Mirvac REIT mission was no flight of fancy

THE trust's unit holders had hoped to influence their investment's destiny.

UNIT holder Richard Whan flew in to Sydney from Byron Bay on the NSW north coast two weeks ago to attend a special meeting to vote on the future of Mirvac Real Estate Investment Trust.

The meeting was called for unit holders to decide on a takeover offer from Mirvac Group, valuing MREIT, which owns assets worth about $1 billion, at $362.3 million.

Armed with proxies for 500,000 votes, Whan had hoped to influence the outcome of the unit holders' votes to reject the bid from Mirvac, which owns 24.6 per cent of the trust.

The net asset backing was 85c a unit at June 30 against the offer of 59.4c a unit. Mirvac's original offer was criticised for being too low, forcing it to increase its offer by 10 per cent a week before the unit holders' meeting.

"I was against the takeover," Whan says "It is a question of principle. The company had gone backwards under the management of Mirvac." He argues that its predicament was brought on by poor management.

"It bought a lot of assets from Mirvac and incurred a large debt. The management took on a short-term debt with Westpac for 12 months in December 2007."

Whan says the timing of the switch could not have been be worse. The credit market dried up after that, making it impossible to refinance the loan. All that, however, is water under the bridge. The trust, which has had a chequered history, has come to the end of the road.

With the tightest of margins (less than 3 per cent) -- aided by young corporate agitator Nicholas Bolton -- Mirvac won the day to take control of the trust.

MREIT was suspended from trading on November 25 and will be delisted on December 7 as it becomes part of the larger Mirvac Group, now the fourth largest property trust on the Australian Securities Exchange. MIRVAC Group made the offer as part of its strategy to increase its investment portfolio.

Under the deal, Mirvac will pay out MREIT's debt and undertake to complete a $208m development project in Canberra.

If the offer had not been not accepted, heavily indebted MREIT would have been in breach of its loan covenants and forced to undertake a highly dilutionary capital raising.

But the deal has left a sour taste in the mouth of some of its 25,000 small-scale unit holders. More than other trusts, MREIT's register is made up almost entirely of small retail investors.

Stuart Wilson, chief executive of the Australian Shareholders Association, tells The Australian that shareholders are always distrustful when it comes to takeovers by a related party. He says the common questions are: "Is this a good deal for me?" and "Am I being ripped off?"

"But unfortunately those questions are misdirected to us," Wilson says. "We are not in a position to answer them."

He says shareholders are generally wary of consolidation.

"We had calls from members who wanted to make sure that they understand the [bid] documents and they want advice on how to vote" he says.

Says Bill Winkworth, a MREIT investor for about two decades: "You've got to take notice of what the bigwigs say. We are just mugs in these things."

Another unit holder, Brad McMaster, who also attended the special meeting, says: "It has been an extremely unhappy investment and it has reached an unhappy ending."

After 20 years, the trust looks as if it is going to break even, he says.

Through the years, it has built up a reasonable portfolio of assets, including prime central business district office blocks, such as 10-20 Bond St, he adds. The trust was formed from five mortgage trusts, managed by Estate Mortgage, which collapsed in the early 1990s, and its directors went to jail over it.

"The mortgagee-in-possession folded the trusts into one," McMaster says. "At the time, its assets were mainly holes in the ground and uncompleted buildings.

"We lost more than half of our investment when Estate Mortgage went down and we were hit the second time by the global financial crisis."

Unit holders say they paid 80c a unit when MREIT was floated under its previous manager, James Fielding, and merged with Mirvac.

"I've never held Mirvac shares because I did not want to own a development company," McMaster says.

His sentiment resonates with Whan, who also shuns Mirvac because he does not like development risk. Whan, who is also a financial planner, says he and his clients have invested only in trusts that own income-producing assets.

"There is a large number of self-funded retirees who have investment in property companies. This is a sector that traditionally delivers steady incomes," Wilson says.

Generally, the ASA receives "a lot more inquiries" about the property sector than others, he says.

He says unit holders don't understand the development side of the business and they also want to know more about debts and risks. Wilson says many calls come from shareholders in Lend Lease and Mirvac in the days before their annual general meetings in November.

A shareholder himself and an ASA representative, Dan Steiner says he is holding more proxies on behalf of ASA members this year, compared with last year, for company AGMs. He says there is greater interest in the performance and governance of companies. "Small shareholders are more interested in what their companies are doing because of the real impact on their income and lifestyle," Steiner says.

Whan says the reason he took the trouble to attend the MREIT meeting was to raise his concerns about how the trust was managed.

"We would be happy for the votes to go against the takeover," he says. "It would then force the board to do a capital raising to pay its debt."

(Mirvac will now pay off MREIT's debt.) Whan says, in an ideal world, shareholders shouldn't have to worry about how companies are run. After all, boards and management are paid handsomely to run them.

But shareholders can no longer sit back and wait for their dividend cheque, he adds. "We have to keep a close eye on what our companies are doing," he says.