Yesterday's surge in the share price of Investa Office Fund (ASX: IOF) on a takeover offer has left investors wondering which property stock could be next to catch the eye of a cashed-up bidder.
Shares in Investa jumped 11.2% to $5.15 on Monday when it was revealed that Blackstone Singapore has made a $5.25 cash offer per share for the fund, which will be lowered by the dividend declared after 4 May and prior to the completion of the deal.
The market is expecting the deal to sail through even though Blackstone's proposal is non-binding and conditional as Investa's share price is currently trading at $5.14. That's just 1 cent below the offer price once you deduct the dividend.
Investa had been lagging the market before the bid but the stock is now ahead by nearly 13% since the start of calendar 2018 compared with a 1% fall on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index over the same period.
Investors may be better off selling the stock now given the limited upside to betting on the completion of the deal unless another bidder comes into the fray to offer a sweeter premium.
I don't think that's likely even though Investa has received takeover offers in the past from DEXUS Property Group (ASX: DXS) and Cromwell Group (ASX: CMW).
If no new bidder throws its hat into the ring, shareholders may be tempted to take their cash now by selling the stock on-market and buying another takeover target given that most experts have a bullish view on the outlook for the Sydney office market, which is probably what prompted Blackstone to act.
While it's a mug's game to try to pick takeover targets, it is probably safe to assume that property stocks trading at a discount to net tangible asset (NTA), which is essentially the value of their properties minus debt; and/or those exposed to the office rental market could outperform in the wake of the merger and acquisition (M&A) interest in Investa.
Blackstone's offer is priced at a 4% premium to Investa's NTA and is 13.2% above the last traded price of the target before the announcement.
This puts two stocks in the spotlight, according to Morgan Stanley. The first is DEXUS given its exposure to the office market but those looking for a big discount to NTA can't look past shopping mall operator Vicinity Centres Re Ltd (ASX: VCX) with its share price trading below its NTA by more than 10%.
Having said all that, I am not a fan of property stocks. I think the discount to NTA is justified given the outlook for retail and residential properties in this country with structural changes and rising interest costs.
Unless a bidder emerges, it is hard to see property stocks perform well relative to the ASX 200 over the short and longer-term.
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