David Kingston’s K Capital tackles Newmark Capital REIT over management conflicts

Former Rothschild banker David Kingston has stepped up his campaign against Newmark Capital’s management of its listed real estate investment trust.

The Newmark-owned Bunnings at Melton in Melbourne.

Former Rothschild banker David Kingston has stepped up his campaign against Newmark Capital’s management of its listed real estate investment trust, attacking its poor performance and conflicts of interest.

The shares of Newmark Property REIT have jumped since Mr Kingston’s K Capital last month launched a campaign against the way the trust is being run, with the stock lifting about 20c to $1.60.

But the dissident investor is still unhappy as the company, which mainly owns Bunnings Warehouse stores, is stuck trading well below net tangible assets of $1.97.

K Capital has sent an eight-page critique of Newmark – which is led by property veteran and former AFL star Chris Langford and fellow property figure Simon T. Morris – to the trust’s 1000 largest shareholders.

Mr Kingston has attacked the vehicle’s underperformance since it floated in December last year, especially as direct rival the BWP Trust, also an owner of Bunnings Warehouse stores, has held up.

Mr Kingston is a well-known activist who has wrought changes at companies including the now privatised Village Roadshow.

Newmark Capital joint managing directors Chris Langford, left, and Simon T. Morris.

He has criticised the Newmark-run trust for buying a $67m centre in Queensland last month and questioned whether the purchase would actually be accretive to its funds from operations.

K Capital argues that, contrary to Newmark’s claims, buying the asset will have a negative impact when the trust’s low-priced interest rate hedging struck at 2.3 per cent expires.

Mr Kingston reiterated that there was a large conflict of interest in the manager charging the trust multiple fees.

The letter to investors details concerns including the large price fall from the December float at $1.895 to a low of $1.20. For most of July, the stock traded mainly in the low $1.40 range.

It argued that the IPO appeal of NPR was its heavy skew to high-quality Bunnings as the dominant tenant and reliable longer-term rental streams – the same as the BWP Trust – but it has underperformed its rival.

The letter criticised Newmark’s failure to begin a major buyback of securities at the huge discount to net tangible assets per security of $1.97. It also cited the large increase in gearing following the acquisition of the Queensland property.

It further raised the issue that buying the centre, which sits next to a Bunnings, would dilute the trust’s high-quality rental streams. The letter also noted worries about the acquisition’s potential future impact on funds from operations based on the trust’s three to five-year fixed-rate unhedged borrowing costs.

“Most investors want to maximise their security value. However, some external managers are enthusiastic to grow funds under management with the associated increase in management fees. This generates a fundamental conflict that may impact on ­security value,” the letter said.

“The recent $57m acquisition generates large upfront and increased future management fees for the investment and property managers associated with Chris Langford and Simon Morris … Warren Buffett’s long-time partner Charlie Munger is often quoted as saying ‘show me the incentive and I’ll show you the outcome’,” the letter added.

Mr Kingston has taken issue with Newmark for failing to disclose the capitalisation rate of the purchase and warned that including funding for a project in the Melbourne suburb of Preston may soon lift the trust’s gearing above 40 per cent.

When it floated, Newmark said the trust’s gearing would increase to 38.1 per cent after a $69m debt drawdown planned for last month for the Preston project. Mr Kingston said that while the Preston drawdown had been delayed until December, “once it occurs it seems NPR’s gearing will increase above the 40 per cent level, which he said exceeded the highest level targeted during the IPO.

Newmark Property REIT fund manager Ed Cruickshank said the purchase was “consistent with NPR’s strategy”.