Takeover speculation grips REIT sector
DEXUS has bought the option over a 14.9 per cent interest in CPA, after the manager of the fund, Commonwealth Bank, revealed it was looking to privatise those rights.
That sparked theories the trusts, including CFS Retail, were now in play as potential takeover targets.
As the real estate investment trust sector heads into the 2012-13 reporting season, the main focus will be the deteriorating office market, patchy retail - food up and apparel flat - and a stable industrial sector.
With more than half the REITs exposed to the Sydney and Melbourne office markets, analysts have raised concerns about the impact on earnings from rising vacancies in the coming year.
DEXUS has made its intention clear - it wants to be the biggest office landlord in the country. Buying CPA, which owns a large portfolio, including a half share of the under-construction 5 Martin Place, will go a long way in helping DEXUS achieve its goal.
Among other takeover possibilities, Charter Hall Group could look at CFS Retail, and this would be done with the blessing of property developer John Gandel, who owns a stake in both REITS.
There are suggestions Simon Property Group of the US is interested in CFS, although analysts are not too convinced.
Some say this could prompt Westfield to weigh in, particularly to snare a share of the Chadstone shopping centre in Melbourne.
There is also talk Stockland could buy Australand, although CapitaLand, which owns 59 per cent of Australand, has said it intends to remain on the register.
GPT Group, which missed Australand, is said to be looking at a new target, possibly FKP Property.
New FKP chief executive Geoff Grady has said he is continuing with the strategy of closing the gap between FKP's security price and its stated net tangible asset value.
Under the plan, FKP intends to streamline and focus the business on its retirement operations, and continue to explore opportunities to realise its property development projects. That could involve a demerger or separation of its retirement and development/trust businesses, some of which could be of interest to Stockland, a 14.3 per cent shareholder, or GPT.
Stockland chief executive Mark Stienert has said the retirement business is an important part of the group. Its full-year results will be out on Tuesday, following GPT's on Monday. FKP's results will be out on August 21.
It is also believed Investa Office Fund was a target, given it is 2 per cent-owned by Morgan Stanley and therefore has a wide-open register.
Goldman Sachs analysts said merger and acquisition talk aside, they were looking for "solid" office asset comparative net operating income from the coming reporting season.
But there is a rising risk that lease incentives, shopping centre leasing spreads and rental declines will hurt retail landlords and REITs restructuring debt costs. Goldman analysts said growth in earnings per share would probably slow down in 2013-14 compared with the previous year, as office fundamentals weakened and the impact of lower interest rates on debt stabilised.
"As we move into 2014, we anticipate normalised growth of about 6 per cent driven by debt cost reductions, slight improvement in residential markets with potentially further upside from acquisitions," they said.
Frequently Asked Questions about this Article…
The speculation began when DEXUS bought an option over a 14.9% interest in Commonwealth Property Office Fund (CPA) after the fund manager, Commonwealth Bank, revealed it was looking to privatise those rights — prompting talk that other trusts could be potential takeover targets.
DEXUS has made clear it wants to be the country’s biggest office landlord. Acquiring CPA — which owns a large portfolio including a half share of the under‑construction 5 Martin Place — would significantly boost its office footprint and help it reach that goal.
The article mentions CFS Retail (linked to possible interest from Charter Hall Group, Simon Property Group and even Westfield), Australand (with Stockland discussed as a potential buyer though CapitaLand says it will remain on the register), FKP (rumoured to be of interest to GPT) and Investa Office Fund (seen as vulnerable because Morgan Stanley owns just 2%).
Analysts flag a deteriorating office market with rising vacancies (especially in Sydney and Melbourne), plus retail pressures from lease incentives, widening leasing spreads and rental declines — all of which could weigh on landlords’ earnings and REITs that are restructuring debt costs.
New CEO Geoff Grady is pursuing a plan to close the gap between FKP’s security price and its stated net tangible asset value by streamlining the business, focusing on its retirement operations and realising development projects — measures that could include a demerger or separation of businesses and might make parts of the company more or less attractive to buyers like Stockland or GPT.
Goldman Sachs warned that earnings‑per‑share growth would probably slow in 2013‑14 as office fundamentals weaken and the benefit from lower interest rates stabilises, but they expect normalised growth of about 6% in 2014 driven by debt cost reductions, modest residential improvements and potential upside from acquisitions.
Investa is cited because Morgan Stanley owns only about 2% of the fund, leaving a wide‑open register — a structure that can make a trust more vulnerable to takeover approaches.
Investors should focus on office asset net operating income and vacancy trends (notably in Sydney and Melbourne), retail leasing spreads and rent movements, how REITs are managing debt costs, and upcoming results (the article notes GPT’s results on Monday, Stockland’s on Tuesday and FKP’s on August 21) for signs of earnings pressure or acquisition activity.
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