Fairvest, the landlord that owns malls in small towns and townships, will insource its management company for R133m, removing an obstacle before a possible merger with peer Arrowhead Properties.
Analysts have said Fairvest must have its property asset management internalised as this is best practice among other listed real estate investment trusts (Reits). Once it has brought the asset manager in-house, Fairvest may pursue the planned merger with Arrowhead, which is also a listed Reit.
In past years, a number of Reits used external managers for their properties. These managers would receive fees that were often higher than internal managers’ salaries, creating more costs.
An external management company tended to be run by a team that listed the Reit. In some cases executives were employed by the funds as management, but also as part of external management companies, effectively being paid twice. This was seen as conflicts of interest and a weighing expense on a property fund.
Fairvest owns assets worth R3.5bn and has a market capitalisation of R1.8bn. It has been in merger talks for several months with Arrowhead, which owns assets worth R9.3bn and has a market capitalisation of R2bn.
Fairvest, led by CEO Darren Wilder, said in May that it planned to acquire 50.1% of Arrowhead. After this it could buy out the rest of the group over time.
The asset management of Fairvest is outsourced to New Star Asset Management in terms of an agreement approved by Fairvest shareholders in 2011. The asset manager was appointed for a fixed period of 10 years, with the contract set to terminate on November 30 2021.
The asset management agreement provided for its renewal for subsequent periods of five years on the same terms and conditions, subject to Fairvest shareholder approval. If it were not renewed, Fairvest would become obliged to acquire the business conducted by the asset manager.
Fairvest said on Monday it had created an independent committee of the board of directors which included Louis Andrag, Khegu Nkuna, Ndabezinhle Mkhize, Jacob Wiese and Trevor Cohen “to consider how best to deal with the asset manager in the context of the transaction, the impending expiry of the initial ten-year term of the asset management agreement and the prospects, which Fairvest considers likely, of a single-step merger being conditional on the internalisation of Fairvest’s asset management”.
No member of the independent board had any conflicting interest regarding the asset manager, it said.
“The independent board proposes and recommends that shareholders approve the internalisation of the asset manager at a distributable earnings neutral cash price that an independent expert has confirmed is fair,” it said.
Alternatively, the independent board proposed that shareholders approve the renewal of the asset management agreement for five years on the same terms in order to ensure continuity of asset management, but that this would then be continued on an outsourced basis.
Accordingly, the independent board resolved that Fairvest acquire the issued shares of the asset manager or, failing that, approve the renewal of the asset management agreement for a period of five years.
“The proposed internalisation will better align the interests of the company’s management and shareholders,” the group said.
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