In a move to enhance the Fund, the RE for the Australian Unity Office Fund has concluded its strategic assessment and announced that it is considering a merger of AOF and a diversified wholesale fund also managed by Australian Unity.
The Chairman of the AOF RE, Peter Day, said “As announced to the market on 23 February 2021, the Board initiated a strategic assessment to examine options to maximise returns and unlock value for unitholders. The Board has considered AOF’s strategic positioning and priorities and identified refinements to AOF’s strategy.”
“In concluding the strategic assessment, the Board has determined to maintain AOF’s office focus in metropolitan and CBD markets, to be complemented by a targeted and diversified portfolio of Australian real estate assets. The Fund will continue to focus on delivering sustainable and growing income returns through active asset management and value-add initiatives.”
“After exploring the various options, the Board has identified a potential merger of AOF and DPF as a key initiative to deliver on the refined strategy. The Board looks forward to working constructively with Australian Unity Property Limited (AUPL), the responsible entity of DPF, to explore a potential merger of AOF and DPF.”
AOF also provided an announcement in relation to its preliminary valuations and FY21 earnings revealing a like for like reduction of $10.7 million in values and a portfolio weighted average capitalisation rate of 5.85%. The net valuation movement principally relates to an $18 million decrease in the value of 30 Pirie Street, Adelaide and an $8 million increase in the value at 2 Eden Park Drive, Macquarie Park.
The Board also advised FY21 FFO guidance range of 18.5 – 18.7 cents per unit, reflecting the top end of the previously provided guidance range of 18.3 – 18.7 cents per unit.
AOF Fund Manager, Nikki Panagopoulos, said “We are pleased to confirm the upper end of the FY21 FFO guidance range reflecting strong collections and positive leasing outcomes throughout the year. Our focus into FY22 will include delivering on AOF’s refined strategy and executing on our active asset management and refurbishment programs, enabling AOF’s assets to continue to meet tenant requirements.”
In relation to the proposed merger, AOF claim that the merger would bring together a quality combined diversified portfolio of 18 assets with a ~$1.2 billion value across the
office, convenience retail and industrial sectors. The portfolio would have occupancy of approximately 96% and a weighted average lease expiry of approximately 4.8 years.
Australian Unity also believe that the Value-add capacity that AOF has used to deliver developments outcomes for 2 Valentine Avenue, Parramatta will also be put to use in DPF assets at North Blackburn Shopping Centre, Victoria. Futhermore, they claim that a mandate to drive income and value-add opportunities with a focus on key asset attributes of affordability, accessibility and amenity would be a useful strategic in the market.
Australian Unity also claim that a combined Fund will enable investors to benefit from the capabilities, relationships and investment opportunities offered by the broader Australian Unity Group.
It is not hard to see through the objectives of the responsible entity. On the way hand they are seeking to protect and enhance unit holder value by offering a diverse asset base, however it is unclear whether a diversified fund is what investors want or whether a merger can actually unlock greater value – on both counts I doubt it passes muster.
Australian Unity are facing battles for control of their Healthcare Property Trust and have previously defended activity to take control of AOF.
It would be easy to draw the conclusion that the RE is re-positioning AOF to make it less of a target from sector specific suitors by mixing the mandate into a more diversified portfolio.
The reasons outlined by AOF for consideration of a merger do not, in my mind, demonstrate how the portfolio value can be truly enhanced. The problem that AOF faces is that it is trading a discount to NTA. The December NTA was 2.77cpu based on a total portfolio value of $681m. The Fund has since sold The Brisbane Club for $31m. The Fund has indicated a valuation loss of $10.7m and a new portfolio value of $639m. We assess the current NTA to be circa $2.51cpu which implies the Fund is trading at a 6% discount to NTA.
The real challenge is that the market perceives greater risks in the office sector than the valuations are currently revealing. Much of this is implied by the work from home thematic which implies a lower demand for office space and as such lower rents and values in the medium term.
To counter this, the prospect of broadening the mandate to cover a more diverse sector wont really help bridge the gap for the existing office assets. Up until early June, AOF has kept pace with COF however the lack of acquisitions have held back AOF at a time where COF has found a way to engage with clients and investors to ensure the Fund is positioned well in the market.
AOF is not on our Top Picks list.
Disclaimer: The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.
Related Articles
