real estate trusts entice hedge funds ...

[Source: www.theage.com.au/business]

Real estate trusts entice hedge funds
ADELE FERGUSON
August 9, 2010

RECENT speculation that the $84 billion listed property trust sector is on the cusp of a takeover frenzy has sparked the interest of hedge funds and day traders who are taking positions on the most likely takeover targets and their acquirers.

If the much-needed clean-up of the sector occurs, particularly at the small end, which is still jammed with debt, it will go a long way to rebuilding the battered credibility of the sector.

Faced with flat to negative earnings growth in real estate investment trusts (REITs) for 2011, compared with an average earnings growth of more than 15 per cent for industrial stocks over the same period, it isn't surprising that the bigger REITs are being bombarded with proposals from investment banks to consider mergers and acquisitions (M&A) as an opportunity to improve their 2011 earnings profile.

In the past few weeks Mirvac bought Westpac Office Trust, Stockland made a takeover bid for Aevum, Century Funds Management has offered to take over the management of two Becton funds and Centro Properties Group has been trying to sell part of its Centro MCS syndicates business to high-quality fund managers.

But it won't be as easy for the $25 billion unlisted retail property funds, which have been forced to freeze redemptions in the past two years. In the next 12 months $4.5 billion of debt falls due, building up to $7.3 billion between December this year and December 2012, according to Zenith Investment Partners senior investment analyst Dugald Higgins.

For them, the banks will be putting on the vice grip to accelerate the sale of assets, many of which are second tier, or look for new ways of restructuring.

The APN Property Group's solution is to list temporarily on the ASX units in two of its unlisted Property for Income funds to give its thousands of investors a chance to redeem their investments.

Under the proposal, APN would temporarily operate two classes of units - listed and unlisted - in the two funds, which hold more than $800 million of property assets, until the funds return to liquidity.

Not surprisingly the rest of the unlisted property fund sector is watching to see whether the APN proposal succeeds. Unfortunately, most believe when the ASX does give the green light, and the shares start trading, the share price will tank.

For the listed REIT sector, the feeling is that the worst is over and prices for top-tier properties have stabilised, something which will be confirmed this reporting season. This means M&A activity is not far away.

Most REITs are still trading at a big discount to net asset backing, making it cheaper to buy the trust than the individual real estate assets. The sector is trading at a median discount of 4.1 per cent to net tangible assets (NTA).

But within this median are wild variances, with Stockland trading at a 25 per cent premium to NTA and Mirvac trading at a 17.5 per cent discount to NTA.

In the past few months, hedge funds have been loading up to the gills on REITs they have tagged as prime takeover targets as credit markets improve.

While hedge funds are a long way from their glory days, they are far from dead, and those with strong balance sheets are using the next phase of the listed property trust cycle to make money through takeovers.

As hedge fund activity is increasing, so are the rumours. Speculation has intensified that Mirvac, Valad Property Group and Dexus are sitting ducks. The share prices in the stocks have risen, and so has the level of hedge fund activity.

But until now there hasn't been much M&A activity due to a poison pill embedded in the debt facilities of most REITs. This so-called change of control provision, which causes the debt facilities to become immediately due and payable on a change of ownership, would have been used by the banks to take back their money.

As credit markets thaw, and the bigger REITs have recapitalised through equity issues, the banks will increasingly overlook this clause and allow the mergers to proceed - but only if it is a bigger REIT doing the buying.

The truth is most of the bigger REITs have been able to sort themselves out, refinance their debt, raise equity, and debt markets have eased to the degree that they can go on the hunt for acquisitions.

But for the smaller REITs, the best they can hope for is to become a takeover target.

Too small to recapitalise through equity raisings, many have big wads of debt due next year and the year after.

According to Zenith Research, $4.6 billion of debt is due for REITs by July 1, 2011 and between July this year and December 2012 another $16.8 billion of debt falls due.

Put simply, the big REITs, with cleaned-up balance sheets, will be under pressure to get bigger to become more relevant and show a decent earnings growth profile in the next 12 months.

The small REITs, which have been shown mercy by the banks for the past two years, will now be forced into some form of restructure or merger with bigger, safer operators.

For the bulk of the unlisted retail sector, it looks like more frozen redemptions, banks and investors getting antsy for their money back, and no real solution in sight.


Ends.