By Jenny Ruth
Friday 25th August 2006
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Sharechat: What was wrong with the Avon name?
Property Finance Group managing director Darryl Queen: Avon Investments was just the holding company. It had a previous history as a development company. It was a shell company before it become involved in Property Finance. The historical name hasn't been changed. The principal activity is Property Finance Securities which is a wholly-owned subsidiary. It was confused between Avon Investments and how Avon tied in with Property Finance Securities. We endeavoured to remove that confusion by changing Avon to Property Finance Group.
SC: Is it a company policy to reduce its exposure to individual counterparties?
DQ: it's not a formal policy per se, but has arisen from the increase in our total assets during the year and indirectly from our desire to have a well-diversified loan book. It wasn't a stated objective or policy of the board. As we grow, the larger loans are a smaller part of the overall book.
SC: Why did the company decide to continue funding property development and to provide bridging loans?
DQ: It's still an important part of our business. We've always stated that and we see no reason to change at the moment. The point we would make and did make to shareholders was that we didn't think that provided a scalable business opportunity for the company. It's very much constrained in terms of future growth. It's an important and profitable part of the business that we wish to retain and there's no plan to move away from that.
SC: Aren't those activities more risky?
DQ: Yes, very much so. In that regard, we made a formal change to our trust deed last September to limit property development financing to no more than 15% of total tangible assets. We recognise that it's profitable but it also carries inherent risk. The board believes that's an appropriate level for the company to be involved in and has supported that view with a formal change to the deed. We've never really been a big developer. It's a specialist area. We're happy to partake in that part of the market with clients we have a good relationship with. It's not a growth area for us.
SC: Are most of the company's loans at fixed rates now?
DQ: The majority are. Two or three points about that: firstly, in terms of our traditional business, they're fixed for the term of the loan, but the loans tend to be by nature of shorter term. Those loans are three to nine months, as a rule. In terms of our branded loan products which we've securitised, the vast majority is fixed for between two and three years and approximately half of our commercial product would be fixed. That's quite a benefit to the company because it provides security - it's more likely the loans will be with us for the fixed period.
SC: Don't your borrowers tend to re-finance with the major banks when their fixed rate terms expire when they've improved their equity position or overcome their non-conforming status?
DQ: The residential market is very active and the average loan life is getting shorter all the time, not only for the non bank players but also for the banks. I think it's an industry-wide issue. Ultimately, it means lenders have to be very efficient. Certainly, it's logical for them to move if there's no benefit for them to be here. With our commercial product we compete head on with the banks so we would expect to keep them longer. The important thing is the ability or willingness of non-bank lenders to re-price so they retain those clients. That's the challenge, to develop strategies so they don't go. It will be interesting to see how we get on in two years time.
SC: How supportive of the company are mortgage brokers?
DQ: As a company, we've taken a major initiative in that channel. We believe that mortgage brokers provide a very efficient, professional and appropriately priced distribution model for our products. It's early days but it would appear that the brokers are very supportive of companies like us who are helping them to establish and/or grow their business. The major initiative we undertook in that space was the introduction of trail commissions in April this year which ties in their incentives with the lender. It seemed to us to be a perfectly natural relationship to have.
SC: Why does the company pay mortgage brokers trail commissions?
DQ: Because we don't want to compete with them. We see them as a partner and not as competition. I can't say how the banks see it. To the man in the street it would appear that the banks are a reluctant partner to the mortgage broker whereas we support it totally. It's not just trails. We have a complete package for the brokers in terms of sponsorship, marketing. We're completely committed as a company to that distribution method.
SC: What's the duration of your average loan currently?
DQ: It's a bit early to say really. It will vary markedly between our products. Lifestyle Security will be the longest and commercial will be the next longest. Residential will be the shortest for understandable reasons. To put a definite term on it now would be misleading. Given that pattern, it's in our best interests to make it longer than it would otherwise be and extend where possible the average loan life.
SC: Wasn't buying the Victoria St building a major departure from the company's core business? Why do it?
DQ: Yes and no when viewed in context. The Christchurch CBD office market is relatively tight and we weren't able to find initially what we were looking for in terms of providing a long-term operation base for the company. It was obvious that our needs couldn't be met by the (then) current ownership structure. We elected to buy it to complete some work, given our expected long-term occupation. For us to grow as we wish to do it's very important to have an operational base to do it from. I would argue it was a good thing to do. We're very pleased with what we've done here. It's no secret the property will be put back to the market soon and we will have achieved our operational objectives. I think it's very easy to underestimate the importance of your operational support and systems, be it premises, computers, phones, people etc. You really need to have that all bolted away, particularly if you're in a high growth market.
SC: Have you noticed any slowdown in debenture sales since the three finance company collapses?
DQ: Not terribly. We are slightly worse, one or two percent less than what we were at 31 March.
SC: What is your debenture reinvestment rate?
DQ: We fund out of financial planners with some centralised systems. Without probing further, it's not always easy to measure. The analysis we're doing (shows) it appears our reinvestment is similar to what it was - it's certainly no higher. Our current reinvestment rate is in the region of 60% to 65%.
SC: Was it an expectation that debenture sales might become more difficult that led you to start your securitisation program?
DQ: No, it wasn't really the liability side in terms of debenture stock. We were very keen to get into a position to fund longer term prime mortgages. It was a question then of working out how we could fund them. I don't think we can take any kudos of being predictive of the market. We wanted to fund high volume, low margin, low risk property loans. We're very pleased to have diversified our funding. That was always one of the key benefits of the strategy.
SC: What ratings do your securitisation trusts have?
DQ: We have four securitisation trusts and they all have a range of ratings, depending on the tranche. With securitisation, you issue debt notes in the wholesale market. The first tranche which is "AAA" is between 70% and 80% of the pool. That's the case in all of our trusts. You could generally expect 75% of a pool to be "AAA" and then to step down from there
SC: Who do you get to take the lower rated paper?
DQ: We do. We invest ourselves. The wholesale market will take "AAA" to "A." We invest in "BBB" paper.
SC: Have you ever sought or considering seeking a rating for your debentures?
DQ: No, we haven't sought one. We're fundamentally in favour of ratings - that's reflected in our securitisation program. The problem the industry has, the same old, same old, is trying to work out who's going to rate them and how they're going to rate them. We all suffer from the problem of being too small. Hopefully, the industry will evolve to a known rating frameword in the not too distant future. It's a very tricky area. It's not going to be easy. I think there's a strong desire by all to have a consistent rating method. The Standard & Poor's and Fitchs of this world don't rate finance companies of $100 million.
SC: At last year's annual meeting, the chairman said although the change in direction would constrain profits, the company should still show modest profits. In December, the chairman said he expected a modest profit in the second half. Why were his predictions proved wrong?
DQ: To be honest, management underestimated the timing to effect the strategy. A lot of these strategies are multi-party and they take a bit of time to develop. It's not materially longer - a month or two here and a month or two there and things slip. Overall, we're happy with what we've achieved. Putting the chairman's comments in context, it's taken a little longer than we had hoped but the outcome is very much as we hoped for.
SC: Is the company growing too fast?
DQ: That's a good question. You have to put that into context. All of the growth is coming from our branded loan products which are very mainstream, both residential and commercial. They're extremely big markets. Whilst the growth is very strong year on year, there are a lot of bigger companies. Analysing the business and seeing which parts are growing gives you some comfort we're not growing too fast. The New Zealand home loan market is worth $140 billion according to Reserve Bank figures. That's a huge market. That would be turning over - nobody knows how much turns over, but the worst case is about a fifth of that turning over. That's $28 billion. There is a lot6 of debate in the industry about how much to mortgage market turns. When you view our position in that context, we're a tiny, tiny player. The same with the commercial (mortgage) market. It's not quite so easy to define how big it is. We would say it's at least $50 billion.
SC: Does the company have sufficient equity? Will it need further capital?
DQ: We're comfortable that the company has sufficient capital and the board reviews this regularly in line with the growth in our business. It's not something we turn a blind eye to. It's always being monitored.
SC: Why did the company issue preference shares rather than ordinary shares?
DQ: It was just effectively the market opportunity. It was a further diversification of funding. It's very efficient in terms of our ability to pay imputation credits and lower our effective cost of funds. We were very happy with the support we got. It's changed our maturity profile. It's three-year money. It's nice to have a new maturity.
SC: Why did you need to provide a personal guarantee to the National Bank?
DQ: The guarantee is historical. It's been there since day one when it was just Darryl Queen and a typist in August 2001. That's been recognised as being inappropriate and we've asked for that to be released and it has been.
SC: Why did your company, Kipling Partners, sell shares?
DQ: I would like to buy some. The only reason for selling some shares is we built a new home and I have to balance my overall responsibilities. I had no great desire to.
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