The stock market is proving a tough ground for property businesses. That is the inevitable takeaway from the news that Hibernia Reit's board has unanimously recommended a takeover offer from Canadian property giant Brookfield.
Hibernia claims its shares have been trading at an average discount of 20.9 per cent to the net tangible value of its assets over the last five years, and closer to 30 per cent consistently over the past three years.
It seems counterintuitive that, at a time of the property crisis in Ireland, a property business cannot secure a stock market valuation in line with the net value of its tangible assets. Hibernia is an office landlord, not a residential one, and we are just emerging from a two-year Covid lockdown that threatens a very different environment for the world of work. But even so, recent transactions in the sector have shown continuing growth, especially for the modern, energy-efficient offices that Hibernia has been developing in high-profile sites, largely in Dublin.
Only last month, Hibernia chief executive Kevin Nowlan said Ireland's strong economic performance "together with high levels of foreign direct investment, helped occupier activity recover in 2021 and ... we are optimistic that the positive momentum in the office market will continue in 2022, absent an adverse change in the direction of the pandemic".
We have, of course, had the invasion of Ukraine since then and a recent spike in Covid cases, but nothing to suggest the long-term outlook for the office market has changed from February.
But shares in Hibernia have never traded at the offer price: their peak at €1.554 was back in 2018. More recently, they were languishing at €1.18 on Thursday just ahead of the offer.
Analysts at Davy advise that the €1.634-a -share bid – including a 3.4 cent dividend payment – is a 3 per cent premium to the current net value of the assets. On that basis, it’s hard to say no.
While the offer came out of the blue, Davy's Colin Grant said it was no surprise given the shares' consistent underperformance relative to the value of the company's underlying assets.
And so, Hibernia looks set to follow the example of Stephen Vernon, who has twice overseen the delisting of property ventures from the Irish exchange – first with Green Property in an MBO back in 2002 and then with the sale of Green Reit in 2019. On both occasions, the catalyst was a perceived undervaluation in share price.
