Goodman leads property trusts towards big bond issues

By Gareth Vaughan Goodman Property Trust could eventually source up to half its debt through public bond issues and, with about NZ$1.7 billion of bank debt in the sector due to roll over by the end of 2011, other listed property trusts may follow Goodman in tapping the retail bond market. John Dakin, CEO of Goodman Property Trust’s manager Goodman (NZ) Ltd, told interest.co.nz that after the success of its first bond issue last year, Goodman may now look to issue bonds every one to two years. Goodman manages a NZ$1.5 billion industrial and business property portfolio and counts Air New Zealand, Vodafone, Microsoft and the Yellow Pages Group among its clients. It raised NZ$150 million late last year through issuing five-year bonds that pay investors 7.75% interest annually. Dakin said Goodman was a big user of debt with loan facilities of between NZ$800 million and NZ$900 million across the business. A major issue was that as a property manager it had long-term assets and long-term leases but faced bank loans expiring every three years. So spreading the debt out and diversifying it should strengthen the business. Cheaper loan terms offered through the bond market over a longer time frame, five years instead of the three year loans on offer from its banks, made a bond issue a logical step to take. “We think it makes sense to have diversity of capital sources and if you can get that at better pricing then why wouldn’t you do it,” Dakin said. Having obtained a BBB+ investment grade credit rating from Standard & Poor’s, Goodman now has a platform to become a repeat issuer. It was “not inconceivable” that Goodman, which has loan facilities with Commonwealth Bank of Australia, the Bank of New Zealand, ANZ National Bank, Westpac and Kiwibank, could get to a position over time of sourcing up to half its debt from bonds. Dakin added, however, that any further offers were unlikely to be bigger than the NZ$150 million initial one. Others to follow? Meanwhile, Forsyth Barr analyst Jeremy Simpson suggests other listed property trusts could follow Goodman into the bond market. Simpson points out the listed property trust sector has about NZ$1.7 billion of bank debt rolling over by the end of 2011. This includes ING Property Trust’s NZ$500 million revolving credit facility with the ANZ National Bank, which is due to expire on September 30 this year and its NZ$40 million cash advance facility with the BNZ that expires on December 31. Peter Mence, general manager of ING Property Trust, said all listed property trusts would be keeping an eye on the opportunity taken by Goodman. "The cost of banking, line fees and margins, is significantly higher than it used to be," Mence said. Simpson said bond issues were a reasonable option for property trusts to take but whether others followed Goodman's lead would depend on how negotiations went with their banks in terms of the fees and margins the banks wanted to charge and the loan terms the trusts were offered. Six of the eight listed property trusts - AMP NZ Office Trust, Goodman, ING Medical Properties Trust, Kermadec Property Trust, National Property Trust and Property for Industry – have bank debt due to rollover next year. Combined that's about NZ$1.2 billion worth, and added to ING's bank debt due to expire this year, is a huge portion of the listed property trust sector's total NZ$2.5 billion of bank debt. Kiwi Income Property Trust is the only firm in the sector whose bank debt isn’t due to roll over before the end of 2011 with its NZ$800 million worth of loans set to expire between 2012 and 2014. Dakin’s advice to other property trusts considering following Goodman into the bond market was to make sure they “tick all the boxes.” This, he noted, included getting a credit rating, making sure any bonds ranked equally with the bank debt and are secured over the trust’s property assets. This was first published this morning in our Daily Banking and Finance newsletter, which is for our paying subscribers. Find out more here.