Australian Unity Office Fund mulls $1.2bn merger with related entity

After being hit with a string of buyout proposals, Australian Unity Office Fund may now join forces with its sister fund.

Australian Unity Office Fund has announced plans to explore a potential merger with the Australian Unity Diversity Property Fund, creating an entity with $1.2bn of real estate.

It follows a strategic review by the Australian Unity Office Fund triggered by a lagging share price, and various conversations this year from Australian listed groups about possible takeover proposals.

However, sources say their own lagging share prices have made any merger proposal uneconomical and any cash proposal unattractive, which has prevented any talks progressing.

Working for Australian Unity Office on the review since the start of the year has been adviser Highbury Partnership and law firm MinterEllison.

The office fund, which has a market valuation of about $400m, has been a takeover target by various suitors in the past.

Starwood lobbed a $486m takeover bid for the fund early last year equating to $2.98 and in 2019, Charter Hall and Abacus Property Group put forward an acquisition proposal at $3.04 per share for the business that was later voted down by shareholders.

Hume Partners holds about 19.9 per cent of the fund and had been strongly opposed to a privatisation of the business.

Shares were trading at about $2.44 in early Wednesday afternoon trade, below the fund’s net tangible assets of $2.72.

Australian Unity Office Fund’s share price has improved since the start of the year when the shares were about $2.13 with its market value at about $350m.

Office landlords have been hit by investors, nervous about more company employees working from home since the onset of the global pandemic.

For the six months to December, Australian Unity Office Fund delivered a $20.1m net profit, down 13 per cent from the previous corresponding period as it wrestled with conditions linked to the coronavirus.

Hedge funds also own shares in Australian Unity Office, while Singapore’s Keppel is a part owner of the responsible entity with Australian Unity.

On Wednesday, Australian Unity Office told the market that it would maintain its office focus on central business district and metro markets, to be complemented by a targeted and diversified portfolio of Australian real estate assets.

It comes as the fund wrote down the value of the portfolio by $10.3m to $639m.

Fund manager Nikki Panagopoulos confirmed the fund’s upper end of the 2021 financial year guidance ranger for funds from operations, reflecting strong collections and positive leasing outcomes throughout the year.

A merger with the Australian Unity Diversified Property Fund, which is advised by E&P Corporate Advisory, would create a $1.2bn portfolio with 18 office, convenience retail and industrial properties and would have average occupancy of about 96 per cent.

A proposed merger would be subject to due diligence and recommendations from unitholders.

However, shareholders of both funds are so far said to be receptive to the idea in a deal that would see Australian Unity Office unitholders own about 60 per cent of the merged entity at the NTA of both funds.

The Australian Unity Diversified Property Fund is seen as sub scale and is understood to have been exploring options of its own at a time that its NTA is about $1.12.

The hope is the merged entity will become more defensive to the pandemic conditions and re-rate, trading at about a 5 per cent premium.