Investa Property Group (Investa) today announced it agreed terms to assume the management of the ING Office Fund (IOF) from ING REIM (ING), the owner of ING Management Limited (IML), the responsible entity (RE) of IOF. Investa is acquiring the 2.5% stake in IOF currently owned by ING entities.
The Fund will be re-named the “Investa Office Fund” with the existing ASX ticker “IOF” to be retained.
The Transaction will result in a transitional arrangement where IML will remain as the RE of IOF, and Investa will replace ING Real Estate Investment Management Australia (REIMA) as the manager of the Fund. It is intended that, in the future, IML will seek unitholder consent to replace IML as RE of IOF with an Investa RE or Investa will acquire IML
.As one of Australia’s largest owners and managers of premium office buildings, Investa is well positioned to manage IOF, being a diversified property company, with extensive office management experience. The company has proven capability in operating a public company, having been listed from 2000 – 2007.
Following the transaction Investa will own and/or manage more than 60 office buildings, valued at approximately $8.3 billion. Almost all are located in the primary commercial centres of Australia’s major capital cities.
Mr Scott MacDonald, Chairman and CEO of Investa commented: “The acquisition of the Fund is a natural progression for Investa, leveraging off our integrated, well resourced office management platform, which spans funds management, portfolio, and asset services, development, property services and sustainability.”
“The transaction delivers a range of financial and strategic benefits which are designed to create additional unitholder value over time,” said Mr MacDonald.
The key benefits available through the agreement include;1. Restructure of RE fee
- Subject to IOF unitholder approval, the RE fee will be restructured from a percentage of assets under management (“AUM”) to a percentage of market capitalisation with effect from 1 July 2012.
- Investa has agreed to an RE fee of 55 basis points per annum of IOF’s market capitalisation, calculated on a quarterly basis. To reduce significant change in RE fees between each quarter due to any volatility in IOF’s market capitalisation, a cap / floor in each quarterly period of + / – 2.5% of the fee for the prior quarter will apply. The existing management fee arrangements in respect of IOF’s offshore assets will remain unchanged.
- For the period ending 30 June 2012, the fee will be fixed at $8.6 million, (excluding management fees paid on foreign assets) which is approximately equal to 55 basis points of IOF’s current market capitalisation. Any amount in excess of these fees (under the current calculation basis) will be deferred until consideration of a resolution by IOF unitholders to restructure the RE fee. Provided IOF unitholders approve the restructured RE fee, Investa will waive any entitlement they have to receive any excess fees. If the resolution to restructure the RE fee is not approved, Investa will be entitled to receive the deferred amount.
Commenting on the proposed change in the fee structure Mr MacDonald said: “Investa is seeking to transform the way REITs are managed in Australia by basing our fee structure on the market capitalisation of the Fund versus the volume of assets under management.”
“We believe this will contribute to the enhancement of unit value and elevate the alignment of interests between the external manager and investors to a level unprecedented in Australia.”
2. Call option over 50% of 242 Exhibition Street, Melbourne
- IOF has been granted a call option over Investa’s 50% stake in this A-grade asset, worth approximately $425 million(100% share). The option may be exercised at any time prior to 30 September 2011 with an exercise price equal to fair market value, as supported by an independent valuation.
- Exercise of the option is subject to the pre-emptive rights held by the existing co-owner not being exercised, approval by the majority of IML directors who are independent of Investa; and IOF unitholder approval.
Commenting on the asset option Mr Campbell Hanan, Group Executive and Head of Commercial Property Investments at Investa said: “242 Exhibition Street is a high quality asset in Melbourne’s CBD, with a long lease covenant to Telstra. This option would, subject to unitholder approval, provide the Fund with access to an acquisition opportunity that would not otherwise be typically available. It also allows the Fund to advance its stated strategy of focusing on Australian A-grade assets in core CBD markets. Further, it provides an opportunity to re-invest offshore sale proceeds if no better alternatives exist.”
3. Path to future internalisation
- IML and Investa have entered into a non-binding memorandum of understanding (“MOU”) which contemplates the granting to IOF of a call option over 50% of the Investa Office Management platform (“IOM”), which currently has approximately $5.7 billion in AUM.
- The MOU contemplates that the option may be exercised within 12 months of the date on which IOF’s total Australian assets are valued at $3.5 billion. The exercise price will be equal to fair market value, as supported by an independent valuation. If exercised, IOF will be granted a pre-emptive right to acquire the remaining 50% of IOM, should Investa elect to sell its remaining interest in the platform.
- Investa and IML must use their best endeavours to enter into a binding agreement to give effect to the MOU as soon as practical.
- At 31 December 2010, total Australian AUM of IOF was A$1.6 billion with total AUM including offshore assets of A$2.6 billion.
Commenting on the MOU Mr Hanan said: “We are very pleased that a clear pathway to an internalised management structure has been allowed for through this option that can be considered by unitholders at the appropriate time.”
4. Unitholder input into RE Board composition
- On termination of the transitional management arrangements, following IOF unitholder approval for Investa to replace IML as the RE, or acquisition by Investa of IML, Investa is proposing that new governance measures, which build on their currently well regarded governance structure be introduced, subject to unit holder approval. Central to this is the proposal that when the RE Board becomes an Investa entity unitholders would have a right to ratify the appointment of independent Directors to the Board.
- The proposed governance structure would involve the majority of the Board, including the Chairman, being independent of Investa.
Investa intends to apply an active approach to capital management, which may include a unit buy back and refinancing of IOF’s Australian syndicated debt facility on market competitive terms.
Commenting on the focus for the management of the Fund Mr Hanan said: “Our key priorities will be to commit capital to the Australian assets, evaluate the benefits of a unit buy back, sell the offshore assets and drive property performance.”
“Long-term, our management strategy will have a total return focus, concentrating on core and strategic asset spreads, with a focus on A-grade Australian assets in core CBD markets.”
An integration plan is underway to ensure an orderly transition from ING REIMA to Investa. The Fund will have a dedicated team of employees, including a number of key IOF staff. The team will be led by current IOF CEO Tino Tanfara, who will become a senior executive at Investa.
“Investa has established an integrated program to ensure a seamless transition of IOF into Investa’s operation. Internal resources available to the Fund include property services, fund’s management, portfolio management, asset management, finance, and legal,” said Mr Hanan.
Investa plans to take over Australian property management operations from an external agent effective 1 July, 2011. From here Investa intends to introduce additional sustainability programs and practices to IOF.
Commenting on the company’s ability to optimise the environmental performance of office buildings, Craig Roussac, General Manager Sustainability, Safety and Environment at Investa commented: “Investa has a long history of market leadership in the application of real estate sustainability initiatives, and can demonstrate sustained improvements in building quality, and subsequent investment returns of the properties we acquire and manage.”
Analysis shows that major improvements have generally been made in the first three years under Investa’s management, and we are confident that we will be able to generate similar environmental performance improvements for the IOF portfolio.”