The DEXUS Proposal continues to undervalue IOF
Independent valuations for IOF should be updated to reflect improved market conditions & potential valuation upside
Recently IOF unitholders were issued a Supplementary Explanatory Memorandum from Investa Listed Funds Management Limited (ILFML), the responsible entity of Investa Office Fund (IOF), regarding DEXUS Funds Management Limited’s proposal to acquire 100% of IOF.
It refers to a proposed Special Distribution for IOF unitholders of 7 cents per IOF unit only if the DEXUS Proposal proceeds. In fact, unitholders are already entitled to have distributed to them all available income of IOF. This is the only change to the DEXUS Proposal and does not alter Investa Office Management Holdings’ (‘Investa’ or ‘the Platform’)1
view that the DEXUS Proposal undervalues IOF.
Investa maintains that IOF unitholders deserve to be paid a substantial premium for a change of control transaction.
1. THE SPECIAL DISTRIBUTION2 WOULD NOT MATERIALLY CHANGE THE VALUE RECEIVED BY IOF UNITHOLDERS
- The Special Distribution represents at best, a 1.7% increase in the value of the DEXUS Proposal
- The substantial scrip component of the DEXUS proposal means IOF unitholders are essentially subsidising the Special Distribution themselves and will in effect only benefit from ̴ 5.5 cents per unit (i.e. not the full 7 cents)3
2. THE SPECIAL DISTRIBUTION WILL BE TAXED AS INCOME AND NOT CAPITAL GAINS FOR MANY UNITHOLDERS
3. THE SPECIAL DISTRIBUTION DOES NOT BRIDGE THE VALUE GAP. IOF UNITHOLDERS DESERVE A SIGNIFICANT PREMIUM FOR A CHANGE OF CONTROL TRANSACTION AND THEY ARE NOT RECEIVING IT WITH THE DEXUS PROPOSAL
- The decision of the IOF Independent Board Committee (IBC) to pay the Special Distribution from IOF funds (including debt), rather than by DEXUS increasing its cash consideration will result in an inferior tax outcome for many IOF unitholders as the Special Distribution will be characterised as income and not capital for most unitholders
4. IOF'S VALUATION AND RESULTING NTA IS NO LONGER CURRENT
- The DEXUS Proposal continues to undervalue IOF4, providing an insufficient premium to IOF’s stated NTA
- IOF’s NTA is no longer current. Recent transactions in the office property market combined with improved sentiment in the Sydney and Melbourne leasing markets demonstrate office property valuations have moved since IOF’s portfolio was valued in October/November 2015. An updated valuation of IOF’s portfolio would suggest that the premium to NTA referred to by DEXUS and ILFML would be overstated.
- The view of movement in market values has been noted by independent market research by Knight Frank6. Key points of the Knight Frank research note are:
(a) Material changes in value in the “upper prime” market;
(b) Valuation lag will be evident versus many 2015 book values; and
(c) A-grade trading within wide band, but below 6.0%
It is important to note that the current assessed book cap rate for IOF is 6.33%, suggesting that independent valuation should be adjusted upwards.
- Additionally, on 4 April 2016, GPT Metro Office Fund (“GMF”) announced a revaluation of the entire portfolio from 31 December 2015, in response to the receipt of an unsolicited proposal to acquire all units in GMF. This has resulted in an increase in total portfolio valuation of 6.4%, for the three months to 31 March 2016:
– “…The increase in property values is primarily the result of a combination of income growth and tightening in capitalisation rates. GMF decided to undertake an independent revaluation of all of the properties in the portfolio as at 31 March 2016, following receipt of an unsolicited, confidential, highly conditional and non-binding proposal to acquire all of the units in the Fund. In making this decision GMF was mindful of transaction evidence from recent metropolitan office building sales. The unsolicited proposal was subsequently withdrawn.”7
5. THE IBC OF IOF CONTINUES TO PRESENT THE VALUE OF THE DEXUS PROPOSAL IN AN OVERLY FAVOURABLE LIGHT
- Investa believes this is a relevant precedent and it is important for the IOF portfolio to be revalued to 31 March 2016 to reflect more favourable market conditions and potential valuation upside.
- The IBC of IOF continue to “cherry-pick” reference dates for both DEXUS and IOF security prices. As the chart below highlights, DEXUS’ security price has largely traded well below the spot prices cherry-picked in IOF8 announcements.
- The substantial scrip component of the DEXUS Proposal exposes IOF unitholders to both market and DEXUS-specific risks:
- From 4 December 2015 to 1 April 2016, DEXUS’ security price has fluctuated by over 13%, highlighting the volatility of the DEXUS security price and the significant risk facing IOF unitholders in respect of the value they may ultimately receive.
- IOF unitholders are exposed to a three-week period of uncertainty between the Scheme Meeting date of 15 April 2016 and the implementation date of 6 May 2016.
- Investa believes IOF unitholders are not being appropriately compensated by DEXUS for this risk along with risks from higher gearing and exposure to industrial property as a result of exposure to DEXUS scrip.
Investa’s Vision For IOF
Investa’s vision for IOF is that it continues to provide attractive, risk-adjusted returns to investors through its investments in Australian CBD commercial office assets, underpinned by the high quality, end-to-end management services it provides. Investa wants to strengthen and consolidate its relationship with IOF through IOF acquiring a 50% interest in the Platform.
Investa has provided market leading performance to IOF unitholders since it assumed management in 2011, outperforming DEXUS during this period.11
Investa believes that as the only pure commercial office AREIT in the market, IOF remains the best way to obtain an exposure to the continually improving Australian office market.
Unitholders are encouraged to carefully consider the information in the letter issued to them today as well as the original Information Memorandum Investa sent to IOF unitholders on 14 March 2016 which can be found at www.InvestaForIOF.com.au
Read the letter issued to IOF unitholders by Investa in response to the Supplementary Explanatory Memorandum Investa Listed Funds Management Limited (ILFML) issued to IOF unitholders
1 This document is issued by Investa Office Management Holdings Pty Limited and is not issued or endorsed by the responsible entity of IOF. Please refer to Important Notices on page 4 of letter to IOF unitholders
.2 Proposed 7 cents per unit special distribution payable by IOF if the DEXUS Proposal is approved by IOF unitholders
.3 If the DEXUS Proposal succeeds, IOF unitholders will hold approximately 21% of the merged DEXUS/IOF entity. The payment to IOF unitholders will adversely impact the value of the merged entity and therefore the value of the DEXUS scrip IOF unitholders receive.
4 The implied IOF offer price includes 7 cents per unit special distribution. Last close as at 31 March 2016
.5 The $4.46 IOF price per unit is calculated by applying the 12% simple average AREIT transaction premium to IOF’s 31 December 2015 reported NTA per unit (see IOMH booklet dated 14 March 2016). The discounts represent the difference between the IOF price per unit based on recent AREIT transaction premia to NTA and the IOF implied offer price based on the Dexus security price at different points in time. All post-announcement implied IOF offer prices are measured from 31 March 2016.
6 Institutional Commercial Market Update/Analysis, April 2016
.7 GPT Metro Office Fund, ASX Announcement, 4 April 2016.
8 Analysis based on IOF announcements
.9 Implied offer price includes full 7 cents per unit special distribution payable by IOF to unitholders if the DEXUS Proposal is approved.
10 From announcement of Dexus Proposal dated 7 December 2015
11 IOF’s total book value return (NTA growth + distributions) has outperformed that of DEXUS by c.17% since 2011.
Learn more at www.InvestaForIOF.com.au