Hedge Funds Target Australia REITs Buying Before Bust: Real M&A

May 11, 2011, 9:32 PM EDT By Jonathan Keehner and Nichola Saminather

May 12 (Bloomberg) -- What’s a Park Avenue office building really worth? Almost 25 percent less to shareholders in Australia, where hedge funds are agitating for the nation’s property trusts to sell their U.S. assets.

Australian real estate investment trusts are trading at an average of 92 cents per dollar of net asset value, while U.S. property trusts are valued at a 20 percent premium, according to data compiled by UBS AG and Green Street Advisors Inc. The valuation gap has prompted hedge funds from Orange Capital LLC to Artis Capital Partners to push for sales of $3.1 billion in U.S. office buildings and shopping centers owned by two Australian REITs. One of them, EDT Retail Trust, is trading at a 15 percent discount to the value of its underlying assets.

Hedge funds are targeting property trusts in Australia after U.S.-traded REITs surged 92 percent since slumping to a record low in 2009, as commercial property prices rebounded, according to data compiled by Bloomberg. With Australian trusts that bought more than $23 billion of U.S. properties still trading at a discount, investors are betting they can turn a profit by forcing the REITs to sell at market prices. Blackstone Group LP offered $9.4 billion in March for U.S. shopping centers owned by Australia’s Centro Properties Group, the private equity firm’s largest deal since 2007.

“Some smart investors have picked up on this disparity, built positions in these stocks and educated others in the market about the opportunity,” said David Lazarus, senior managing director at boutique investment bank EdgeRock Realty Advisors LLC in New York. “This has put pressure on management teams of the A-REITs and will lead to mergers or asset sales.”

Trading Below Assets

REITs in the U.S. traded at an average premium of 20 percent to their net asset values as of May 2, according to data from Newport Beach, California-based Green Street.

Australian REITs, which haven’t traded at a premium since January 2010, were valued 7.8 percent below their net assets on average as of April 30, UBS data show. Investors are valuing the nation’s trusts at 23 percent less than those in the U.S.

“Australian REITs are trading at substantial discounts to net asset backing, and are better off selling than buying,” said Simon Garing, a real estate analyst at Bank of America Corp.’s Merrill Lynch unit in Sydney.

The Bloomberg REIT index of 124 U.S.-listed property trusts has rallied 16 percent in the past 12 months. During the same time, 22 so-called A-REITs in the S&P/ASX 300 REIT Index are down 1.4 percent in local currency terms.

Property Price Rebound

U.S. commercial property values increased about 42 percent through April since a low in May 2009, erasing about two-thirds of the decline that occurred during the worst U.S. recession since the Great Depression, according to Green Street’s weighted price index. The price rebound was driven in part by improving capital and financial markets, according to the May 5 report.

While companies in the A-REIT index have cut debt and many have sold assets abroad in the past two years, investors are actively pushing them to divest more U.S. real estate holdings. Many A-REITs are run by external managers responsible for the operation of the trust in exchange for a fee. Such managers can be removed by a special vote if a majority of investors present support the move.

“Externally managed REITs are the norm in Australia and some of these structures cost shareholders money,” EdgeRock’s Lazarus said. “Incentives of external managers and shareholders aren’t aligned and they benefit from different outcomes.”

Blackstone Deal

Blackstone, the biggest private-equity firm, plans to complete its $9.4 billion purchase of Melbourne-based Centro’s 588 U.S. shopping centers and malls around mid-year. The deal is New York-based Blackstone’s biggest since 2007, when it paid $26 billion including net debt for Beverly Hills, California-based hotel chain Hilton Hotels Corp.

The Centro acquisition, at a 1.3 percent discount to the malls’ value as of Dec. 31 according to Centro, signals that Blackstone is betting on a continued recovery in U.S. commercial property after the subprime crisis derailed Centro’s U.S. acquisition spree as debt costs soared.

Australian property companies bought $23.5 billion in U.S. real-estate assets in the four years through Dec. 2008, according to data compiled by Bloomberg. The buying spree backfired when the financial crisis froze credit markets. Centro, which had A$16.5 billion of assets and A$16 billion of debt before the agreement with Blackstone, was among the biggest Australian casualties of the credit crunch.

‘Peak of Bubble’

“No one has accused the Australians of being the smartest guys in the room when it comes to buying U.S. real estate at the peak of the bubble,” said Mike Kirby, director of research at Green Street. “A lot of those deals didn’t create shareholder value and may be unwound.”

Independent directors of Sydney-based EDT Retail, which trades at a 15 percent discount to its net tangible asset value, urged investors on May 3 to reject a takeover bid by its biggest shareholder, EPN EDT Holdings II LLC, saying it undervalued the company.

Investors including Artis Capital and PSQ Capital called for EDT, which has interests in 48 U.S. shopping centers valued at almost $1.4 billion as of December, to consider a sale instead. The firms said in a letter to EDT that there was a “large gap” between where EDT was trading and the value of the assets.

“EDT’s assets are similar to Centro’s, of better quality and are a more bite-sized portfolio for some of the buyers,” Peter Kennan, managing partner at Artis Capital in Hong Kong, said in an interview. “We’ve got a window here to sell.”

Interest in EDT

Area Property Partners, a New York-based private-equity firm that also bid on Centro’s assets, is among companies that expressed interest in EDT’s portfolio, according to a person familiar with the firm’s discussions, who declined to be named because the plans are private. National Australia Bank Ltd., the nation’s fourth-largest lender, bought a 35 percent stake in Area in March.

Mitchell Breindel, an outside spokesman for Area, declined to comment.

EDT Retail, which owns Shoppers’ World in a Boston suburb and Woodfield Village Green in a suburb of Chicago, received a sweetened bid from EPN for 9 Australian cents a share on May 11, up from the initial 7.8 cents-a-share offer.

John Martin, EDT’s Sydney-based chief accounting officer, said the trust’s independent directors are reviewing EPN’s revised offer and will release their response to the bid soon.

Outright Sale

Orange Capital in New York has pushed Sydney-based Charter Hall to consider an outright sale of its portfolio, which has a book value of about $1.7 billion, instead of pursuing a U.S. joint venture for the office REIT.

Shares of Charter Hall, which owns office buildings in Los Angeles and Tampa, Florida, have risen 17 percent since Jan. 12, the day before Orange Capital disclosed a stake and said it hired advisers to evaluate options for the company. The REIT closed at A$3.50 a share on May 11, a 12 percent discount to its assets.

“We’ve always thought that the value of Charter Hall’s assets, especially in the U.S., was far in excess of where they were trading,” Orange Capital managing partner Daniel Lewis said in an interview.

Orange Capital is cooperating with Luxor Capital Group LP and Point Lobos Capital LLC on its initiatives to maximize shareholder value, according to Australian regulatory filings. The three hedge funds own shares amounting to 18.15 percent of the voting rights of Charter, according to a May 9 filing.

Seeking Offers

Charter Hall is seeking offers for its entire U.S. portfolio, people familiar with the plan said last month.

Blackstone, Toronto-based Brookfield Asset Management Inc. and Highwoods Properties Inc. in Raleigh, North Carolina, are among firms that have expressed interest in some or all of Charter Hall’s 14 U.S. properties, which may fetch more than book value, the people said last month.

Bids for Charter Hall were due last week, according to a person familiar with the process, who declined to be identified because the matter is private. Kylie Ramsden, a spokeswoman for Charter Hall, declined to comment.

Tishman Speyer Office Fund, an Australian REIT started by Tishman Speyer Properties LP in 2004, has a portfolio consisting entirely of U.S. office buildings in such locations as Beverly Hills, California; Greenwich, Connecticut; and 300 Park Avenue in Manhattan. The property trust traded at 65 Australian cents as of May 11, or a 4.4 percent discount to its asset value.

The future of Australian-listed trusts that own primarily U.S. assets, such as Tishman’s fund, “is very limited,” as Australian investors remain wary of REITs focused overseas, said Stuart Cartledge, managing director at boutique investment management firm Phoenix Portfolios in Melbourne.

“Those trusts that are trading at significant discounts to NTA would certainly be of interest to external parties, be they their own managers or private equity groups,” said Scott Courtney, head of REIT research at Morningstar Australasia Pty in Sydney. “The margin between the underlying value of their assets and their current trading prices makes them attractive, particularly as conditions improve in the U.S.”

--With assistance from Jason Kelly, Kara Wetzel and Jennifer Sondag in New York and Daniel Hauck and Katherine Snyder in Berlin. Editors: Sarah Rabil, Michael Tsang.

To contact the reporters on this story: Jonathan Keehner in New York at jkeehner@bloomberg.net; Nichola Saminather in Sydney at nsaminather1@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; David Scheer at dscheer@bloomberg.net; Andreea Papuc at apapuc1@bloomberg.net.

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