.8)

Dairy Brands

16.6

(27.7)

Grocorp

9.5

28.6

Tasman Agriculture

104.7

(34.1)

NZ Rural Properties

16.6

(15.2)

Simple average

 

(37.3)

Weighted average

 

(31.8)

PROPERTY TRUSTS

   

AMP Office

235.0

(2.1)

Kiwi Income Property

321.9

(10.0)

National Property

33.5

(4.9)

Newmarket Property

37.6

(24.0)

Property for Industry

132.1

(8.6)

Shortland

194.3

(26.1)

St Lukes

289.4

29.5

Trans Tasman Properties

126.8

(56.8)

Simple average

 

(12.9)

Weighted average

 

(7.0)

NZRPT

75

(50)*

* based on secondary market prices

While PWC say the proposed structure is not dissimilar to a number of other investment vehicles it is very different from the basis upon which the NZRPT was established and organised.

"Unitholders who approve the closure must appreciate that they are giving up a significant right, albeit one which has proved impractical and problematic."

Management fees
Related to the future of the trust is the management fee. This is seen as being of vital importance in this case as the manager is asking for a quid pro quo with investors. In exchange for unitholders relinquishing their redemption rights, the manager will take a lesser "performance related" fee.

Currently the manager is paid a cash fee equal to 2 per cent of the fund's gross value for its services. It proposes to split that into two components: cash and units issued at NAV.

The total fee is still based on the size of the fund and declines at various threshold levels.

PWC's analysis of the proposal and comparison with other property holding investment vehicles show that the fee is relatively high, even taking into account the relative size of the trust and the geographic spread of assets, and the changes make only small changes in the fee's monetary value.

PWC's other concern is that the "performance related component" does not efficiently align the manager's incentives and rewards with the interests of unitholders.

The fee still remains closely tied to the fund's size, rather than to its performance. This is a real issue for unitholders considering the recent poor performance of the trust and its decline in value.

"Our preference for a restructured management fee would involve linking a material component of the manager's remuneration to a measure of increased unitholder value, rather than the entire fee being tied to the size of the trust's asset base. Ideally, under such an arrangement the performance component of the manager's fee should only become payable where unitholders received a total return (income plus capital appreciation) that reflects a rate of return exceeding the appropriate cost of capital measure."

A number of other positive changes are also being proposed including holding annual meetings, and improving some corporate governance issues.

Unitholders will get to vote on the changes at a meeting in Wellington on October 5.

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