Northington Partners Ltd has given the thumbs up to the proposed internalisation of Property For Industry Ltd’s management in an independent assessment out today.
The proposal will go to the vote at PFI’s annual meeting, to be held at Eden Park on Thursday 22 June.
Under the proposal, PFI will pay the management team’s company, PFIM Ltd, $42 million, equating to $30.3 million after tax.
Northington owner Greg Anderson & director Jonathan Burke assessed the market value of the management agreement at $48-56 million and estimated the valuation of the internalisation to PFI at $63-78 million: “As a result, the proposed internalisation is expected to add between $33-48 million of value to PFI on a post-tax net present value basis.”
Other key points in their summary:
- The proposed internalisation is estimated to provide earnings accretion of about 6%/year on a pro forma basis, enhancing distributable profit for PFI, which allows for higher future dividends in line with PFI’s dividend policy
- Post-transaction gearing remains at a reasonable level and generally in line with other listed property vehicles
- The $42 million internalisation payment is 19% lower than Northington’s midpoint valuation
- The $30 million after-tax value represents a 41% discount to Northington’s midpoint market valuation
- The proposed internalisation would significantly reduce PFI’s overall management expenses. It’s likely to have the lowest management expense ratio (MER) in the listed property sector with a MER of about 0.4%, compared to the sector average at 0.8% (excluding potential performance fees paid by other externally managed entities)
- Northington estimates that the proposed internalisation will result in increased distributable profits to PFI shareholders of between 5-6% (on a normalised 2016 financial year pro forma basis): “All else being equal, this increase in earnings should allow for increased dividends”
- “While the proposed internalisation will modestly increase gearing by about 3% (to 34%), and reduce NTA by about 7c/share to $1.54 (2016 financial year pro forma), in our view these impacts are more than outweighed by the net present value benefit and earnings enhancements noted above”.
PFI’s independent chair, Peter Masfen, said: “The management by PFIM has been very positive for PFI and has contributed to the delivery of strong & stable returns for our shareholders. Pleasingly, internalisation would see this partnership continue, with the retention of the existing highly experienced management team & employees.
“Currently, the management agreement is for a perpetual term and PFI has very limited rights to terminate the agreement. PFI also has very limited control if a third party wished to negotiate to acquire the agreement from PFIM. Internalisation removes these concerns and provides PFI with complete control over the management of the company, and an ability to manage the company at a significantly lower cost.”
Under the proposal, managing director Greg Reidy, general manager Simon Woodhams & chief financial officer Craig Peirce will transfer to PFI under independent service contracts, while all other employees will transfer to direct PFI employment.
PFI will also grant the senior management team a licence to operate its other non-PFI business out of the Prince’s Wharf premises (for a fee of $100,000/year + gst), have access to PFI’s IT support systems and use PFI employees for that external business.
Attribution: Company release, annual meeting & Northington documents.