DPF delivers healthy gain

'It would need to be a pretty compelling reason for us to consider listing. It's not something we have on the radar right now.' – DPF chief executive Greg Reidy.

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If Direct Property Fund (DPF) was a listed company, its shares would probably be the most expensive stock on the NZX, at around $146 each.

Not that the company is considering such a move, for the time being at least.

DPF is one of those rare beasts, a public unlisted company and last week it announced its dividend for the year would be $10.60 a share, providing those shareholders able to take advantage of its status as a PIE entity with a gross yield of 11.2%.

Until recently, company policy has been to avoid publicity, but it appeared briefly on media radar screens last year when it emerged as the buyer of Fisher & Paykel's main East Tamaki factory site, which it purchased for $53 million under a sale and leaseback arrangement with the whiteware manufacturer.

While it would be going too far to describe DPF as a vulture fund, such deals have been few and far between over the last couple of years and DPF has been one of the few property companies able or willing to undertake significant capital expansion.

After allowing for acquisitions and disposals, the total value of its portfolio increased by 8.5% to $376m in the year to March.

The company was formed in 2003 by its chief executive Greg Reidy and director Malcolm McDougall and three of their associates.

Reidy and McDougall are the major shareholders in property development company McDougall Reidy, formerly Willis Bond (Auckland) and McDougall originally played a prominent role in the establishment and management of NZX-listed Property For Industry.

Since 1999, McDougall Reidy was involved in the development of high-end industrial properties which it onsold, mainly to institutional investors such as Goodman Property Trust. They also developed The Hub shopping centre at Botany Downs in East Auckland.

However Reidy and McDougall also had a hankering to become investor/owners as well as developers.

"The reason for forming DPF was that we would have liked to own some of the property we developed, but the scale of it was too big for us to own by ourselves," Reidy said.

"The concept for DPF was hatched in a fairly modest way around an industrial development we were working on at Albany [on Auckland's North Shore], with a sale and leaseback to Amcor Packaging."

The most common way of bringing in outside investors to such a property would have been to syndicate it, but Reidy said they didn't like the syndication model.

McDougall's experience at Property For Industry had impressed on him the value of spreading risk over a portfolio of properties, so they decided to form a public unlisted company which could grow its asset base.

They were also wary of attempting to raise money from so-called mum and dad investors, but felt it would appeal to colleagues and associates who were already involved in the property game and had a few bob to spare.

"We did some shoulder tapping of some of our commercial friends and we raised $5m and then we invested $2m ourselves," Reidy said.

Shares were issued at a whopping $12,000 each with a minium subscription of $120,000 which kept the mums and dads out.

With the Albany property under their belts, investors were tapped for more funds and the list of shareholders grew to include friends and associates of friends and associates.

A one-hundred-for-one share split last year brought the price down out of the stratosphere, but the shares remain tightly held, with just 428 shareholders owning a company which now has equity of $206m. The average shareholding is worth around $500,000.

DPF's portfolio has grown to include 35 properties, mostly at the top end of the market with about two-thirds of the portfolio made up of industrial properties and the balance in CBD fringe mixed use commercial. It has avoided the CBD office market which has hammered many property investors so badly over the last two years.

Because of the company's size and success in the property market, talk of a potential capital raising and NZX-listing is gaining momentum, but Reidy is cautious on the possibility of opening the door to smaller investors.

"We like the wealthier investors because they usually understand property intimately and a lot [of our shareholders] are commercial property investors themselves. We've said we are a very close surrogate to owning a property yourself and if we were on the sharemarket, we'd be one step removed from that.

"So it would need to be a pretty compelling reason for us to consider listing. It's not something we have on the radar right now," Reidy said.

However, the company's current business model may also need to be reviewed if it was to consider attracting institutional and large numbers of retail investors.

DPF is externally managed and McDougal and Reidy own just under half of the management company.

The management company receives a flat fee based on the total value of the portfolio (0.75% up to $250m, 0.55% on the value between $250m and $500m and 0.45% over $500m). In addition, around a third of the properties in the company's portfolio have been developed by McDougall Reidy, although the process is overseen by independent directors.

While such close relationships with related parties may be acceptable to a relatively small group of tightly knit and financially savvy shareholders, they also bear the hallmarks of some companies in the property and finance sector which have proved disastrous investments for shareholders the last few years. For that reason the company may need to review its working model if it ever decides to seek a wider shareholder base.

- © Fairfax NZ News