MACQUARIE GROUP'S swoop on Charter Hall Office REIT, on behalf of a consortium of global hedge and sovereign funds, has led to forecasts that other deals are in the wings.
The gap between net tangible asset (NTA) values and share prices has triggered the rush by hedge funds into Australian real estate investment trusts (A-REITS).
Corporate governance issues between internal and external management have also left the door open for investors.
Brokers and investors believe more deals from hedge funds will emerge unless A-REITs close the share price-NTA gap. Many trusts are buying back shares in an attempt to narrow the gap.
Merrill Lynch's property team said it was likely A-REITs would be the subject of corporate activity, or they would have to consider selling assets to crystallise their net asset backing.
"Already this year, we have seen a number of deals, most notably takeovers of ING Industrial Fund by a Goodman group-led consortium, Valad Property by US private equity group Blackstone, and EDT by EPN Retail," Merrill Lynch said.
"In these deals, we believe the fundamental rationale was likely the opportunity to take advantage of the disconnect between the stock price and the value of its portfolio of assets."
Macquarie Equities analysts said discounts to NTA were widespread in the REIT sector, and demand for quality real estate from unlisted investors was high.
The broker said while there were impediments to several groups being taken over (in the case of co-ownership of properties and management covenants), they believed sufficient value was evident in the sector for investors to be considering companies with quality property portfolios trading at substantial discounts to valuation.
One factor that will make it difficult for an outside party to attempt a full takeover for Charter Hall Office REIT is the cross-ownership it has on some key assets.
Under the Macquarie plan, Charter Hall Group will retain management of the office trust and will also keep its 13.3 per cent direct stake.
The remainder of the register, which includes 19 per cent held by US hedge funds Orange Capital, Point Lobos and Luxor Capital, will be offered up to $3.52 a share, including a $1.10 capital return from the sale of its US assets.
It is expected the US hedge funds will use the offer as an exit from the office trust.
Charter Hall Office's independent directors are assessing the conditional offer before they hold any discussions with the consortium.
UBS analysts said the independent directors would be expected to consider several pricing issues and the NTA gap when forming their recommendation.
"We expect them to look at the offer price relative to NTA. In our view, the discount to NTA may be considered too big to warrant exclusive due diligence," they said.
"There is the potential for a superior bid, similar to the case of Goodman Group's IIF [ING Industrial Fund] deal ..." they said.
Frequently Asked Questions about this Article…
What was Macquarie Group's offer for Charter Hall Office REIT and who was behind the bid?
Macquarie Equities led a conditional offer for Charter Hall Office REIT on behalf of a consortium of global hedge and sovereign funds. Under the Macquarie plan, Charter Hall Group would keep management of the office trust and retain a 13.3% direct stake, while the remainder of the register would be offered up to $3.52 a share (which includes a $1.10 capital return from the sale of US assets).
Why are hedge funds targeting Australian REITs (A-REITs) right now?
Hedge funds are targeting A-REITs because many trusts are trading at discounts to net tangible asset (NTA) values — a gap between NTA and share price that creates buying opportunities. The article also notes strong demand from unlisted investors for quality real estate and corporate governance tensions between internal and external managers that can make some trusts vulnerable to offers.
Could the Charter Hall Office REIT offer trigger more takeover activity in the A-REIT sector?
Yes. Brokers and analysts cited in the article say Macquarie's swoop could signal more deals to come unless A-REITs close the share price–NTA gap. They expect further corporate activity unless trusts take steps to narrow those discounts.
What actions are A-REITs taking to close the share price–NTA gap?
Many A-REITs are buying back shares to try to narrow the discount, and some may consider selling assets to crystallise their net asset backing. Merrill Lynch’s property team said trusts facing discounts will likely be the subject of corporate activity or will need to sell assets to realise value.
What makes full takeovers of some A-REITs difficult?
The article points to practical impediments such as co‑ownership of properties, management covenants and cross‑ownership of key assets. These structures can make it harder for an outside party to complete a full takeover of a trust.
Who were the key existing shareholders mentioned in the Charter Hall Office REIT offer, and what might they do?
The article says about 19% of the register was held by US hedge funds Orange Capital, Point Lobos and Luxor Capital. It is expected those US hedge funds would use the Macquarie offer as an exit from the office trust.
What will Charter Hall Office REIT’s independent directors consider when assessing the offer?
Independent directors are evaluating the conditional offer and — according to UBS analysts — will consider pricing issues and the gap between the offer price and NTA. UBS expects them to weigh whether the discount to NTA is too large to justify exclusive due diligence and to consider the potential for a superior bid.
What recent A-REIT takeover examples does the article cite as part of this trend?
The article references several recent deals: the takeover of ING Industrial Fund by a Goodman-led consortium, the acquisition of Valad Property by US private equity group Blackstone, and the takeover of EDT by EPN Retail. These deals illustrate investors taking advantage of stock-price versus asset-value disconnects.
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