Emira Property Fund (JSE: EMI) has proposed a general offer to Transcend Residential Property Fund shareholders to acquire all the shares in Transcend that Emira doesn’t already own.
Transcend is a specialist REIT with a residential-only property portfolio, which listed on the JSE AltX in 2016 and migrated to the main board in 2020. In 2018, Emira secured a strategic minority stake in Transcend to expand its investment in residential property and enhance portfolio diversification.
Since its initial investment in Transcend, Emira has played a pivotal and almost exclusive role in providing capital to fund its growth. In the process, Emira has increased its equity in Transcend. Most recently, Emira was one of only a few legacy shareholders to follow their rights in Transcend’s December 2021 R156m equity raise via an underwritten vendor placement. This investment, together with a small stake acquired in an off-market trade from a major financial institution, increased Emira’s stake in Transcend to a pre-offer level of 40.69%.
However, since its listing, Transcend’s ability to grow has stalled with significant changes in the nature and dynamics of equity capital markets, particularly in South Africa. It is now restricted to issuing new equity at a substantial discount to net asset value (NAV), thereby diluting existing shareholders.
Transcend’s ability to raise equity capital stuttered in December 2021, as highlighted by its R156m capital raising where Emira was required to subscribe for an amount greater than its proportionate share. Emira has stated that it will not support the issue of further equity at a discount to NAV. Thus, Transcend’s listing, originally intended to access affordable equity capital on an efficient basis, no longer presents it with a viable or conducive means to raise significant equity. In addition, Transcend already has a relatively high loan-to-value ratio for a REIT of 44.9%. These factors severely constrain its ability to grow by adding residential assets.
Transcend also faces fundamental obstacles deterring a broader universe of institutional investors. It is a highly illiquid small-cap with less than 0.9% of its issued shares trading over the last three months. Further, its external management company structure is unpopular within the investment community.
“We firmly believe that operating Transcend in the unlisted environment is the only realistic alternative for the future, given its limitations. Controlling it as an Emira subsidiary makes sense from a cost, access to capital and investor interest perspective,” notes Geoff Jennett, CEO of Emira.
Jennett adds, “We see no benefit to maintaining two listed entry points into Transcend’s assets, which we strongly believe would be better served in an Emira-controlled subsidiary where we would be able to support the assets and prospects of Transcend without having to further increase its gearing or raising more equity as a discount to NAV. Emira is not supportive of Transcend issuing new equity capital to the extent that it results in a dilution of either Emira’s shareholding in Transcend or its NAV per share, which, other than via increasing the LTV ratio, is the only way to meaningfully fund acquisitive growth. This will constrain Transcend’s strategy to grow into a larger specialised residential REIT and, as a result, any future benefits of achieving economies of scale are unlikely to be realised. Therefore, we want to provide a once-off liquidity event to existing Transcend shareholders and ensure the focus is on driving shareholder value rather than Transcend’s size and share liquidity.”
Emira’s general offer is a liquidity event for all existing shareholders at a clean share price of R5.38 per Transcend share – representing a 17% premium on the recent vendor placement price of R4.60, which most legacy shareholders declined to take up. This once-off liquidity event also represents a 12% premium to the effective R4.80 clean closing price of 8 July 2022. The clean share price will be escalated by an estimated distribution accrual per share for the applicable distribution period up until the finalisation date of the offer.
Emira has already received irrevocable undertakings from 16.7% of existing shareholders to support the general offer. Should competition commission approval be obtained and the general offer runs its course, this would effectively give Emira a minimum 57.4% stake in Transcend.
“We are confident the December 2021 vendor placement price most accurately reflects shareholders’ perceived value of Transcend, and the premium offered represents good value to those shareholders seeking an exit strategy to realise the value of their investment,” comments Jennett.
For Emira shareholders, the consolidation of Transcend as a listed subsidiary is a logical progression of its residential rental property strategy that it embarked on in 2018. It will result in value accretion for both Emira’s distributable income per share and NAV per share.
“This transaction achieves more than shifting our indirect investment in Transcend’s assets into a directly-held residential-to-let property portfolio. By taking Transcend in-house, Emira would realise value for shareholders by adding the advantage of critical mass, removing cost duplication on a corporate level, enabling better access to capital, and driving increased stakeholder value. At the same time, we would honour existing management arrangements with IHS for continuity of operations across the Transcend assets,” explains Jennett.
Emira has posted the necessary cash guarantees with the Takeover Regulation Panel for the value of the full offer. It used a new specific R500m facility from Rand Merchant Bank and available cash. Proceeds from Emira’s planned sale of its stake in Enyuka will comfortably settle this new facility and support its ongoing capital recycling programme.
Emira is a leading diversified REIT invested in a quality, balanced portfolio of retail, office, industrial and residential properties. Emira’s rental residential property exposure includes its stake in Transcend and a direct investment in The Bolton, Rosebank with co-investor the Feenstra Group.
Emira has total assets of R12.6bn, including 77 directly-held properties valued at R9.8bn in South Africa. A 17% portion of its total asset base is international, made up of equity investments in 12 grocery-anchored open-air convenience shopping centres in the USA.
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