Australia | May 31 2011
– Charter Hall Office now likely to sell all US assets
– Sale price expected to be above book value
– Proceeds to be returned to shareholders
– Broker opinions on value remain split
By Chris Shaw
For some time Charter Hall Office REIT ((CQO)) has been intending to dispose of some of its US assets but the group has now made a minor strategy change and intends to divest its entire US portfolio and return net proceeds to shareholders.
Macquarie notes the whole portfolio is expected to be sold at a premium to book value, BA Merrill Lynch expecting the process will be executed in the third quarter of this year. BA-ML suggests the result could be around $700 million available for distribution to shareholders, which would equate to around $1.42 per share. Estimates for the exact value of any payout vary, as JP Morgan expects the capital payout will be in the order of $1.33 per share.
The total exit from the US comes after Orange Capital, which holds 18.2% of Charter Hall Office's issued capital, requested the unit holder register as the first step in convening an extraordinary general meeting to have existing management removed and the entire portfolio sold, with funds returned to shareholders.
JP Morgan expects the decision to totally exit the US should alleviate the possibility of current management being voted out. This is because the main claim made by Orange Capital was the US portfolio was undervalued and should be sold off.
Assuming a $700 million return of capital, BA-ML estimates the remaining Australian portfolio of Charter Hall Office would be worth around $1.9 billion and would be geared to around 30%. This implies net equity of about $2.65 per unit.
This indicates at current levels the market is implying a 20% discount to Australian net tangible assets (NTA) estimates BA-ML, which suggests a cap rate of 9.1%. In contrast, the Australian portfolio was last valued on a cap rate of 7.86%. Cap rate is net operating income divided by total market capitalisation.
Macquarie's view is assuming peer averages for earnings multiple, free cash flow yield and discount to NTA, the remaining entity should trade at around $2.14 per share. Add in a cash return of as much as $1.45 and this suggests a total group value at present of $3.59, which is broadly in-line with the current share price.
According to Macquarie there would be potential for greater valuation upside if the whole fund was wound down, as under such a scenario it is estimated Charter Hall Office could return around $3.84 to shareholders if the Australian asset were sold at book value.
BA-ML sees value in Charter Hall Office even allowing for just the sale of the US portfolio, noting a yield around peer levels would imply a share price of around $2.30. This means the stock is at a discount to BA-ML's estimate of net equity post the sale of the US assets of around $2.65.
The potential for change in management and for the disposal of the Australian assets could drive the stock to trade closer to valuation in BA-ML's view. This is enough for the broker to rate Charter Hall Office as a Buy, with a price target of $3.64.
BA-ML is the only broker in the FNArena database so positive on the stock, as total ratings stand at one Buy, three Holds and three Sells. Macquarie and UBS are among those with Hold ratings, Macquarie suggesting the positive sale outcome for the US assets and the ensuing capital return is already being priced in at current levels.
JP Morgan has an Underweight rating, its numbers suggesting the current share price discount adjusted for a payout to shareholders of $2.44 would be a 5.7% discount to valuation. This suggests little relative value as it is higher than the current discounts offered by the likes of Commonwealth Property Office ((CPA)) and ING Office ((IOF)), which are closer to 10%.
The FNArena database shows a consensus price target for Charter Hall Office of $3.35, with targets ranging from $3.10 to $3.64. Charter Hall Office today is trading unchanged at $3.63 as at 11.20am, the current share price implying 7.6% downside to the consensus price target in the database.
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