Emira turns down Arrowhead’s proposal

Emira Property Fund has rejected Arrowhead Properties’ expression of interest to acquire all of its issued share capital on the basis that it has no benefit to its shareholders.

Gerald Leissner CEO of Arrowhead

Gerald Leissner CEO of Arrowhead

On Monday, Arrowhead announced a tentative advance towards its struggling peer Emira, mulling to buy out the company.

The move, was seen as what could have signalled the beginning of a period of consolidation for South African listed property, in which these companies have struggled to find well-priced acquisition opportunities.

In a statement released on Thursday, SA Commercial Prop News learnt that the offer had been rejected by the Board of Directors of Emira labeling it unsolicited, non-binding, and highly conditional expression of interest.

Arrowhead, a diversified fund that has been growing mostly through acquisitions since it listed five years ago, recently acquired 10.5% stake in Rebosis Property Fund, 11% stake in Dipula Income Fund, and it listed SA’s first pure residential property fund Indluplace Properties in 2015. It has a market capitalisation of about R8.6bn, while Emira has one of about R7.4bn.

Redefine Properties, one of the top five Reits on the JSE, already owns about 11% of Emira.

“The Board has considered Arrowhead’s conditional expression of interest and we believe it’s clearly not in the best interests of our shareholders,” says Ben van der Ross, Chairman of Emira.

“There are many reasons for this. The proposal is highly opportunistic. The very low share swap ratio proposed represents a discount to Emira’s current price and Emira has also traded at a premium to the ratio for the vast majority of the last 12 months. Fundamentally, the ratio is also at a substantial discount to Emira’s net asset value,” he said.

Arrowhead’s chief financial officer, Imraan Suleman, said if the deal were successful, Arrowhead would grow to have a market capitalisation of about R16bn, which would attract larger investors than it had in the past, and get it onto the radar of foreign investors.

Last month, Emira became the first real estate investment trust (Reit) to forecast negative distribution growth in the coming results season. It forecast a negative growth in its dividend per share, one of the key metrics investors typically use to judge a property company’s performance and investment case on, of about 2% for the year to June 30 2017.

The company said the decline reflects the cumulative impact of numerous occurring factors, including higher vacancies in its office portfolio, rental reversions, financing costs and a lack of activity in the property market.

Geoff Jennett, Chief Executive Officer of Emira commented “not only is the proposal opportunistic but it would also leave our shareholders receiving shares in Arrowhead, an entity with a portfolio that Emira itself would not invest into. We believe there would be limited, if any, synergies between the two companies, their assets or their strategies. We are very different businesses, focussing on different sectors of the property market.”

Statement by Emira’s Board

The statement further states that: Emira was established in 2003 and has a diversified portfolio of South African commercial real estate, and a offshore investment in Growthpoint Properties Australia (GOZ), with a total asset value of R14 billion. In addition, the fund has a much larger average rand value per property, a meaningfully higher portfolio and a significantly greater total asset value.

In contrast, Arrowhead listed in 2012 and has a complex structure with several piecemeal minority stakes in local counters, limiting its diversification.  In its own portfolio, Arrowhead has a meaningful exposure to smaller lower-grade office buildings. We understand Arrowhead intends moving a large portion of these smaller assets into a separately listed vehicle with further non-core office assets of other funds. However, Arrowhead’s investors would still be exposed to the economics of the lower quality office building sector through a significant interest in the new entity.

A transaction with Arrowhead would be completely counter to this strategy, and it believes that increased exposure to the office market is inappropriate at this time given the forecasted continuing weakness in the office market, the Board said.

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Geoff Jennett, CEO of Emira Property Fund, responds to Arrowhead Property’s non-binding expression of interest for the group.