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Charter Hall Group (ASX:CHC) (‘CHC') responds to Charter Hall Office REIT's (ASX:CQO) (‘CQO') ASX announcement made yesterday, about its intention to sell all of its United States (‘US') portfolio and its current intention to return net proceeds to CQO unitholders.
Should the current CQO US asset sale process result in a sale of the whole US portfolio at current book values and if the net proceeds were returned to unitholders, the financial impacts on CHC are estimated to be:
- a net reduction in intangible assets from $66.2 million1 to approximately $53 million;
- any reduction in intangibles will impact the statutory profit and net assets, offset to the extent of any net divestment fees earned in the same period by CHC in managing the sale of CQO's US portfolio;
- approximately 10% of the net proceeds from the sale of the CQO US portfolio returned to CHC as a CQO unitholder2;
- no adverse impact to CHC's net tangible assets; and
- loss of net income from the management activities of CQO's US portfolio (estimated to contribute approximately 3% of FY11 operating earnings of CHC).
CHC refers to Orange Capital's most recent press release, advising it had requested a copy of the unitholder register of CQO, with the stated subsequent intention of calling a meeting of CQO unitholders to consider removing Charter Hall Office Management Limited (‘CHOML') as responsible entity of CQO. CHC is able to vote on a resolution to remove CHOML as responsible entity of CQO. CHOML is a 100% owned subsidiary of CHC.
CHC was recently approached by a member of the Orange Capital led consortium with various propositions consistent with the activist's short term investment objectives, including the liquidation of CQO's Australian portfolio. CHC notes that these activist hedge funds have not identified their proposed responsible entity that under their proposal will replace CHOML to undertake any liquidation of the Australian portfolio of CQO. The activist hedge funds did propose that their own financial adviser, Moelis & Company be appointed by CQO as a joint adviser to manage their planned sale process at CQO and that two representatives of the activist hedge funds be appointed to the CHOML Board. CHC notes that CQO has appointed Bank of America Merrill Lynch to manage the United States asset sales.
CHC remains the largest individual CQO unitholder, aligning its interest with unitholders to maximise value for the CQO unitholders, as a whole. CHC does not consider the wind up proposed by the activists is designed to maximise value, neither do they consider it in the best interests of all CQO unitholders.
CHC is an experienced manager of Australian real estate assets, with approximately 270 people across its management platform in both the listed and wholesale fund environment. CHC maintains a dominant position in the Australian office sector with approximately $5 billion of office assets under management and a track record of extracting value from office assets. Furthermore, with its 20 year history managing institutional capital in the real estate sector, CHC believes the current low point in the value cycle for Australian real estate is being exploited for the benefit of the CQO investors, as a whole through the retention and continued active management of the Australian portfolio. As CQO's largest individual unitholder, CHC is focussed and aligned to maximise unitholder value.
The Board of CHC notes, in the event that a meeting of CQO unitholders is called and a resolution is passed to remove CHOML as the responsible entity of CQO, this is likely to result in a wind up of CQO. Following the sale of all CQO assets and a full return to unitholders of the net capital released, the estimated financial implications for CHC may include:
- receipt by CHC of approximately 10% of the net proceeds from any return of capital by CQO. Based upon CQO's NTA this equates to approximately $195.5 million , being CHC's current book value of that investment. This compares with a cash cost of CHC's investment in CQO units of $148.5 million3.
- a reduction in intangible assets of $66.2 million and the extinguishment of an earn out liability of CHC, payable to Macquarie Group of $12.0 million;
- no adverse impact to CHC's net tangible assets; and
- loss of net income from the management activities of CQO, that are currently expected to contribute approximately 15% to FY11 operating earnings of CHC.
CHC has appointed Goldman Sachs as financial adviser and Allens Arthur Robinson as legal adviser to act on its behalf.
1 Based on the book value of CQO management rights as at 31 December 2010.
2 CHC currently holds approximately 10% of the issued capital of CQO.
3 Based upon the CQO NTA of $3.96 at 31 December 2010, adjusted for additional securities purchased after that date. |
