Orange Capital says Board's decision to convene a unitholder meeting to approve a transaction involving a Charter Hall entity a good first step Orange Capital calls Board's overall response to date inadequate
Orange Capital calls a simple "yes" or "no" vote proposing either a seriously flawed Joint Venture or the status quo not in the best interest of unitholders, as both are unattractive alternatives
Orange Capital encourages Board to take the necessary actions outlined in previous letters to ensure any transaction involving the sale of CQO's US Assets achieves maximum value for all unitholders, including establishing formal independent committee to evaluate all strategic alternatives; hiring an independent financial advisor to actively solicit and assess all alternative proposals; initiating an open auction for the US Assets with relevant property valuation materials available for interested bidders
Orange Capital believes sale of a 100% interest in all or select properties would likely result in a higher purchase price due to a likely control premium and larger base of potential bidders
In response to the 8 February 2011 Charter Hall Office REIT (ASX:CQO) ASX Announcement ("United States Strategy Update"), Orange Capital LLC has issued the following letter (text below) to the Independent Directors of Charter Office Management Limited ("CHOML"), the responsible entity of CQO.
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Letter Copy: |
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13 February 2011 |
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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 |
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Proposed joint venture involving 50% of Charter Hall Office REIT's United States property portfolio
Dear Independent Directors:
We are encouraged by Charter Hall Office REIT's ("CQO") 8 February 2011 ASX Announcement that a unitholder vote will be called if it intends to sell up to 50% of CQO's US asset portfolio ("US Assets") into a joint venture (the "Proposed Joint Venture") managed by Charter Hall Office Management Limited ("CHOML"). At the same time, we strongly believe that much more needs to be done to ensure that the best interests of CQO's unitholders are properly recognized. We believe that to date, the Board's responses to our concerns surrounding the Proposed Joint Venture are inadequate.
While the vote is a good first step, we believe a simple "yes" or "no" vote on a flawed joint venture is not in the best interest of unitholders. Such a vote would only offer the alternatives of the Proposed Joint Venture or the status quo, which may be even less attractive.
We agree with the Board that corporate action must be taken to close the gap between the trading price of the CQO units and the per unit market value of the CQO property portfolio. Our goal is not to frustrate a transaction, but rather achieve the best transaction possible. To date, unitholders have not received adequate disclosure around other alternatives that the Board has considered and the unsolicited bids made by third parties for the US Assets.
We have previously outlined the steps that we believe the CHOML Board needs to adopt to fully discharge its fiduciary responsibilities and follow best practice in regards to corporate governance. The first critical step is to establish an independent committee of the Board to actively solicit and evaluate all potential strategic alternatives for the US Assets. This is particularly the case given the unusual structure of the Proposed Joint Venture and the fact that CHOML would likely have a significant conflict of interest with unitholders in promoting the Proposed Joint Venture as compared to the outright sale of the US Assets to a third-party. We strongly encourage the Board to take the necessary actions outlined in our previous letters in order to ensure any transaction involving the sale of CQO's US Assets achieves maximum value for all unitholders. These steps include:
- Establishing a formal independent committee to evaluate all available alternatives;
- Hiring an independent financial advisor to assess all alternative proposals;
- Completing an up-to-date independent valuation of the entire portfolio;
- Initiating an open auction for the US Assets making available all relevant property valuation materials on a secure investor data site. Only through the confidential provision of detailed, property-specific information to a broader but targeted audience of financially capable investors can CQO expect to achieve maximum proceeds and optimize strategic execution;
- Actively solicit investor interest in the US Assets, including opportunities for a sale of all the US Assets, single and group asset sales or joint venture partnerships;
- Considering other alternatives to the Proposed Joint Venture for maintaining an upside interest in a recovery of the US Assets if the Committee of Independent Directors of CQO believes this to be in the best interest of CQO unitholders, including: (a) accepting a partial or full stock compensation for a sale should the acquiror be a publicly traded REIT, or (b) selling 100% of select, stabilized assets while retaining 100% in the remaining, unstabilized assets with strong upside potential. Both of these alternatives avoid the unnecessary complexity of having a joint venture hold an interest in existing joint ventures as proposed by CHOML.
Our view that book value is understated has already been shared with the Board in our previous letters.
Considering the obvious conflict of interests associated with the Proposed Joint Venture, we believe the marketing of CQO's US Assets to the open market needs to be run by the Independent Directors with a primary and sole focus on creating value for unitholders.
We remain concerned that the "preferred" outcome remains the Proposed Joint Venture managed by CHOML. CQO's continued disinterest in a full and open auction process suggests that management's primary interest remains in preserving fees over maximizing unitholder value. To this point, the Board has given us no comfort on dealing with conflicts with CHOML. As a result, we find it necessary for us to reiterate our strong belief that the Proposed Joint Venture is both potentially highly dilutive and narrows the potential investor pool, given that REITs and strategic buyers with domestic US operating capabilities will likely not participate in a transaction asset managed by other entities. We strongly believe that the Proposed Joint Venture would deprive unitholders of a control premium. As CQO's largest independent unitholder, we need to be assured that other alternatives are being simultaneously explored with a wide range of third parties, both foreign and domestic.
Agreeing to a unitholder vote gives us cause for some optimism, but it is not nearly enough to satisfy our concerns. We hope you will shed light on the sale process and the third-party interest in the portfolio in the very near future. We look forward to our upcoming discussions with the Independent Directors and hope to make progress on these fronts quickly.
Sincerely, |
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Daniel Lewis |
Managing Partner |
Orange Capital LLC |
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Cc: | David Harrison, Joint Managing Director, Charter Hall Group | |
David Southon, Joint Managing Director, Charter Hall Group | ||
Adrian Taylor, CEO, Charter Hall Office REIT |
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