Hedge funds still aggressively hovering over A-REITs

Larry SchlesingerDecember 8, 2020

The failed bid by of a consortium of three hedge funds to instigate a management takeover at Charter Hall Office REIT is unlikely to deter further action, according to JP Morgan analyst Scott Jackson.

His comments follow the three US hedge funds - Orange Capital, Point Lobos Capital and Luxor Capital, which collectively hold 19.06% of Charter Hall units, announcing that they will continue with their co-operative arrangement until the end of October.

Last week, unit holder in the A-REIT voted overwhelmingly (62% opposed) against a proposed resolution by the consortium to sack the current Charter Hall Office REIT management and replace it with Moss Capital management and wind up the fund.

Despite the heavy defeat, Jackson says the action yielded benefits for the hedge funds included an increase in the unit price and a current review of corporate governance arrangements and fee structures.

A similar best practice review will also be undertaken of the Charter Hall Office REIT management team.

Since Orange Capital along with Point Lobos Capital and Luxor Capital began agitating for a management takeover the share price rose to a peak of $3.60, though it has fallen since then and is currently trading around the $3.34 mark. At the start of the year it was trading below $2.90.

The portfolio is fully price at $3.96, representing a discount on net tangible assets of about 17%, and has a market cap of $1.875 billion.

One analyst told the Australian Financial Review it would be preposterous to assume the A-REIT would not be trading where it is now were it not for the action of the hedge funds.

Andrew Parsons, managing director of Resolution Capital, writing in the Sydney Morning Herald said the shareholder revolt showed the difficulty of management of externally advised REITs to serve “two masters; “investors and the owners of the management entity”.

Parsons says a crisis of confidence still shrouds A-REITs in the wake of the Federal Court case concerning Centro - the risk of its collapse should have been apparent to experienced directors.

“On a positive note, with debt at reasonable levels and lower distributions payout ratios pointing to sustainable distributions per unit, A-REITs are becoming reliable providers of income and are capital self-sufficient. However many continue to trade at a discount to net tangible assets and their offshore REIT peers,” he says.

In tabling its resolution, Orange Capital had claimed that the board of Charter Hall Office management has an inherent conflict of interest and was incentivised to favour the interests of Charter Hall and not make decisions that are in the best interests of unit holders.

“From here it’s a matter of trying to guess what their next bet is – but hedge funds are typically not long-term holders of these assets,” Jackson told Property Observer.

“They won’t just sell out and go away. They are now a lot more determined to push up the share price to net tangible assets,” he says.

Possible option could see the hedge funds targeting large investors to buy up the assets in the fund and then get the fund wound up and realised at book value.

The office assets held by the fund are currently valued at $3.6 billion. However the fund is currently in the process of selling off its US office assets. Sale of these assets will reduce the fund to around $1.9 billion, geared to around 30%.

Prior to the takeover bid, the Charter Hall Office REIT, along with many other office REITS, was trading at a significant discount to its net tangible assets.

Mark Wist, senior asset consultant at Atchison Consultants, recently told Property Observer the Charter Hall vote could be seen as abarometer for sentiment in the A-REIT space” indicating little appetite for change.

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

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