How Invesco completed the first-ever J-REIT privatization

In a notoriously difficult market for take-privates, there was a key reason why Invesco succeeded where other foreign private real estate firms had failed.

Dallas-based Invesco Real Estate has defended a hostile takeover of its $3 billion office J-REIT by Starwood Capital Group via its own privatization transaction.

The transaction has now been completed and is the first successful take-private in J-REIT history. The firm paid 22,750 yen ($197; €174) per unit for Invesco Office J-REIT, higher than the 22,500 yen offered by Starwood. PERE understands that the transaction was led by Invesco’s latest $1.25 billion value-add fund, Invesco Asia Fund IV, which was closed on $750 million with an additional $350 million in sidecar capital last year. The co-investment capital is understood to have increased to $500 million for the privatization. It is unclear how much of the fund’s equity has been tied up in the transaction. IOJ was delisted in November, but Invesco is said to have not closed on the deal until this month.

The privatization of IOJ was initially triggered by Starwood’s launch of an unsolicited tender offer bid at 20,000 yen per unit with a goal to squeeze out non-tendering investors and de-list the REIT. The offer represented a 20 percent discount to the REIT’s pre-covid trading price and a 7 percent premium to its book value. As the manager of the REIT, Invesco responded by launching a counter takeover bid at 22,500 yen per unit. While Starwood reacted by increasing its offer to the same price and reduced the minimum threshold to 50 percent, Invesco won the takeover with 65 percent of shareholders approving the takeover bid.

Taking over a J-REIT is considered a challenging process because most J-REITs have sponsor ownership stakes of over 10 percent. This makes it difficult for a bidder to remove management or secure a 66 percent vote for privatization. In this case, Invesco’s office J-REIT appeared to be an easier target for Starwood because the management only owns a 3 percent stake in the REIT.

Having said that, the takeover bid and privatization process for J-REITs and listed Japanese companies had little precedent, according to the head of Japanese capital markets at a real estate brokerage firm. “There is a cultural reason which makes hostile takeover even more uncommon. It is not just the J-REIT market, taking over a listed Japanese corporation is unusual as well,” the source explained.

As such, Invesco’s long tenure in Japan is understood to be a key reason for the success of its privatization, according to a senior executive in a real estate investment firm. “Invesco is viewed as ‘local’ and the incumbent manager, whereas Starwood’s approach was viewed as that of a ‘foreign hostile bidder,’” the source said.

The deal came at a time of resurgence for Invesco’s real estate activities in Asia in general. Closed in the first half of 2021, the firm’s value-add fund Invesco Asia Fund IV has been 70 percent committed, with investments in Japan and Korea. With a loan-to-value of up to 60 percent at the portfolio level, the fund has a target gross return of 15 percent.

At the same time, the firm’s flagship open-ended Asia core fund Invesco Real Estate Asia Fund has grown to more than $4 billion in gross asset value from $3 billion at the end of December 2020. It now has a queue of $200 million from investors. This is a stark reversal from the start of the pandemic, when the fund was facing $600 million redemptions with a $400 million incoming queue. At the time, PERE reported that UBS Asset Management and an undisclosed US investor were seeking $400 million and $200 million in redemptions, respectively. It is understood that the full redemption request from UBS has now been fully satisfied while the US investor chose to partially redeem and requested to keep a meaningful investment in IREAF.

IOJ’s privatization timeline

April Starwood Capital Group launched an unsolicited tender offer bid at 20,000 yen per unit. The minimum TOB threshold was 66 percent of outstanding units. Invesco then increased its ownership position from 3 percent to 7 percent to demonstrate a commitment to IOJ and further align interest with unitholders. IOJ had been consistently trading above SCG’s offer price of 20,000 yen per unit.

May 10 Starwood increased its offer price to 21,750 yen per unit and decreased its minimum threshold from 66 percent to 55 percent.

May 12 Invesco notified the market of its intention to commence a counter takeover bid at 22,500 yen per unit with a minimum threshold of 66.7 percent.

June 1 Starwood increased its offer to 22,500 yen per unit and reduced its minimum threshold to 50 percent.

June 11 Invesco announced that it would increase the price in its forthcoming counter takeover bid to 22,750 yen per unit and reduce its minimum threshold to 54.1 percent.

June 15 Starwood’s takeover bid failed.

June 18 Invesco formally launched its counter takeover bid per the terms above.

June 27 The Invesco-led takeover bid secured 65 percent tenders.

November 9 IOJ is delisted.