Charter Hall Office REIT : Orange Capital Issues Response to Charter Hall Office Management Limited's (CHOML) Explanatory Statement

July 11, 2011 at 09:30 pm

MarketScreener.com By

Orange Capital LLC ("Orange Capital" or the "Company"), a global investment firm, announced today that the Company along with Luxor Capital Group, LP, and Point Lobos Capital, LLC ("Concerned Unitholders" or "We") issued the following response to the Explanatory Statement ("Statement") issued by Charter Hall Office Management Limited (CHOML) on 8 July 2011. The statement is as follows:

On 8 July 2011, Charter Hall Office Management Limited, the responsible entity of Charter Hall Office REIT (CQO), issued the Statement in response to the Notice of Meeting issued by Orange Capital, LLC calling for a meeting of CQO Unitholders to be held on 27 July 2011.

The Statement disclosed, for the first time, that a related party of CHOML had been hired for services related to the US sales process (Related Party Agreement) and will be due significant disposal fees in relation to the sale by CQO of its US Assets (Related Party Fees).

The Related Party Fees total one percent of the gross sale price of the US assets which equates to $16 million in the event the US assets are sold at approximately book value. These fees are for unspecified services and are in addition to the base fees being paid to CHOML and the fees payable to Bank of America Merrill Lynch (Bank of America) for managing the US Asset sale process. The Concerned Unitholders regard the Related Party Fees as overly excessive on terms that lack commercial merit. The Concerned Unitholders have sought and received broker quotes from numerous nationally recognized US firms to perform due diligence and sales services for a US portfolio sale between $1.5B and $2.0B in gross value that are 40 percent to 60 percent lower than the fees the Independent Directors agreed to pay to a related party of CHOML.

The Concerned Unitholders are deeply troubled that the Independent Directors failed to disclose the details of the Related Party Agreement until issuing the Statement despite numerous previous public releases on the US Asset sale process. It is as troubling to learn that even if CHOML is removed as the responsible entity of CQO prior to a sale of the US Assets the Related Party Fees will still be payable by CQO. The Related Party Fees raise significant corporate governance issues relating to the approval process adopted by the CHOML Independent Directors and substantive issues concerning the quantum of fees and the services to be provided.

On the basis of the information disclosed to date, the Concerned Unitholders are unable to determine on what basis the Independent Directors decided that the signing of the Related Party Agreement and the payment of the Related Party Fees are in the best interests of CQO Unitholders, if the Related Party Agreement was agreed to on arms-length terms, and if the Independent Directors have fulfilled their fiduciary obligations to protect the interests of all Unitholders.

The Concerned Unitholders believe that all CQO Unitholders are likely to have serious concerns about the Related Party Agreement and the Related Party Fees. The Concerned Unitholders also believe that the Independent Directors should immediately provide detailed answers to the following specific questions (which have not yet been addressed by CHOML):

Q.		What services, in addition to the services that CHOML has to provide as responsible entity of CQO and the services already being provided by Bank of America, will the CHOML related party actually perform?

Q.		What experience does the CHOML related party have in disposing large portfolios of US assets prior to this engagement?

Q.		What is Bank of America's fee arrangement?

Q.		What safe guards did the Independent Directors put in place to manage the inherent conflict between appointing a CHOML related party to provide services relating to the US sales process at the same time CHOML had publicly expressed its desire to pursue a sale of a 50 percent interest in the US Assets to a fund managed by another related party of CHOML?

Q.		What independent advice did the Independent Directors receive on the market basis of the Related Party Fees and from what expert was it received? Did the Independent Directors attempt to lower the fee burden to shareholders?

Q.		What market comparable fees/transactions did the Independent Directors consider when deciding that the Related Party Agreement and the Related Party Fees were made on arms-length terms?

Q.		Were other third party service providers solicited for services to be performed under the Related Party Agreement and if so what fee did those providers offer?

Q.		What is the commercial logic for obliging CQO to make a payment to a related party of CHOML even if CHOML is removed as the responsible entity of CQO?

Q.		When did the Independent Directors agree to enter into the Related Party Agreement?

Unfortunately this latest related party transaction, unless later amended, deemed invalid, or recovered, is to come at the great expense of all Unitholders and to the benefit of the Charter Hall Group. This is another example illustrating the inherent conflict between Charter Hall and its Unitholders and offers further evidence why a change of the responsible entity of CQO is necessary to close the discount between the fair value of CQO's assets and the trading price of CQO's units.