IOF Proposal Gets Cromwell’s Downvote

Cromwell Property Group has voted its entire Investa Office Fund (IOF) holding against the proposed partial internalisation of the IOF management platform.

Cromwell is reportedly the single largest shareholder in IOF, holding 9.83% of securities.

Cromwell said they believed implementation of the proposal represents a “worst of all worlds” outcome for IOF investors.

“The proposal is a compromised, related party transaction which materially benefits Investa Commercial Property Fund while offering limited value and marginal accretion for IOF investors at a cost of at least $45 million,” the company said.

“The transaction essentially results in IOF acquiring future uncertainty, embedding questionable governance practices, and reducing investor value both now and in the context of any potential future third party acquisition opportunity.”

Cromwell specified six issues that fuelled their stance:

1. “No certainty on Return on Investment: IOF investors are being asked to outlay $45 million for management rights, the value of which can subsequently and significantly reduced as soon as 2020.

“There is no lock up period to protect the management rights IOF investors are being asked to pay for.”

2. “The Proposal will have a negative impact on the value of IOF securities, as the Independent Expert Report acknowledged. The Proposal and the impact of the pre-emptive rights granted to IOMH are such that any offer from a bidder for IOF will be materially diminished in recognition of the scale down costs for the sale of the Platform.

“The anticipated decline in IOF’s NTA by $0.07 set out in the Notice of Meeting is material.”

4. “The partial “internalisation” is at its core an unsatisfactory concept. We remain highly skeptical of the proposed governance arrangements and in our view the Proposal appears to embed, continued adverse governance practices. IOF only receives two of six board seats meaning IOM and ICPF can outvote IOF. The effective rights of veto granted to IOM over the management and operation of the Management Platform allow IOMH and IOM to act in ways that may not be in the best interests of IOF investors.”

5. “There is little, or, at best, marginal, financial benefit to IOF investors: Management’s own estimates indicate the proposal will add just 0.2 cents per security to Funds From Operations from 2018. The platform has a high cost structure resulting in minimal accretion despite being wholly debt funded – it is a structure that benefits management rather than investors.”

6. “Absence of a “best interests opinion”: while not technically required in this case, it is striking that the Independent Expert is silent on whether the transaction is actually in the best interests of IOF investors, as is usual market practice. Investors are owed an explanation as to why the Independent Expert was not asked to provide an opinion on whether the transaction was actually in investors’ best interests, particularly in light of the transaction resulting in a material payment to a related party.”

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