A property trust in its debt throes

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Any investor who needs reminding of the perils of investing in highly geared property funds that buy assets in foreign markets should take a look at what is happening to RNY Property Trust, which appears to be in its death throes.

Last week RNY announced that the price it was likely to get for a group of properties it was selling to repay a loan would probably not cover the outstanding debt. Two days later a substantial shareholder requested a meeting of unitholders so that it can push for a restructure of the business.

RNY has a long and sorry history that serves as a cautionary tale.

It started life as the Reckson New York Property Trust, when it was listed on the Australian Securities Exchange in September 2005. The trust raised $263 million for investment in the New York Tri-State region in the United States.

The trust acquired a 75 per cent indirect interest in 25 commercial properties – most of them suburban offices. The deal was worth $550 million and involved more than $300 million of gearing.

The interest in the properties was sold by Reckson Associates Realty Corp, a US commercial property developer and manager with New York Stock Exchange listing.

The trust felt the impact of the financial crisis, reporting in 2007 that leasing was falling below expectations and, in 2008, that earnings and distributions were down. It suspended distributions in December of that year and has never reinstated them.

At the end of 2009, the trust reported that the valuations on its holdings had fallen 14 per cent over the previous 12 months and that it had lost $53 million that year.

During 2010 it started getting into protracted negotiations to extend, roll over or replace its debt. Debt negotiations have remained a constant theme ever since.

The trust’s high debt load meant it had very little flexibility in dealing with its business difficulties.

The trust lost money in 2010 and 2011, before returning to profit in 2012

In April 2012 it refinanced the biggest of its loans, worth US$196 million, for five years.

In 2013 it refinanced a smaller loan but this involved some restructuring of the asset ownership. It made a profit and reported a small gain in the value of its portfolio.

However, in 2014 it fell back into losses and reported a decline in asset values.

Its losses blew out to more than $60 million in 2015 and asset values were down 15 per cent. By this stage the $500 million investment it had made a decade earlier was worth $262 million.

Last year it started to sell assets, with the proceeds going to pay debt. In August it announced a plan to sell all its assets.

By this stage some of its debt was starting to look more like equity, with one lender agreeing to waive covenants in return for a high percentage of earnings.

In November it reported on the sale of 12 of its 19 assets. The highest bid received was a 13 per cent below its June valuations.

“Management and the board are taking all reasonable steps to maximise unitholder value and are disappointed in the continued limited interest by investors in the suburban office product,” the trust said in an ASX announcement.

The trust had to meet sale agreements imposed by another lender and between November and January this year it issued a number of sale contracts.

By this time the value of the portfolio was down to $208 million. The loss for 2016 was more than $50 million.

Last week, the trust reported that five properties encumbered by a loan had received bids that were materially below their December 2016 valuations – by 50 per cent in one case.

If sales of these assets were conducted at the bid prices, net sales proceeds would be insufficient to pay the debt.

A couple of days after this announcement, RNY Australia Management Ltd, the responsible entity for the RNY Property Trust announced that it had received a notice from Aurora Funds Management Ltd, which owns 19.6 per cent of the trust, requesting a meeting of unitholders.

Aurora is proposing to remove the responsible entity and appoint itself.

All in all, it’s been a disaster. RNY units were issued at $1 a unit and traded as high as $1.20 in 2007. Since late 2008 they have rarely been above 40 cents and the current price is around two cents.

The prospectus forecast yields of eight per cent but the distribution flow dried up almost 10 years ago.


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