Above image shows Sakura Sogo’s portfolio in Tokyo
The successful outcome should encourage better corporate governance and could spark similar takeovers of underperforming J-REITs.
Star Asia Group has succeeded in its bid for Sakura Sogo by using for the first time a rule that allows a unitholder having a minimum of 3% stake for a minimum of six months to call for an extraordinary meeting and propose management changes.
Amid Japan’s typically amicable REIT culture, Star Asia’s takeover proposal for Sakura Sogo on May 10 was an unexpected move. The group, which has about a 5.1% stake in Sakura Sogo REIT through its affiliate Lion Partners, requested a unitholders’ meeting. It wanted to remove Sakura’s existing executive director and for its asset manager to be replaced by Star Asia’s asset manager.
In June, Lion Partners received regulatory approval from the Kanto Finance Bureau to move ahead with the Sakura Sogo’s unitholder meeting, which was planned at 10 am (Japan time) on August 30, 2019.
Concurrently, Sakura Sogo, which manages about 56 billion yen (US$518 million) worth of assets, had spurned Star Asia Group’s offer. It announced that it is in friendly merger talks with Mirai Corporation, whose sponsors are Mitsui & Co. and IDERA Capital Management. The diversified REIT, which has about 56% of its assets in the Tokyo Metropolitan Area, scheduled a meeting for unitholders to vote for the friendly merger at 4 pm on August 30, 2019.
The Crucial Vote On August 30
On the day, Sakura Sogo’s unitholders voted in favour of Star Asia’s bid over Sakura Sogo’s proposed merger with Mirai.
Resolutions were passed for the replacement of Sakura Sogo Executive Director Makoto Muranaka with Lion’s Representative Director Toru Sugihara. Muranaka resigned ahead of the meeting. Unitholders also voted in favour of replacing asset manager Sakura Real Estate Investment Advisors with Star Asia Investment Advisors.
In the afternoon meeting, an insufficient turnout of unitholders led to failures to pass the resolutions for the proposed absorption-type merger with Mirai, according to a Japanese language statement from Sakura Sogo.
“The unitholders spoke pretty loudly, and they were in full support of the morning meeting as well as the outcome of the afternoon meeting. Certainly, all of the institutional shareholders whom we spoke with were very supportive. They all thought that the deal is in the best interests of the shareholders of both sides,” says Malcolm MacLean, Co-founder and Managing Partner of Star Asia Group. He added that a separate J-REIT regulation known as Minashi, by which non-votes are counted as ”deemed approval,” did not come into effect at the meeting because of the favourable outcome. “The vote was strongly in our favour that there was no need to use Minashi,” says MacLean.
Star Asia Investment Management, a J-REIT affiliated with Star Asia Group, has 102.3 billion yen (US$952 million) of assets under management.
The Next Steps
With the conclusion of the meeting, independent investment banks will now negotiate a merger agreement between the two companies, and that process “will happen over the next 45 days”, says MacLean. “We’ll look to execute a merger agreement as soon as possible.”
MacLean stressed that the negotiations would be conducted at arm’s length.
“The investment banks and financial advisers from both sides will need to report to the respective REIT board of directors to ensure that the final deal is fair to both set of unitholders,” says MacLean.
He explained that separate teams from each REIT would be established to negotiate a deal to ensure compliance, prevent any cross-over of information flow and eliminate any conflicts.
Star Asia expects the merger to conclude by early 2020, and the asset manager will seek to optimise the combined portfolio by trimming excess exposure and acquiring new assets and improve operating efficiencies in order to ensure sustainable DPU and NAV growth.
He added that the outcome would make “management teams and asset management companies strive to do better to maximise unitholders’ value and focus on performance.”
Test Of J-Reit Framework
Before the August 30 meeting, Reit AsiaPac asked fund managers and analysts about their views of the potential merger, and many saw it as a positive move.
Tim Gibson, Co-Head of Global Property Equities at Janus Henderson Investors told REIT AsiaPac before August 30 that the deal “is an important test of the legal framework, as well as Japan’s resolve to improve corporate governance.”
Read: REIT Laws And Taxes
“Whatever the outcome, J-REITs that are facing challenges in achieving growth on their own and have low market assessments of the value of their property holdings could also become the subjects of takeover proposals,” UBS’s Tokyo-based analyst Kazufumi Takeuchi told REIT AsiaPac ahead of the meeting. “This possibility could lead to further efforts to strengthen governance and raise their share prices through buybacks,” he added.
Daniel Feldmann, a senior analyst at Timbercreek Asset Management, also favoured Star Asia Group’s merger proposal over Mirai’s. In his three years of coverage for Mirai, Feldmann said the company had been found to have debatable asset allocation decisions and weak shareholder alignment. Mirai, a Chinese-Japanese joint venture, also has the disadvantage of trading at a significant discount as certain investor groups do not fully understand or trust the Chinese backed J-REIT structure, he said.
“Just from a simple business combination point of view, I do not believe that there is going to be additional shareholder value created through a Mirai-Sakura Sogo REIT. I am very positive that Star Asia, as a significant shareholder of Sakura Sogo, can create more shareholder value in the long run in taking over the management of the combined vehicle,” Feldmann said before the August 30 meeting.
In terms of Star Asia managing two REITs with similar mandates, Feldmann said that this is not something new. Other groups are managing different REITs as well, he said.
Peter Murphy, Head of Asia – Sakura Real Estate Funds Management Inc., could not be reached for comments following the meeting. He told REIT AsiaPac in an interview before August 30 that Lion Partners and Star Asia’s approach “represents the abuse of minority unitholders’ rights to complete a hostile takeover. The reason why minority unitholders have these rights is certainly not to achieve the outcome set out by Star Asia.”
DEVELOPING STORY: On September 13, Galaxy JREIT Pty Limited, the sponsor of Sakura Sogo REIT, said it plans to contest the results of two Sakura Sogo REIT Investment Corporation’s unitholder meetings convened on August 30, 2019. Click here for the full story.
For our interviews with Sakura Sogo and Star Asia before the August 30 meeting, please click here:
Sakura Sogo: Approach taken by Star Asia creates dangerous precedents for the J-REIT sector