NEW YORK--(BUSINESS WIRE)--Orange Capital LLC, an event-driven global investment firm, has issued the following letter (text below) to the Independent Directors of Charter Hall Office REIT (ASX: CQO). This letter sharply criticizes CQO’s proposal to sell up to 50% of its US asset portfolio (“US Assets”) into a joint venture at book value with Australian superannuation or pension funds (”Proposed Joint Venture”) managed by Charter Hall Office Management (“CHOML”) or its affiliates as damaging to unitholders.
Without improved governance and cooperation from CQO management, Orange Capital intends to convene an Extraordinary General Meeting (“EGM”) of CQO unitholders. As a substantial unitholder, Orange Capital has the statutory right to call such a meeting as clearly defined under the Australian Corporations Act. Actions to be considered at an EGM may include resolutions, directives, or amendments requiring a mandatory vote on the Proposed Joint Venture, replacement of CHOML as the responsible entity, or an orderly wind-down of CQO with proceeds payable to unitholders.
Orange Capital also announced that, given the lack of constructive dialogue with CQO management or the Board, Orange Capital had retained its own financial advisor, Houlihan Lokey, to provide Orange Capital with a financial analysis of CQO’s US Assets and to assist Orange Capital in reviewing strategic alternatives for CQO’s US Assets. Houlihan Lokey is a well-known international, advisory-focused investment banking firm with offices throughout the United States, Europe, and Asia. In 2010, Houlihan Lokey's Real Estate, Lodging & Leisure Group was ranked by Thomson Reuters as the No. 1 M&A advisor for US real estate, lodging and leisure transactions.
Orange Capital noted the following:
- Utilizing publicly available information, Houlihan Lokey provided Orange Capital with an estimate of the potential value for CQO’s allocated ownership interest in the US Assets of approximately US$1.727 billion to US$1.849 billion. The midpoint of such range is equal to US$114 million over CQO’s stated book value for the US Assets as of 31 December 2010.
- Orange Capital believes Houlihan Lokey’s estimate with respect to the US Assets is conservative and the midpoint of such estimate would add an incremental A$0.23 per share to CQO’s stated 30 June 2010 NTA of $4.24 per share.
- Orange Capital, with the assistance of Houlihan Lokey, has identified a number of potential strategic alternatives for the US Assets that Orange Capital believes should be evaluated in detail, as each exhibits the potential to realize greater value with respect to CQO's US Assets relative to the current Proposed Joint Venture. These alternatives include: sale of CQO’s US Assets in logical subsets or as individual assets via a broad marketing process; sale of a 50% to 100% interest in CQO’s US Assets to a public or private entity via a broad marketing process; an IPO or a spin-off of CQO’s US Assets.
- Orange Capital is also considering other potential strategic alternatives for CQO, including resolutions requiring the sale of all of CQO’s assets and wind-down of CQO or the replacement of the responsible entity, CHOML.
Orange Capital states that CHOML is likely to reap higher performance fees if CQO consummates the Proposed Joint Venture at book value as of 31 December 2010. Orange Capital finds it unacceptable that CHOML, which has a conflict of interest, has failed to update external valuations for all of the US Assets. Orange Capital notes that only 36%, being five of the 14 US Assets, were reported as being the subject of external valuations at 31 December 2010.
Orange Capital reaffirmed its view that the Proposed Joint Venture structure is a deficient course of action for achieving CQO management’s stated objective of addressing CQO’s significant trading discount to its net tangible assets and there are significantly more attractive alternatives for unitholders than the Proposed Joint Venture.
The letter, which was delivered today to the Independent Directors of Charter Hall Office Management Limited, follows in this announcement.
Letter Copy:
6 February 2011
The Independent Directors
Charter Hall Office Management Limited
(in
its capacity as responsible entity of Charter Hall Office REIT)
Level
11, 333 - 339 George Street
Sydney NSW 2000
Proposed joint venture involving 50% of Charter Hall Office REIT's United States property portfolio
Dear Independent Directors:
We have reviewed Charter Hall Office REIT’s (“CQO”) letter of 3 February 2011 and wish to express our strong disappointment with your refusal to engage in any constructive dialogue regarding the appropriate disposition of CQO’s US asset portfolio ("US Assets"). Your actions to obtain a waiver from ASX rule 10.1 in connection with the proposed joint venture managed by Charter Hall Office Management Limited (“CHOML”) involving the US Assets ("Proposed Joint Venture") disenfranchise unitholders and is a regrettable development. Without improved governance and cooperation from CQO management, Orange Capital intends to convene an extraordinary general meeting (“EGM”) of CQO unitholders. As a substantial unitholder, we have a statutory right to call such a meeting as clearly defined under the Australian Corporations Act.
Actions to be considered at an EGM may include resolutions, directives, or amendments to the constitution requiring a mandatory vote on the Proposed Joint Venture, replacement of CHOML as the responsible entity, or an orderly wind-down of CQO with proceeds payable to unitholders. As you well know, an orderly wind-down or replacement of the responsible entity would require approval by a majority of unitholders. In pursuing any course of action, our objective is to maximize value for unitholders. We have no interest in being a candidate to replace the responsible entity, CHOML.
We believe it is imperative that CQO evaluate in detail all potential strategic alternatives for the US Assets, particularly given the unusual structure of the Proposed Joint Venture. Given the lack of constructive dialogue with CQO management or the Board, in early January 2011, Orange Capital retained its own financial advisor, Houlihan Lokey, to provide Orange Capital with a financial analysis of CQO’s US Assets and to assist Orange Capital in reviewing strategic alternatives for CQO's US Assets. Houlihan Lokey is a well-known international, advisory-focused investment banking firm with offices throughout the United States, Europe, and Asia. In 2010, Houlihan Lokey's Real Estate, Lodging & Leisure Group was ranked by Thomson Reuters as the No. 1 M&A advisor for US real estate, lodging and leisure transactions.
In connection with its financial analysis of CQO's US Assets, Houlihan Lokey derived property-specific estimates of value for the US Assets based on CQO's publicly disclosed information and certain research reports and industry sources. Houlihan Lokey has not yet had an opportunity to discuss such information with CQO's management.
Utilizing publicly available information, Houlihan Lokey provided Orange Capital with an estimate of the potential value of CQO’s allocated ownership interest in the US Assets of approximately US$1.727 billion to US$1.849 billion.
Houlihan Lokey's financial analysis of CQO's US Assets reinforces Orange Capital’s view that the US Assets are undervalued relative to their fair market value. We note that the midpoint of Houlihan Lokey's estimated value range for the US Assets corresponds to an increase of approximately US$114 million over CQO’s stated book value for the US Assets as of 31 December 2010. This is equal to an A$0.23 increase in CQO’s stated net tangible asset value (“NTA”) of A$4.24 per unit at 30 June 2010. In fact, we believe Houlihan Lokey’s estimate with respect to the US Assets is conservative. We also note improving conditions in the Australian office market, recent publicly announced transaction activity, and continued interest from wholesale investors in Australian commercial real estate.
We believe that CQO's independent external valuations are outdated and based on historical data that do not necessarily reflect the most recent and forward-looking trends in real estate valuation metrics and debt and equity capital markets, particularly for higher quality assets in key US locations.
In your press release of 1 February 2011, you note that, “the preferred strategy remains to pursue the sell down of up to 50% of the United States portfolio at book value.” We believe it is highly unorthodox that you would announce your target pricing (i.e., book value) for the transaction in advance of a formal marketing process specifically directed to maximize asset value.
We note that only 36%, being five of the 14 US Assets, were reported as being the subject of external valuations at 31 December 2010. CHOML has a conflict of interest and is likely to reap higher performance fees if CQO consummates the Proposed Joint Venture at book value. We find it unacceptable that CHOML has not updated external valuations for all of CQO’s US Assets.
We have reviewed, with the assistance of Houlihan Lokey, a number of potential strategic alternatives for the US Assets that we believe should be evaluated in detail, as each exhibits the potential to realize greater value with respect to CQO's US Assets relative to the Proposed Joint Venture. These potential strategic alternatives for CQO's US Assets include:
- Sale of CQO’s US Assets in logical subsets or as individual assets via a broad marketing process
- Sale of a 50% to 100% interest in CQO’s US Assets to a public or private entity via a broad marketing process
- IPO of CQO’s US Assets
- Spin-off of CQO’s US Assets
We also have considered certain other potential strategic alternatives for CQO, including:
- Sale of all of CQO's assets and liquidation of CQO
- Replacement of the responsible entity, CHOML
Our review of potential strategic alternatives supports our belief that:
i. the Proposed Joint Venture is a deficient course of action for achieving CQO management’s stated objective of addressing CQO’s significant trading discount to its net tangible assets; and
ii. there are significantly more attractive alternatives for unitholders than the Proposed Joint Venture.
In an effort to maximize value for unitholders, we will continue to make ourselves available to discuss our views with CQO management and members of the Board.
Sincerely,
Daniel Lewis
Managing Partner
Orange Capital LLC
| Cc: | David Harrison, Joint Managing Director, Charter Hall Group | |
| David Southon, Joint Managing Director, Charter Hall Group | ||
| Adrian Taylor, CEO, Charter Hall Office REIT |