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The Shoeshine Column: Trans Tasman Properties: high-rise debt, low-rise profits and no new brainwaves

Friday 25th August 2000

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How long does it take to turn around a dog property company? The answer, if you're one of the shareholders Trans Tasman Properties inherited from the old Robert Jones Investments days, is a very long time indeed.

TTP this week reported a $10.6 million June half-year profit, which executive chairman Don Fletcher described as "very pleasing." Given the company has total assets of nearly $1.4 billion he must be easily pleased. Then again, any sort of profit beats the $5.5 million loss the company chalked up last year.

As TTP is easily New Zealand's biggest listed property company, dwarfing its nearest rival, Kiwi Income Property Trust, its feeble performance is a serious drag on investor returns from our market. But, these days at least, it cops curiously little criticism from smaller shareholders and even less from institutions and investment analysts.

The present situation is a classic tale of ideas that looked good on paper but never quite came off.

Its twin roots were Sir Robert Jones' old property empire, renamed RJI and then Tasman Properties, and Seabil New Zealand, a joint venture between Brierley Investments and Hong Kong's SEA Holdings set up to buy a portfolio of properties from Challenge Properties.

Seabil listed in 1994 with Fletcher, then its chief executive, proclaiming a policy of "cautiously aggressive" growth. Perceived as a blue chip, it started off with a good spread of institutional holders attracted by its solid portfolio and clear property investment philosophy.

It was an auspicious start but things started turning to toast almost immediately afterward as Fletcher abandoned the property focus and embarked on a series of corporate plays.

First Seabil agreed to participate, with SEA, in the recapitalisation of Tasman Properties, a bare survivor of the post-crash property slump with heavy debt, a ragtag portfolio and no institutional holders.

Within weeks Seabil announced plans to merge with Tasman. The rationale, Fletcher told all and sundry, was to create the only transtasman property-investment vehicle with the critical mass to attract international investors.

It never did and the local ones bailed out in pretty short order, too.

Hamstrung by Tasman's debt, the merged Trans Tasman Properties in 1996 started selling down its smaller, peripheral properties, particularly in regional centres.

When it became obvious the institutions needed to drive the share price up weren't interested the company came up with its second brainwave. It carved out Australian Growth Properties, keeping 46.4% and selling the rest to Aussie investors who didn't want to be exposed to all that nasty Kiwi debt.

As the name implies, it professed a focus on growth but it also paid a quarterly dividend to keep the income punters happy.

The float was a success and TTP used the proceeds to pay back $A170 million to its banks. It then began carving off New Zealand Growth Properties for a repeat performance, hoping it would be able to raise $300 million to pay off another chunk of debt.

The idea was to have controlling shareholdings in two solid country-specific property investment vehicles and an overarching, appropriately geared TTP which could do the sexy stuff such as building skyscrapers.

It was a good plan but NZGP-type floats are bull market stuff. As TTP prepared it for market a whole raft of other property floats sucked up all the cash. The steam then went out of property and it hasn't come back since - TTP missed the boat and pundits reckon another one isn't due for a couple of years.

Management remained determinedly optimistic. In July 1998, with the share price at 49c, Fletcher said it was only a matter of time before it lifted again. It has since sunk steadily, to around 20c.

At that price TTP has a market capitalisation of $120 million but its June 30 net asset value of 74c values it at $440 million. For most property outfits a discount of 73% would be a raging "buy" signal but any investor punting on an early recovery will need balls of solid steel.

Rising interest rates haven't helped, of course but the market perceives far more intractable problems.

First, TTP's $700 million-odd of debt makes it by far the most highly geared listed property stock.

When a chunk of capital notes came up for repayment in March last year it had to exercise its option to roll them over for five years, at an increased coupon rate of 9.5%, or pay out holders in shares.

It is debatable how much of a dent selling properties can make without seriously downsizing the company.

Second, there are doubts about the quality of its portfolio. These may be unfair - it may not have the high-profile flagship office blocks AMP Office Trust, Kiwi Income Property Trust or Capital Properties boast but its buildings generally have good rental flows and are solidly tenanted.

Third, the same sort of doubts apply to the quality of management, who haven't scored any big hits in a long time.

And fourth, an endless string of restructurings has done little to sort out the complexity of the balance sheet, making it hard for investors to value the company on its existing and potential income streams. Devaluations of the portfolio - $42 million in 1998 and $25 million last year - haven't helped sentiment either.

The company's only course seems to be to whittle that debt mountain away chip by chip. Of course SEA Holdings could take advantage of the big discounts and clean up the minorities, but don't bet on it.

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