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Hedge funds are circling the REITs


Date: Wednesday, June 1, 2011
Author: Adele Ferguson, The Age

THE $74 billion listed real estate investment trust sector (REIT) is bracing for a big upheaval as speculation mounts that international hedge funds are poring over a list of 14 local REITS that are trading below net tangible asset backing to mount an attack.

In the past few months, hedge funds have been loading up to the gills on REITs they have tagged as potential money spinners for overseas property sales or to arbitrage the share price against the realisable value of the trust.

While hedge funds are a long way from their glory days, those with strong balance sheets are expected to use the next phase of the listed property trust cycle to make money by taking advantage of low share prices.

The funds speculated to be on the hit list include Mirvac, Commonwealth Property Office Fund and Investa Office Fund. There was a suggestion that a few hedge funds had already started buying shares but are yet to declare their hand.

Australian listed property companies first caught the eye of US hedge funds when their high-profile peers started buying deeply discounted debt in Centro Properties Group. Last year, hedge funds Appaloosa Management and Paulson & Co waded into the distressed debt sector buying $18.6 billion of Centro Properties Group's distressed debt.

Their interest intensified this week when it emerged that a trio of US hedge funds turned up as a 20 per cent stake in Charter Hall and are now trying to oust the external manager at a unit holder meeting and take control.

Hedge funds have been watching REITs for a long time, trying to work out how to bridge the gap between the price and the net tangible assets (NTA).

Charter Hall has shown them the way. If the three hedge funds - Orange Capital, Luxor Capital and Point Lobos Capital - succeed in their battle with Charter Hall, it will provide a model for other hedge funds to copy as they jump on the register of a REIT and call the shots by sacking the external manager or agitating through the board.

The talk yesterday was that if they are successful in overthrowing the current external manager, then they will move down the list of REITs that are heavily discounted to their NTA.

But the battle for Charter Hall will be tough, and the hedge funds might have overplayed their hand.

Whatever, the case, it is making some underperforming REITs acutely aware that anything management does strategy-wise could trigger the activist universe of investors to get involved.

It is putting a target on any of a number of REITs in Australia that are trading well below NTA backing. Only two of the 16 REITs trade at a premium to NTA, representing 35.7 per cent of the REIT index market cap: Goodman Group, which is trading at a 57 per cent premium to NTA and Westfield, which is trading at an 11 per cent premium to NTA.

On the flipside, Abacus is trading at a 24 per cent discount to NTA and Mirvac is trading at a 21 per cent discount to its NTA, which are two of the steepest discounts of the REITs.

The recent trend of local REITs to sell portfolios of US assets at higher than book value has highlighted a glaring value gap between what the REITs are trading at and the realisable value of the properties.

Last week, Lend Lease managed to get $US545 million ($A509.7 million) for its stake in the King of Prussia Mall in Philadelphia, while Centro sold its US shopping centres to private equity group Blackstone for $US9.4 billion in March and Westfield is on the brink of selling a portfolio of US non-core assets at above book value.

And it is putting the spotlight on the merits or otherwise of the external management model that some Australian REITs and infrastructure funds continue to employ, a model that was phased out in the US market a decade ago due to the high cost, potential conflicts of interest and complicated structure.

Most REITs in Australia have moved away from the model, but a few cling on, most of which rip out healthy fees and do little to maximise shareholder wealth.

With the so-called smart money starting to plough into the REIT sector, the rest of the market will follow the money and so it will become a self-fulfilling prophecy that the gap between the share price and the NTA will close.

AFTER committing $43 billion to build the national broadband network, the Gillard government has finally released its vision to make Australia one of the world's leading digital economies by 2020.

The vision is high-level, but at the end of the day its success depends on the NBN's ability to create competition, which, in turn, will come down to the price that households are charged for broadband and the ability of the regulator to regulate.