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QD view – Up in the AIRE

The COVID induced discounts that some UK real estate investment trusts (REITs) are trading on have been grabbing the attentions of investors for many months now.

Private equity giant Brookfield Asset Management took a 7% stake in British Land in May and upped it to 9.2% last month, while KKR has snapped up a chunk of Great Portland Estates.

But this week there was an interesting development at the smaller end of the REIT universe.

Alternative Income REIT (AIRE), which has a market cap of £45m, was the subject of a tender offer for 25% of its shares by International Stock Exchange listed REIT Glenstone Property.

The offer of 59.25p was a 12.9% premium to the closing price on 26 October 2020, but a 29% discount to the 30 June 2020 net asset value (NAV) per share of 83.58p.

Although on the small side, AIRE has caught the eye of QuotedData after appointing a new investment adviser in M7 Real Estate and proposing amendments to investment policy to take advantage of opportunities thrown up by COVID.

Glenstone is obviously a fan too. The question is, are current shareholders?

The offer does provide AIRE’s shareholders with a tempting liquidity event against the backdrop of the prevailing macro-economic uncertainty caused by COVID-19 and Brexit.

But the fact that AIRE’s NAV is underpinned by robust rent collection figures (it has received all rents billed this quarter and 92% and 86% of those billed for the third quarter and second quarter respectively) and the new tie up with M7 Real Estate makes this offer from Glenstone look very lightweight.

AIRE has had an eventful life since it was launched in 2017 under the name AEW UK Long Lease REIT (AEWL). The group was knocked back by its largest tenant going bust, decided to give up, served notice on the managers, got bids for the company, re-let the space occupied by the large tenant in fairly short order and on the same terms, rejected all offers and decided to carry on. 

The appointment of M7 Real Estate in May this year signalled a turning point and the start of a new era. M7 has some serious pedigree in the real estate sector.

It specialises in the pan-European, regional, multi-let real estate market and manages over 830 properties with a value of €5bn for clients including some of the world’s largest real estate investors such as Blackstone, Oaktree, H.I.G. Capital and Starwood Capital.

M7 has achieved an average geared internal rate of return of 22.6% per annum since it was founded in 2009 for the UK investment vehicles it has fully exited. Its strength is in its utilisation of technology. Its Coyote information and data management system, which it developed in-house and subsequently commercialised in 2018, tracks individual properties or portfolios of properties from introduction to acquisition (or rejection), allowing M7 to collect proprietary data on more than 15,000 assets across the UK and Europe.

The first undertaking as AIRE’s investment adviser was to review its investment policy. It has proposed some fundamental changes (which will be voted on by shareholders at the end of November).

AIRE’s current investment policy centres around buying smaller lot sized assets on very long let, inflation linked leases in specialist real estate sectors. Competition for these types of assets is high, pushing up prices and has resulted in acquisitions that, whilst meeting its investment policy, provide limited scope for rental growth or asset management-led value enhancement.

Value enhancement is what M7 is all about. It has identified investment opportunities for the company that it believes will deliver higher value and earnings, strong and secure cashflow and contribute to a stable and growing dividend.

It is little wonder that Glenstone wants to get in on the action.

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