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Michael Rothner of Ashe Morgan

People & Companies / Profiles

Jul 04 2015

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Michael Rothner, Principal of Sydney- based property private equity group, Ashe Morgan, talks about their acquisition and repositioning strategy for Melbourne's iconic Harbour Town portfolio.
Acquiring the portfolio for $150m AU, representing less than half replacement value, in December 2014, Ashe Morgan have sold two of the residential sites to a Chinese developer for an aggregate price of $20m this month. The projected return for the single-asset unlisted Harbour Town fund is in the high teens.




Interviewer: Thank you for letting us inside your beautiful home.

Michael: My pleasure.

Interviewer: Can we talk a little bit about the design aspects and what inspired you to create such a wonderful space?

Michael: Sure. Well, it was obviously a long time in the making. The time of the build was probably double what we thought it was going to be. I suppose, really, it's very much holiday star house and it was influenced by lots of hotels that we've stayed in, around the world.

Interviewer: And so, I think it's really interesting how you've been able to integrate this luxury. It is so luxurious, but it's warm and comfortable. And you've obviously got small children.

Michael: Yes.

Interviewer: So, how were you able to integrate all the fantastic design elements and have it functional, as well?

Michael: We had a lot of consultants and designers on it. Lisa, actually, really takes a flare for this sort of stuff, and put a lot of effort into it. We decided to have, like, this parent's retreat, which is upstairs. And the pool area, which is very kid-friendly. Because the size of it, you can have the kids in the theater area, either upstairs or downstairs, and you've got these formal areas, there are so many different areas of the house that you can integrate with either kids or adults.

Interviewer: How big is it?

Michael: Six bedrooms, plus nanny's quarters. It's about 900 square meters internal [inaudible 00:01:22].

Interviewer: And it's quite rare to be able to get a site like this, on the waterfront in Darling Point.

Michael: Yeah, we've owned the house for probably 12 or 13 years now. So we started working on it about three or four years ago. It took a long time with counseling. There were many Section 96s. It was a difficult process, but we managed to get there in the end. Effectively, we've got this glass door's automated. It allows it to be the door that blocks children from going through, and then obviously we've got these glass sliding doors that close it off. So, that level was really a feel of inside-outside, and it actually got redesigned after we actually started construction. And that was because it was originally going to be actually a timber deck, and then for whatever reason, we decided to pull some in and extend it. So, it would be that Santorini-style feel.

Interviewer: Property is in every aspect of your life. So, AsheMorgan is your business and obviously that's been operational for a long time now. So, can we talk a little bit about that and talk about the history of the business?

Michael: Well, AsheMorgan has been around for nearly 35 years. It was started by one of my partners, Michael Moss. At that time, it was just a very small mortgage brokerage operation, which grew into a very large lending business. Which was doing that, up until probably around the GFC time, when we obviously changed our business model and our platform.

Interviewer: The business has completely evolved, in terms how it looks at property now.

Michael: Yeah.

Interviewer: And how has the business changed since then?

Michael: I think the business prior to GFC was very much on the back of a lending business. So, we were very much involved in providing senior debt, mezzanine debt, equity, participating in projects, etc. And as you know, once the global financial crisis hit, a lot of the whole dynamics of the market completely changed. Then you had offshore lenders leaving the country, and institutions and insurance companies just completely closing their doors, in relation to lending.

So, having been in that space, we had to, I suppose, really think about what we were going to do moving forward. And I suppose, that with every adversity brings opportunity. So, we really saw that when the lending market was changing, obviously there were a lot of assets that were going to come on to the market that we were able to take advantage of. So, we shifted our focus to being able to buy assets that we felt were at the right time in the circle and good opportunities to add value to us.

Interviewer: And so...

Michael: We really moved effectively from out of the leading business to the funds management syndication model.

Interviewer: As a funds management business, your specialty really seems to be retail and residential. I know you've got multi disciplines, across various sectors of the property world, but it's more retail and residential.

Michael: Yeah.

Interviewer: So, you've had great success with Marsden Park.

Michael: Yes.

Interviewer: Can we talk a little bit about that?

Michael: Yes, absolutely. So, as you say, obviously having coming from a lending background, we were obviously across all sectors of the market. But when we actually moved into the principal-based and syndicating assets, we decided to focus on retail and Marsden was one of the first assets that you mentioned. And I suppose the reason we liked that, it was sort of an asset that was tied, that we saw that it was undervalued, that the rents were sort of below market, there was an opportunity to spend some money on the center. There was also some land that was attached to it that wasn't being used. So, it had all those factors. Where we could pay, which is our strategy now. Of paying investors a reasonably robust passing yield...

Interviewer: Hmm-hmm.

Michael: but providing some significant capital upside, by bringing our smarts to the asset.

Interviewer: Right. So, as an investor, you're getting annual distributions from the rent.

Michael: Yes.

Interviewer: And then, from the capital works that you are doing to the asset, then you also get a larger distribution. Which brings your annualized return boosted.

Michael: Exactly, exactly. So, I think really what happens is, we'll go in to buy an asset, there will be obviously passing income on the way through. We will then do works to try and improve that income.

Interviewer: Yes.

Michael: And then, when we sell the asset, obviously, hopefully the value is gone up. And then, people are getting along with their distributions on the way through, some capital growth on their original investment. Which is what's happened.

Interviewer: And you've had great success with Marsden Park.

Michael: Yes.

Interviewer: And then, there was another one at DY.

Michael: Yes, yes.

Interviewer: Which was also very successful.

Michael: That was a different strategy. That really worked out for us, because that asset really moved from being just a small, neighborhood retail asset.

Interviewer: Right.

Michael: Which had opportunities to, basically, do a residential tower.

Interviewer: Okay.

Michael: So, we started looking at an opportunity to put a residential tower in place, where the center was. As you know, the market is very hot at the moment. And there were quite few people to even approach by to actually buy it. And in the end, a Chinese investor thought it was a good opportunity, and has bought it, and is going to put up a residential tower.

Interviewer: So, I guess your IP, as a business, is very much governed around, not only your ability to source the opportunity through your relationships and off-market opportunities...

Michael: Yes.

Interviewer: But really, to be able to look at the asset with a very experienced set of eyes and identify where the upsides are. So, Habour Town.

Michael: Yes.

Interviewer: You've just acquired.

Michael: Yes.

Interviewer: Which was a funny asset, from a media perspective. No one could see the value, but you guys have really identified it as the diamond in the rough.

Michael: Yeah.

Interviewer: You've acquired it at less than half the replacement value.

Michael: Yes.

Interviewer: Can you talk a little bit about that?

Michael: Yeah. Yeah, sure. So, we have been working on that for a very long time, before we actually ended up settling on it. We settled on it towards the end of last year. That was, again, an off-market opportunity, like you mentioned. Where we saw something that, really, the market d, [inaudible 00:06:36]. It's near the wheel, as you know. It's an area and the center that was a little bit over-built for its time. It's 40,000 meters of retail, it's got residential sites, it's got a big ice skating rink, it's got a large car park for 3000 cars. And we just saw it as, I suppose, as an opportunity to be able to re-position that center and bring in expertise to change the retail mix. To get value our of the residential and really redesign and re-position the asset completely.

Interviewer: Absolutely. And so, the real anchor to that strategy is the retail.

Michael: Yes.

Interviewer: And the fact that you are turning the retail into a destination.

Michael: Yes.

Interviewer: And fresh food.

Michael: Exactly.

Interviewer: Can we talk a little bit about the concept?

Michael: Yeah, yeah. One of the things that we are also doing is, I suppose, as you know, the weather in Melbourne is not very conducive to outdoor shopping.

Interviewer: Yes.

Michael: This is an outdoor mall. One of the strategies is, actually, to put in a covered roof. So, it will effectively be much better for the weather elements, but it won't take away the feel of, I suppose, the center itself.

Interviewer: Right. So, it could compared, almost, to Broken Head Point. Which, obviously, has been very successful. So, I think Abacus acquired that in 2010 for 170-ish million. And then, have recently sold it, six months ago, to Novak, for 300 million.

Michael: Mmm-hmm.

Interviewer: So, obviously, the strategy is there and it works.

Michael: There were three architects that, basically, came to ... they were given a brief.

Interviewer: Yeah.

Michael: To, basically, talk about how we can re-position this asset and have some input into the master plan. And that was ultimately won by a group caled NH Architect.

Interviewer: Okay. And that is very much governed around the fresh food and the open, despite the fact you're covering the center, to the fact that it's open.

Michael: Yeah.

Interviewer: And, obviously, I guess, one of the wonderful things about it, is that's it's so accessible. So, you ride on the freeway there.

Michael: Yes.

Interviewer: And then you've got the parking for the 3,000 cars, you've got the tram that goes from the city.

Michael: Yeah. Yeah, it's very close to the city. It's 4 or 5 K. And that whole area has been completely developed. So, you've got [inaudible 00:08:24] across the road, which is thousands of apartments and housing.

Interviewer: And I would guess that those big apartment developments will need amenity.

Michael: Exactly.

Interviewer: So, you're providing the amenity.

Michael: Yeah, correct. Exactly, yeah. And as I said, as part of [inaudible 00:08:38] we're doing some substantial residential development ourselves. And we've got a number of sites. We've actually sold one of the sites and another site we're looking for is a joint venture partner to come in. Because it's a larger site, which is actually located in front of the car park. So, we're doing some work on that now to find the right partner.

Interviewer: Wonderful. And so, can we just talk a little bit about your joint venture partners and co-investors?

Michael: Yeah. Yeah, so, all of our investors are basically [inaudible 00:09:01] with clients that come in. The AsheMorgan model is basically ... we obviously take management phase, obviously running it and doing things on the way through it. And then, we take a performance phase, above certain IRR hurdle.

Interviewer: Yeah.

Michael: Which is, really, a private equity property funds management model. For the Harbor Town transaction, we brought in an offshore institution, just because it was a large equity check. And just having come back from the region, I can tell that there is an enormous appetite for those style of institutional, and even high net worth, investors wanting to come and invest in Australia.

Interviewer: And this is more Asian-based capital coming into Australia?

Michael: Yes, absolutely.

Interviewer: Right, it's very interesting. There is a lot of it at the moment.

Michael: Yeah, enormous amount. I mean, that's what is really driving the market. Investing through people like us and also directly, because they're buying assets as principals themselves. And they're also investing through people like us.

Interviewer: What do you think the drivers are for the Asian capital and the influx coming into the market at the moment?

Michael: I think they see Australia as a very safe haven. Australia is attracted to them obviously had the fall in the dollar which is obviously helped in terms of their returns. So, there is a real affinity towards Australia.

Interviewer: Do you find a lot repeat investments? Like, once someone has invested, or an investor has invested once, that they come and it's a relationship, it's continuing thing?

Michael: Sure. Well, the model, as I said to you, is a different model to what it was in the last five years when we changed the whole platform of the business. But the old business had many repeat key clients that used to borrow from us all the time, for all their various projects. Now, in this new environment with the new business that we've got, that is all repeat investors that invest across generally any of our assets that we decide to syndicate.

Interviewer: Makes a bit of sense. If your family offices... obviously, if you've had success in the past investing with AsheMorgan, then you would do it again. Because you've got the relationship, you know that AsheMorgan are going to putting the capital in alongside yours, it's all very transparent. Makes a lot of sense.

Michael: I guess we're not driven, at all, by having to deploy capital. In the all of the assets that, if you look that we've bought, we could have bought a lot of more stuff for the last four or five years. But I guess we've been particularly careful. That's one of the benefits of having come out of the GFC, I suppose we've changed our risk profile and how we look at opportunities. We are much more sort flexed on the downside and where we can get caught out, doesn't mean ... obviously you can get caught up but we're very [inaudible 00:11:09] to really weed some of the pitfalls out ...

Interviewer: And how to manage those [inaudible 00:11:13]

Michael: That's what generally our strategy has been to buy assets that we have a strong robust income, that we can extract some capital upside. It's to the extent that there is a shake in the market, where things are going to get difficult, that we can now ride that through and come out the other side.

Interviewer: Retrospect to the opportunities that you are seeing in the market, obviously there's a lot of opportunities coming to the market and there's lot of discussion and [inaudible 00:11:36], everyone is trying to navigate the most appropriate way through the market. It would be interesting to get your feedback on how you view opportunities and what your methodology is for selecting. Obviously, I know that you do everything off-market and the majority of the time you'll be ...

Michael: We're not always off market, we've bidded a few things online. In fact, we just bid on something early this year, which I was to pay which we didn't actually make the shortlist on. But if I go back and look what we've done over the last six months, we've bought Habour Town, we've bought Post Office Square in Brisbane and we built a shopping center together with a joint venture partner. [Inaudible 00:12:09] is a commercial building which also has development opportunity. We haven't actually bought anything in the last six months simply because we just haven't ... although we've bid on stuff as I've said to you, we just haven't seen an opportunity where we want to deploy capital to.

Interviewer: The reason that you're missing out on some of those opportunities is because you are not bidding to a certain level, you're [inaudible 00:12:30]

Michael: Exactly we're not chasing the market. The market is really strong at the moment, I think that we've probably looked at three or four assets in the last quarter that we've either been second or third and we just haven't wanted to chase it. As I said earlier, given that we're not driven by deploying capital, we're really particularly careful now in what transactions we're going to move forward on. As I said to you, there's a lot of money coming in from Asia and we can tap into that, we just want to make sure that if we are going to tap into that and buy assets, it's going to be the right assets, at the right time and the circle.

Interviewer: So, you think quality over quantity, essentially?

Michael: Absolutely, I think that the market obviously is ... you've got a low interest rate environment, you've got a lot of off shore money coming into this market, you've got banks that are very willing to lend again So, you've got all the right ingredients for a hot market. But in saying that there's always opportunities and it's just a matter of being able to sieve through the right opportunities.

Interviewer: Thank you, very much.

Michael: Thanks for your time. It was great to be able to have the interview.


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