Goodman Property Trust’s decision to sell a 49 per cent interest in its Auckland Viaduct properties has made a large number of unit holders very, very angry.

They can’t believe the trust would sell these strategic properties at such a low price to GIC, the Singapore sovereign wealth fund.

Why have the trust’s external management company directors agreed to sell interests in such highly prized assets?

Were the properties put up for tender? Were New Zealand interests asked to bid? Was GIC the top bidder or was it offered an exclusive deal?

More importantly, is this just a classic case of corporate governance issues and an illustration of the huge problems associated with the external management model for property trusts?

Goodman Property Trust (GMT), formerly known as Colonial First State Property Trust and Macquarie Goodman Property Trust, listed on the NZX in June 1999.

This was after the trust raised $53.1 million from the public, well below its target of $100 million.

One of the main characteristics of the trust, as with most listed property trusts at the time, is its external management model. Under this structure a trust is managed by a separate company with unit holders having no ability to scrutinise the manager or vote on the selection of the management company directors.

In my view there is an inherent conflict of interest in this structure because management companies have a strong incentive to aggressively grow property trusts – regardless of the profitability of the acquired assets – as their fees are based on the gross value of the assets. Management companies may also receive additional fees from the purchase and sale of assets.

These external management companies either have a contract in perpetuity or require a 75 per cent vote of unit holders to remove them. These entrenched arrangements enable the shareholders of the management company to sell their interests for a substantial profit while the unit holders of the listed property trusts do not participate in this windfall.

In December 2003 Goodman (NZ), which is 100 per cent owned by Sydney-based Goodman Group, became the manager of the trust after it acquired the management company from Colonial First State (NZ) for $6 million. Goodman Group also acquired 20 per cent of GMT for $28 million.

GMT continues to be managed by Goodman (NZ) and the directors of the Goodman Group owned management company are chairman Keith Smith, Leonie Freeman, Susan Paterson, Peter Simmonds, Greg Goodman, Phil Pryke and executive director John Dakin.

As at March 31, 2014, GMT had total assets of $2.12 billion, the largest being Highbrook Business Park in East Tamaki, valued at $539 million.

Goodman (NZ) received total fees of $18.6 million in the March 2014 year. One of the features of GMT’s 2014 annual report was the announcement that unit holders would be asked to approve a resolution at the August 2014 annual meeting allowing them to nominate and vote for independent directors. The management company’s chairman Keith Smith wrote that this would increase “the already strong alignment between Goodman Group, the trust’s manager and largest investor, and other unit holders”.

The annual report also revealed unit holders would be asked to approve a motion at the annual meeting requiring the management company to use its base management fee to subscribe for new units in the trust.

The notice of meeting stated that Goodman Group owned 17.6 per cent of the units and if it reached 25 per cent it could vote against any proposal to appoint a new manager (the GMT manager can be removed by a 75 per cent majority of unit holders).

“Having taken legal advice, the independent directors also do not consider the revised arrangements (the issue of GMT units to Goodman (NZ) as payment for its annual base management fee) will extinguish the ability for the manager to be removed when there is just cause to do so.”

This may be true in terms of the ability of the High Court or the trustee to remove the manager but it certainly reduces the opportunity for unit holders to remove Goodman (NZ) if they are unhappy with its performance as the trust’s manager.

How can the directors argue that the “alignment” between stakeholders had been increased when additional units will be issued to the management company and reduced the ability of unit holders to sack it for poor performance?

The controversial transaction, which has made GMT unit holders extremely angry, was released to the NZX on November 3.

The first sentence said: “Goodman (NZ), the manager of Goodman Property Trust, has announced the introduction of GIC (Singapore’s sovereign wealth fund) as a new capital partner in an expanded joint venture investing in Auckland’s Viaduct Quarter.”

The statement really said it all; it was Goodman (NZ) that made the controversial decision as GMT has no directors or independent management team.

The NZX granted a waiver from the requirement to obtain unit holder approval, as it usually does in these situations, because it believes that no related party is a direct or indirect beneficiary of the transaction.

Investors find this waiver difficult to understand because Goodman (NZ), which is clearly a related party, drove the transaction and earns a fee from the sale.

Nevertheless, the NZX granted GMT a waiver from having to obtain unit holders approval for a number of reasons, including an assurance that the Goodman Group representatives on the Goodman (NZ) board “did not vote on any resolution to approve the proposed transaction”.

It is a shame that the NZX doesn’t look at the commercial rationale of these transactions because if it did, I believe, the regulator would probably decide they had questionable value and, as a consequence, required unit holder approval.

GIC is buying 49 per cent of the Viaduct Quarter, which comprises Air New Zealand House, the Fonterra building development under construction and the Viaduct Corporate Centre, which contains the Vodafone, KPMG and Microsoft/HP buildings, with a total value of $153.6 million.

As part of the deal Goodman Property Trust is selling 49 per cent of its stake in Air New Zealand House and the site where the new Fonterra development is rising, while private investor Newcrest is selling its 49 per cent of the Viaduct Corporate Centre.

The most frustrating aspect is that the properties are being sold at March 2014 book values when there has been a clear improvement in market conditions, and prices, since then.

A 49 per cent interest in the Air New Zealand Building is being sold at a valuation of $64 million – the March 2014 book value – yet the NZX Property Index has appreciated by 13.6 per cent, in capital terms, since March 31.

GMT is selling a 49 per cent interest in the Fonterra Building, which it purchased in November 2013, for a profit of only $300,000. This tiny gain will be wiped out after a transaction fee of $450,000 is paid to Goodman (NZ).

The sale of a 49 per cent interest in the Fonterra Building at a net loss is quite extraordinary when Auckland’s Viaduct is considered one of the hottest property areas and the dairy giant has a 15-year lease with two additional rights of renewal.

Is this the best deal that Goodman (NZ) can do or is this another case of the long-standing conflict between property trust unit holders and their external management company?

Goodman Group has an internal management structure in Australia. The only way Goodman Property Trust unit holders can be absolutely sure of a fair deal is when the trust moves from an external to internal management structure. This development is long, long overdue but don’t expect Goodman Group to quickly give up its dominant position.


Brian Gaynor

Portfolio Manager

Disclosure of interests: Milford Asset Management holds units in Goodman Property Trust on behalf of clients.