DNZ to put pressure on rivals

Fund managers say DNZ Property Fund's decision to bring its management in house ahead of a sharemarket listing will put pressure on rival listed property trusts to follow suit.

DNZ confirmed yesterday it would seek up to $140 million from new and existing shareholders as part of a sharemarket listing. Owner of 50 percent of Wellington's Johnsonville Shopping Centre, DNZ's 82 cents per share offer opens on Monday with NZX trading due to kick off on December 17.

From proceeds raised in the sale of the 158.5 million shares on offer $43 million will be used to buy out DNZ's management and the balance used to reduce bank debt.

DNZ was created in September 2008 from the merger of four property funds that had been exclusively available to clients of financial advisory firm Money Managers, now MMG Advisory Partners.

A feature of DNZ's float capturing investor interest is its management structure. It will be the first listed New Zealand property trust to have internalised management. The others all have external managers.

Former Brook Asset Management executive chairman Simon Botherway, now a DNZ independent director, said the internal structure should produce better outcomes for investors because the interests of managers and investors would be aligned.

Mr Botherway, who in his Brook days four years ago was one of a group of institutional investors to force corporate governance changes on Kiwi Income Property Trust, said the external management model created a conflict of interest because the directors involved with the company are directors of the manager, not of the property trust itself.

Management fees are tied to the size of the asset base of the trust under management. This means the manager is incentivised to grow the asset base, not the distributions - or dividends - per unit to investors, said Mr Botherway.

ING equity investment manager, Craig Tyson, agreed with Mr Botherway's assessment, pointing to rising management fees during periods of increasing asset prices without the managers' actually increasing returns for unitholders.

Mr Tyson believes DNZ's decision to shift to internal management will put pressure on other property trusts to follow. Internally managed property vehicles have attracted more capital in the last ten years than externally managed ones in Australia, he added.

Internally managed funds now account for nine out of 16, or 83 percent of the market capitalisation of all listed Australian property trusts.

"Money, in a capitalist world, will always follow where investors get the best returns," said Mr Tyson.

Paul Robertshawe, Tower Asset Management's head of equities, said the internal management model represented best practice and hoped DNZ's listing would encourage other property trusts to follow suit.

"I'm not sure if they'll get there [internal management], but they will at least look at their existing management fees and structures... and for some of them it will make sense to go internal," said Mr Robertshawe.

DNZ's capital raising, underwritten by Goldman Sachs JBWere, features a $30m priority pool reserved for existing shareholders with the option to accept oversubscriptions worth up to $10m. There is also a $100m offer to institutional investors and NZX Primary Market Participants.

The offer follows a 2-for-5 share consolidation this week and includes a share sale facility enabling existing shareholders to sell shares at the 82c offer price.

DNZ has about 270 tenants in 61 properties and expects net rental income of $60 million in the 2011 financial year.

Tenants include Bunnings, the Government, Progressive Enterprises, Fletcher Building and ASB.

Post the share offer DNZ said it would have bank debt of $350 million with about $108m undrawn. Gearing, or debt to equity, will be 34.6 percent at March 31.

DNZ expects to have a market capitalisation of about $306m placing it in the NZX top 50.

- © Fairfax NZ News