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QD view – More REIT M&A to come?

The listed property sector is ripe for merger and acquisition (M&A) activity with many real estate investment trusts (REITs) still trading at significant discounts to net asset value (NAV).

Today we saw RDI REIT the subject of a £467.9m takeover bid by Starwood Capital at a price offering a huge premium to its share price, but also a hefty discount to its NAV.

It is not the only listed property company with trading at a substantial discount, so will 2021 be the year of REIT M&A?

RDI had been persistently trading at a discount of an average of 35% for the past three years as it struggled with a large weighting to the UK retail sector and high leverage in comparison to peers.

It has gone some way to rectifying these, with several retail asset sales bringing its exposure to the ailing sector to 9.5%. It has ploughed some of the proceeds into the logistics sector, which now represents 28.8% of the portfolio.

The group’s loan to value has also been reduced, from around 50% to around 28% and it has available liquidity through cash and available debt facilities of £275m.

Despite this, it has not been reflected in its share price – perhaps due to the ongoing uncertainty in the recovery of the property sector post-pandemic. More than 50% of RDI’s portfolio is held in hotels (which have been heavily impacted in the past year) and London serviced offices (which also has an uncertain future).

Starwood, which bought a 29% stake in the company in July 2020, said it was attracted by the quality of the property portfolio and it certainly does not have the same worries about the future of real estate post-pandemic as the market.

It is picking up a portfolio that was valued in August 2020 at £857.4m (it is due to be revalued at the end of February 2021) for little more than £460m.

Investors clearly have a bearish view of property, which has left many listed REITs exposed to takeover approaches by bullish large private equity companies.

Brookfield is now British Land’s largest shareholder with a 9.2% holding, while KKR owns 5.4% of Great Portland Estates – both betting big on a bounce in London offices.

With so many REITs’ share prices yet to recover from the COVID sell-off, more M&A activity could be on the cards this year as investors look for cut-price deals.

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