Oaktree launches tender offer for Japanese Reit

The private equity firm aims to acquire up to 48.4% in Re-plus Residential Reit through an investment package that will also provide the Reit with fresh capital.
US-based private equity firm Oaktree Capital Management yesterday officially launched a tender offer for an additional 10.79% stake in JapanÆs Re-plus Residential Investment Inc, taking advantage of a severely depressed unit price. This is the first ever tender offer for a Japanese real estate investment trust (Reit), and also the first major investment by an institutional investor in the sector since the beginning of the credit crisis and the correction of the stockmarket 12 months ago.

The earlier flagged tender offer comes two weeks after Oaktree bought 38% of Re-plus through a new share issue and if successful it will leave the US firm with a 48.4% stake. Oaktree has also bought a 35% stake in Re-plus Reit Management, which is responsible for the day-to-day business of the Reit. If the entire tender offer is taken up, OaktreeÆs total investment will amount to Ñ15.72 billion ($144 million) û a sum that it will handle without taking on any new debt. The acquisition is being made through AppleRingo Holdings, a company owned by Oaktree-managed funds.

OaktreeÆs initial investment, which was made at Ñ175,000 per unit, was aimed at providing new capital for Re-plus to enable it to go out and acquire new properties at todayÆs more attractive prices. Japanese Reits û like those in Singapore and Hong Kong û have found it tough to grow through acquisitions over the past 12 months because of the difficulty in obtaining financing at a reasonable cost. All in all, Re-plus raised Ñ12.3 billion from the sale of new shares to Oaktree and one other investor.

ôAll of a sudden this Reit is in a unique position among its peers to be able to exploit the current environment,ö says Robert Zulkoski, a managing director of Oaktree Capital Management and head of the firmÆs real estate efforts. At the same time, the tender offer will provide minority shareholders with liquidity in size at a premium to the market price.

According to Zulkoski, Oaktree would have been happy to buy an even greater stake, but the size of the tender offer is capped by the fact that a single investor can own only 49% of a Japanese Reit, or it will lose its status as a Reit and thus also its favourable tax treatment. However, Oaktree will still be by far the single largest unitholder of Re-plus and will play an active role in the management of the vehicle. The Reit sponsor holds only about 7%.

The offer price of Ñ260,000 per unit represents a 41.5% premium over the closing price of Ñ183,700 on August 12 when the offer was first revealed through a Tokyo Stock Exchange filing. And while the share price jumped 8% the following day, it has hovered in a narrow range since then and closed at Ñ195,100 yesterday û a price which could give investors who buy in the market now a quick 33% return. The tender offer will remain open for about 10 days.

But while this kind of premium may be attractive to investors who have invested in Re-plus over the past few months or who want to cut their losses, those who have been sitting on Re-plus units for some time may not be that impressed. Twelve months ago, around the time the subprime crisis was starting to really take a toll on global property stocks, Re-plus was trading at around Ñ456,000 and its initial public offering in June 2006 was completed at a price of Ñ450,000 per unit.

It is precisely this kind of decline that has attracted Oaktree to the Japanese Reit market though. In a telephone interview with FinanceAsia, Zulkoski argues that although Japan is part of a global re-pricing of risk of all asset classes, the public markets have overshot the mark on the downside and even though he expects the correction of physical real estate valuations to continue to go on into 2009, he is optimistic that unit prices will recover.

ôBased on the fear and uncertainty in the market, unit prices have in some cases dropped significantly below the underlying value of the real estate. We believe that at todayÆs price our effective investment rate is actually below what it would cost to reproduce or rebuild this real estate.ö

ôResidential real estate in Japan typically trades at a yield of 5.5%. By investing in this company, we invested in this same real estate at a yield of 7.5%, so the underlying real estate will have to go down quite a bit before it gets to the price that we invested at today. And if it doesnÆt go down that far, we have made a very good investment,ö he says.

Other international investors appear to agree with Oaktree's assessment of the opportunities in the Japanese market as several other firms are said to be eyeing similar acquisitions. What makes this such an interesting deal though is the combination of equity investment and capital injection and if that approach is copied by other investors, it could provide a real boost for the Japanese Reits and enable them to actually take advantage of the falling asset prices.

Re-plus invests exclusively in residential real estate, which according to Zulkoski tends to be less volatile than commercial buildings as the tenants stay much longer, resulting in a more stable income stream. The mid-sized Reit has assets of more than Ñ100 billion ($915 million) divided over 130 apartment buildings that are spread across Japan.

According to Zulkoski, Re-plus was targeted because of its diversified portfolio of assets, which Oaktree believes can withstand what it expects will be ôfurther turbulent timesö, and because it has a management team that it feels it can work with to exploit the current opportunities.

Oaktree has more than $58 billion of assets under management and has been in Japan since the mid-1990s. Its Tokyo-based team has a multi-strategy investment focus looking at real estate, private equity, distressed and equity investments.
¬ Haymarket Media Limited. All rights reserved.
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