Yappari… Oaktree takes advantage of the Re-Plus situation

We would like to get on to other stories but it looks like the RePlus situation might lead to more interesting movements in the JREIT market.  Oaktree has definitely taken advantage of the recent bankruptcy and very timely for moving the market positively in their favor.

Bloomberg announced that Los Angeles-based Oaktree Capital, which manages $58.7 billion of assets, plans to buy a 48.4 percent stake in Re-Plus through purchases of new shares and a tender offer.

Any one investor pushing above the 50% stake level will trigger a taxation condition that deletes the REIT dividend pass-through status and makes it subject to corporate tax.

Re-Plus had announced on Aug. 12 that it would issue new shares to Oaktree at 175,000 yen each, raising funds to acquire assets and refinance loans. That transaction was completed on Thursday, lifting Oaktree’s stake to 37.6 percent.  Oaktree also plans to buy 18,063 shares through a public tender offer at 260,000 yen each, 33 percent more than the current closing price.

A Japan Times article stated that Oaktree is also intending to take control of the REIT manager but we have not confirmed this.  The REIT manager is or was a wholly owned subsidiary of Re-Plus and Oaktree should have a priority opportunity to bid at this if they wish to control both the management and assets.  JREITs are purely asset holding assets, completely separate entities from the private and licensed management companies.  They are similar to the Australian model except that in Australia these separate entities are at times `stapled` together, but different from the US model where REIT management and assets are one in the same entity.

However, an easy way to take control of the assets and forge a larger M&A to create a strong story for the listed entity would be to buy the manager and merge management / assets with another smaller residential REIT.  It will be interesting to see if the Oaktree strategy goes in that direction – no JREIT mergers or privatizations have succeeded to date.  For now, they have taken advantage of good timing to capture the exposure to resi assets at a discount.

RePlus falls under pressure

Re+ applied for bankruptcy procedures in Tokyo Regional Court yesterday and the application was received.

The hard work and brains of Re+ President Hirofumi Kang have unfortunately been overcome by market forces stopping their asset management process and cutting corresponding management fees this year.  Pressure from banks to sell assets has increased where the debt term has completed.  The business of supporting asset growth of the RePlus REIT, as well as many other JREITs, involves acquiring and stabilizing assets on a corporate book or within another private fund before selling stabilized tranches of buildings into the separately managed REIT.  Market pullback in the JREITs this year has halted this process and left the assets tagged for the REIT in limbo with increasing lender pressure.  The large deals in Beijing they were working on have also been hit this year.

RePlus has 32.59 Billion JPY (USD $292 M) in corporate liabilities as of today and 382 Billion in assets under management including private and public funds within the RePlus group as of yearend 2007, including assets of the RePlus REIT.  The effect to the REIT is that the sponsor can no longer create a stable let alone growth scenario and this may actually benefit those looking to force a merger or acquisition of the REIT management subsidiary (and control of its assets)… OakTree would be an initial prime suspect for the REIT.

The assets held by RePlus itself, their design and various management divisions and subsidiaries, the RentGo system, etc. are all up for grabs to potential sponsors now.

There are a number of asset managers managing JREITS and private funds under similar pressure and we would hope recent pickup in the market will bring sponsors out of the woodwork before more of these situations occur.  The underlying fundamentals of the assets are still very strong, especially in urban areas.