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Morningstar | Abacus’ FVE Unchanged Following Joint Takeover Bid for Australian Unity Office Fund

We maintain no-moat Abacus Property Group’s fair value estimate at AUD 3.85 per security following transfer of coverage to a new analyst and Abacus and Charter Hall Group’s joint proposal to acquire all the units of Australian Unity Office Fund, or AOF. AOF is an ASX-listed REIT with a portfolio consisting of nine office properties located across Sydney, Adelaide, Melbourne, Brisbane, and Canberra. At this early stage, we don’t have enough confidence the proposed takeover will complete in its present form to warrant accounting for it in our model and Abacus’ current AOF stake is not material enough to move its fair value estimate. Abacus’ current circa AUD 48 million interest in AOF represents less than 2% of Abacus’ total assets. Furthermore, while this investment is consistent with Abacus’ focus on office properties and generating recurring revenue streams, we expect this initial investment will contribute less than 2% of fiscal 2020’s underlying net profit after tax.

Our uncertainty around the proposed takeover completing in its current form stems from the fact that Abacus and Charter Hall’s takeover price is only a moderate improvement on NYSE-listed Starwood Property Trust’s bid for AOF made about six months ago. In late November 2018, AOF rejected Starwood’s takeover which was also priced at AUD 2.95 per unit, but which did not include the AUD 7.9 cents in distributions offered by Abacus and Charter Hall. We expect the ongoing demand by investors for income-generating assets is likely to have intensified more recently following the further fall in interest rates and lower interest rate outlook. We think this makes bond proxies like AOF--assets that generate passive recurring rental steams--more attractive to investors than when Starwood’s offer was rejected in November 2018. The Australian 10-year Government bond was yielding above 2.5% in November 2018 and has now fallen to about 1.5%.

Furthermore, the Reserve Bank of Australia, or RBA, has just cut the cash rate by 0.25% to a record low 1.25% and there is currently consensus among macroeconomists for at least one further 0.25% rate cut later this year. This contrasts to most of 2018 when the RBA was in more of a neutral stance or had a slight bias to a rate hike. Abacus and Charter Hall’s takeover price is also only a 6.1% premium to AOF’s closing unit price on June 3, 2018. Although we note it is a 10.5% premium (not including the AUD 7.9 cents in distributions) to AOF’s last reported net tangible asset per unit of AUD 2.67 as at Dec. 31, 2018.

Abacus and Charter Hall have established, among other things, a special purpose entity, CHAB Office Trust, as the vehicle to acquire all the issued units of AOF. Abacus and Charter Hall have an equal 50% interest in CHAB and CHAB has just acquired an initial 19.9% stake in AOF at a price of AUD 2.95 per security for total consideration of about AUD 96 million. This initial stake is a launching pad for Abacus and Charter Hall’s full cash takeover. The proposed takeover is at the same price of AUD 2.95 per unit plus AOF unit holders are entitled to retain a distribution from AOF of up to AUD 3.95 cents per unit in respect of the quarter-ending June 30, 2019. If the takeover is completed after the record date of AOF’s Sept. 30, 2019 quarterly distribution, and AOF’s responsible entity acts in good faith to meet the acquisition timetable (yet to be set), AOF unit holders will get a further distribution of up to AUD 3.95 cents per unit in respect of the September quarter.