Saba Capital has lifted its stake in Workspace Group (WKP) to over 28% as the activist hedge fund positions itself for an attempt to seize control of the flexible office provider at its annual general meeting in two weeks’ time.
The 1% increase in its holding to 28.2% disclosed yesterday puts Saba just behind property developer Nicholas Roditi who holds 29% of Workspace shares through his London & Amsterdam Trust.
It came before Saba’s release today of a further defence of its board nominees and the disposal plan it believes could fund significant share buybacks and generate a better return than the turnaround strategy of Workspace’s new chief executive Charlie Green.
Saba said Workspace shares trade around 50% below net asset value, the widest discount among UK real estate investment trusts (REITs), after delivering a total loss of 48% to shareholders over five years even with dividends included.
It insisted the six nominees it has put forward for election at the AGM in London on 23 July all had “meaningful real estate experience”. For example, Gautam Garg, its proposed chair, had spent over two decades investing in global REITs at fund managers Lazard, Elliott, ExodusPoint, LMR and Verition.
The US firm, which recently succeeded in replacing the boards of Edinburgh Worldwide (EWI) and Impax Environmental Markets (IEM), denied Workspace’s suggestion that its nominees could not be considered independent under the UK corporate governance code, stating: “The nominees do not represent Saba; they are wholly independent. If elected, each would owe statutory and fiduciary duties to Workspace and would be required to exercise independent judgement and act in the interests of all shareholders.”
The independence of Saba’s nominees has become a subject of intense debate. Rule changes proposed by the FCA last month would prevent a director nominated by the firm from voting it as the new investment manager. However, this is not part of Saba’s current plan.
In a new Q&A section on its makeworskpacework.co.uk website, Saba said it had held “extensive discussions with shareholders, analysts and other stakeholders” in Workspace over its proposal to appoint real estate advisers to make selective disposals within geographic clusters of properties.
“Our analysis indicates that one or two properties could be sold within each cluster. Where appropriate, tenants could be encouraged to relocate through financial incentives, flexible lease terms and contributions towards relocation costs.
“This approach is designed to preserve customer relationships, protect rental income and improve occupancy across retained assets while unlocking capital through the selective disposal of non-core properties,” it said.
Saba said that even if properties were sold for up to 20% less than book value, that would generate a better return because the released capital would be used to buy back shares on a much wider discount. It said its strategy would require far less capital outlay than Workspace’s strategy of extensive refurbishment. Although Workspace assumed it would make a 12% yield on its capital spending, this was around eight times higher than the returns it had made in the past.
“Our analysis shows Workspace invested approximately £165m of incremental capital across 15 refurbishment projects between 2016 and 2022. These projects generated, in aggregate, an annual net rental income of only £2.5m or a 1.5% yield on cost.”
Our view
Richard Williams, senior analyst at QuotedData, said: “Investors have a straight choice – go with the new management’s strategy to improve the earnings potential of the portfolio through refurbishments or Saba’s strategy to sell down the portfolio over time. Both carry a high degree of execution risk and are long term in nature. I believe in the abilities of the company’s new leadership to knock its portfolio into shape, but also have sympathy with shareholders who want to get out after long-term underperformance. It may prove a very tight vote, so make sure you vote your shares accordingly.”
