JSE-listed Emira Property Fund has proposed a general offer to real estate investment trust (Reit) Transcend Residential Property Fund shareholders to acquire all the shares in Transcend that it does not already own.

Transcend, with a residential-only property portfolio, listed on the JSE’s AltX in 2016 and migrated to the main board in 2020. Emira, in 2018, secured a strategic minority stake in Transcend to expand its investment in residential property and enhance portfolio diversification.

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 one-off liquidity event also represents a 12% premium to the effective R4.80 clean closing price of July 8, Emira states.

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 assets totalling R12.6-billion, including 77 directly held properties valued at R9.8-billion in South Africa.

Emira has already received irrevocable undertakings from 16.7% of Transcend’s existing shareholders to support the general offer. Should Competition Commission approval be obtained and the general offer run its course, this would effectively give Emira a minimum 57.4% stake in Transcend.

Since its initial investment in Transcend, Emira says it has played a “pivotal and almost exclusive role” in providing capital to fund its growth, thereby increasing its equity in Transcend.

Most recently, Emira was one of only a few legacy shareholders to follow their rights in Transcend’s R156-million equity raise through an underwritten vendor placement in December 2021. 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 Transcend’s listing, Emira says the company’s ability to grow has stalled with significant changes in the nature and dynamics of equity capital markets, particularly in South Africa. As such, Emira says Transcend is now restricted to issuing new equity at a substantial discount to net asset value (NAV), thereby diluting existing shareholders.

Further, Emira says Transcend’s ability to raise equity capital stuttered in December 2021, highlighted by its R156-million capital raising, where Emira was required to subscribe for an amount greater than its proportionate share.

Following this, Emira says it will not support the issue of further equity at a discount to NAV, thereby making Transcend’s listing, originally intended to access affordable equity capital on an efficient basis, no longer a viable or conducive means to raise significant equity.

In addition, Transcend already has a relatively high loan-to-value ratio for a Reit, at 44.9%.

Emira says these factors severely constrain Transcend’s ability to grow by adding residential assets.

Transcend also faces fundamental obstacles deterring a broader universe of institutional investors. Emira says Transcend has a highly illiquid small capitalisation 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, states Emira.

Emira CEO Geoff Jennett says the company “firmly believes” 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.”

He adds that Emira sees no benefit to maintaining two listed entry points into Transcend’s assets, which the company strongly believes will be better served in an Emira-controlled subsidiary where it is 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 a share, which, other than via increasing the loan-to-value ratio, is the only way to meaningfully fund acquisitive growth,” says Jennett.

He explains that the transaction achieves more than shifting Emira’s 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, Jennett says Emira will honour existing management arrangements with IHS for continuity of operations across the Transcend assets.

Emira has posted the necessary cash guarantees with the Takeover Regulation Panel for the value of the full offer. It used a new specific R500-million facility from Rand Merchant Bank and available cash.

Proceeds from Emira’s planned sale of its stake in Enyuka will be used to settle this new facility and support its ongoing capital recycling programme.