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Charter Hall Retail REIT (ASX: CQR) has partnered with industry super fund Hostplus for a $717.5 million takeover of pubs group Hotel Property Investments (ASX: HPI) that would bolster the group’s existing retail portfolio to more than $4.6 billion.
But the bid already faces an uphill battle after HPI says its board has “unanimously concluded that the offer is opportunistic, not compelling and materially undervalues HPI”.
Among the key sticking points are that the bid is pitched at a 10 per cent discount to the value of net tangible assets (NTA) at the end of June this year.
Charter Hall Retail, which along with Charter Hall Group (ASX: CHC) already controls a 14.8 per cent stake in HPI, is offering $3.65 per security in the off-market bid which it says will boost its exposure to the convenience retail sector through the addition of a “high quality portfolio with strong tenant covenant”.
Should a takeover succeed, Charter Hall Retail and Hostplus will own 50 per cent each of HPI’s assets which comprise 58 freehold hotels and specialty tenancies, valued at $1.24 billion, in Queensland, NSW, South Australia, Western Australia and Victoria.
Charter Hall Retail’s portfolio currently comprises 641 properties worth just over $4 billion and the addition of the HPI assets will boost several of its key group metrics including the weighted average rate of return (WARR), weighted average lease expiry (WALE) and occupancy.
HPI’s portfolio is fully leased, largely to the Australian Venue Company (AVC) and QVC, which is a joint venture between Coles (ASX: COL) and AVC.
“The proposed acquisition of HPI alongside Hostplus is attractive and designed to deliver significant benefits to both HPI securityholders and CQR unitholders,” says Ben Ellis, Charter Hall’s retail CEO.
“The acquisition is in line with CQR’s strategy to invest in high quality, net lease retail assets, whilst partnering with leading convenience retailers to deliver resilient and growing income streams.
“Hostplus is an existing partner through our investment in LWIP 2 and we are pleased to extend our partnership through the proposed acquisition of HPI.”
The cash offer is priced at a 4.9 per cent premium to HPI’s closing price last Friday of $3.48.
Charter Hall Retail says the price is at an “attractive premium to HPI’s historical trading levels” and is also at an 11.6 per cent premium to the closing price of $3.27 on 27 March 2024, the day before Charter Hall picked up the 14.8 per cent stake in HPI for $97 million – pr $3.35 per security.
But after reviewing the unsolicited offer over the weekend, the HPI board has this morning described the 4.9 per cent premium offered by Charter Hall Retail and Hostplus as “minimal” in addition to the price being set at a 10 per cent discount to NTA.
“HPI has a unique high-quality portfolio of pub assets with long-term leases and strong investment fundamentals providing reliable distribution with forecast distribution growth of 2.6 per cent in FY25,” says HPI.
“The board intends to formally recommend that securityholders reject the offer. HPI believes that its existing portfolio and current strategy, including its organic growth initiatives, offer significantly greater value to HPI securityholders.
“The board remains committed to maximising value for all securityholders and will continue to evaluate all strategic options in that context.”
The HPI board says it intends to provide a “more fulsome response” to the bid in due course and has advised securityholders to take no action in relation to the offer.
In presenting its case for acquiring HPI, Charter Hall Retail notes the strength of the group’s portfolio, which is 100 per cent leased, compared to its own portfolio which is 90 per cent leased.
HPI’s portfolio has a 9.1-year WALE with an average options period of an additional 19.3 years that Charter Hall Retail says provides security of income, along with “favourable rent review mechanisms” that it says delivers growth through inflationary cycles.
The takeover is subject to a 50.1 per cent minimum acceptance condition.
Charter Hall Retail’s move on HPI follows a solid performance by the pubs group in FY24 which saw rental income lift 3.3 per cent to $73.2 million, thanks to contract rent increases across its portfolio. Adjusted funds from operations rose 2.7 per cent to $37 million.
HPI securities were trading 4c lower at $3.63 at 10.34am (AEST).
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