The new force in property

17:00, Apr 12 2014
Mark Francis, Augusta Capital
HEAVY HITTER: Mark Francis is now the single largest shareholder in listed Augusta Capital.

Augusta Capital's takeover of property syndicator KCL may have cost just $15 million but it will probably be one of this year's biggest property deals.

That's because it has increased the value of the property portfolio Augusta manages from $350m to $1.2 billion.

The deal squarely positions Augusta's managing director Mark Francis as one of the heavy hitters of both the commercial property market and the funds management sector.

The move, finally settled on April 1, may seem audacious but given Francis's track record, should have come as no surprise.

Francis learned the property ropes at the side of his father, property developer and investor Peter Francis who, in his heyday during the 1980s, was regarded as one of the industry's shrewdest dealmakers.

"During university holidays I always worked for dad so that's how I got to understand property, it was entirely through him," Francis said.


It didn't take him long to start showing the same entrepreneurial flair.

Francis initially tried his hand at property development but found it didn't suit him. He thought he'd try his hand at property syndication instead, which involves putting together a group of private investors to buy a commercial property and then managing it on their behalf.

"I just bought a property in Hamilton and ran some ads in The [New Zealand] Herald and decided I was syndicator," he said.

"I had no track record in the game at all, no brand, no anything. And it was a tiny little deal and I only just limped it home and that was the start of it really."

Perhaps the biggest lesson he learned from that first syndication was how difficult it was to attract investors to put money into them.

So he called on some of his father's connections at Bayley's Real Estate to help him out.

"There's an old, long-standing family connection between the Francises and Bayleys which goes back to my father and Mike Bayley's father," Francis said.

"So that was always there. But then in the early days of syndicating I realised it would be quite hard to raise money [from investors] on my own, so that's when I teamed up with them and they became my sell-down agents for the syndicates."

At that stage Francis was operating through his private company Augusta Group, but had ambitions to float the company as a listed property vehicle. He was joined by his brother Chris who had been working as a hedge fund manager in Sydney.

The brothers worked on a deal to acquire a $150m portfolio of commercial properties owned by property developer Jamie Peters, who was facing mounting financial pressure, and in 2006 the portfolio was floated on the NZX as Kermadec Property Fund.

The brothers were again in the news two years later when they spotted an opportunity to buy the freehold land under an upmarket housing complex opposite Auckland's's Victoria Park, in which the individual apartments were owned on leasehold titles.

With the apartment owners ground rent set to increase by around 400 per cent, and the resulting legal challenges that ensued, it wasn't a deal for the faint hearted. But the complex's developer Nigel McKenna was under financial pressure, so the Francis brothers were able to buy the freehold title to the entire complex. They then offered individual apartment owners the opportunity to convert their units from leasehold to freehold titles.

With the alternative being a huge increase in ongoing ground rent payments, it was an offer which most of the apartment owners found hard to refuse.

At that stage the Francis brothers' empire was split between two companies, Kermadec, which was a listed property investment company, and Augusta, their privately owned syndication and property management company. Augusta was also the manager of Kermadec.

In 2012 the two operations were merged, creating a single new listed entity, Augusta Capital.

Last year Chris decided to exit the business, so Mark bought his brother's shares, making him the listed company's largest shareholder with a 17.45 per cent stake.

At March last year, the merged company had its own portfolio of investment properties worth $97m, and managed a separate portfolio of syndicated properties on behalf of outside investors which was worth $212m. The investment portfolio holds four Auckland commercial properties, including the Finance Centre and Brookfields House in the CBD.

But Mark Francis was keen on growing the syndication side of the company and increasing its scale.

"I've always felt that's where our growth should come from - within the funds management side of the business rather than the property ownership side," he said.

Bayleys also had its own syndication operation although it was a relatively small affair. There had been discussions about Augusta buying it but the two companies couldn't agree on price.

Francis was also looking for bigger fish.

"We had discussions with a few but there aren't that many credible players in this space so there was slim pickings in terms of takeover targets for us. But KCL was always the big prize we wanted," he said.

"Their sheer size gave us the opportunity to triple our funds management business, so that was pretty unique."

Discussions started after Francis phoned KCL's managing director and major shareholder Bryce Barnett.

"I heard that they were considering options and talking to various parties so I gave Bryce a call and we went for coffee," Francis said.

Almost immediately, there seems to have been a meeting of minds.

"I'd have to say the process was an enjoyable one, which you can't always say in a deal like this," Francis said.

"We had parties on both sides that were keen to see it happen, so neither side felt they were having their arm twisted."

The scope of the deal was also widened to include Bayleys.

Augusta once again offered to buy Bayleys syndication arm but this time with a sweetener.

While Augusta had long used Bayleys as sales agents for its syndicates, KCL had been using Colliers for much of that work.

Under a new arrangement, Bayleys would become the exclusive sales agents for all new syndications.

And the property management contract for the entire $1.2b portfolio would also be awarded to Bayleys' facilities management division, a move that would almost double that side of Bayleys' business.

That meant the deal stacked up for Bayleys to sell its syndication business to Augusta as well, at the right price.

Francis said he believes there is now plenty of scope to ramp up syndication activity considerably.

"We've only just scratched the surface in terms of how deep investor demand is for managed property. So we are going to look to get well beyond single asset syndicates and we'll look to launch a range of sector specific property funds, either listed or unlisted. We think the appetite for that is significant," he said.

That may lead to some sort of formal trading mechanism being set up for investors who want to exit or buy into existing syndicates.

"It's something we're considering," Francis said.

"The more syndicates that get set up and the more investors there are in them, it becomes more logical that you would see some form of formal trading platform set up for them.

"But at the moment we are finding that our facilitating of resales through our own database is proving effective."

Augusta is also grappling with the issue of whether to remain an active property investor or to sell its directly owned portfolio, and concentrate on the funds management side.

"We've got $100m of real estate of our own. Whether we intend to keep holding that long term is something we are debating at board level, but we certainly see the momentum and growth coming from the funds management side," Francis said.

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