Merger and acquisition talk is in the air for embattled listed property trust sector
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 takes place, particularly at the small end, which is still jammed up 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 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 trusts are being bombarded with proposals from investment banks to consider mergers and acquisitions as an opportunity to improve their 2011 earnings profile.
In the past few weeks Mirvac bought Westpac's 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 and Centro has being 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 were 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 Dugald Higgins, a senior investment analyst with Zenith Investment Partners. For them, the banks will be applying the vice to accelerate the sale of assets or looking for new ways of restructuring.
In the case of the APN Property Group, its solution is to temporarily list 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 returned 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 real estate investment trusts sector, the feeling is that the worst is over and property prices for top-tier properties have stabilised. This means mergers and acquisitions activity is not far away.
Most such trusts 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. But within this median are wild variances with Stockland trading at a 25 per cent premium to net tangible assets and Mirvac trading at a 17.5 per cent discount to net tangible assets.
In the past few months, hedge funds have been loading up to the gills on real estate investment trusts they have tagged as prime takeover targets as credit markets improve.
Those hedge funds with strong balance sheets are using the next phase of the listed property trust cycle to make money: takeovers. As hedge fund activity is increasing, so are the rumours. Speculation has increased 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 mergers and acquisitions activity due to a poison pill embedded in the debt facilities of most trusts. 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 trusts 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 trust doing the buying. But for the smaller trusts, 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 real estate investment trusts by July 1, 2011 and between July 2010 and December 2012 another $16.8 billion of debt falls due.
The big trusts, 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 trusts 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.