As predicted, merger and acquisition (M&A) activity has taken off in the listed property sector in 2021. Friday’s announcement that St Modwen Properties (SMP) had received an unsolicited approach from US private equity giant Blackstone regarding a possible cash offer of £1.2bn for the company feels a bit different to recent M&A news.
This week RDI REIT (RDI) was bought by largest shareholder Starwood Capital and last week Globalworth Real Estate (GWI) fought off a €1.5bn takeover offer from two of its largest shareholders. Unlike these two acquisitions, the bid price for SMP is at a considerable premium to both its share price and net asset value (NAV). So what is it that Blackstone, the world’s biggest real estate investor, sees in SMP and why has it bid so high?
The possible offer of 542p per share is a 21% premium to SMP’s 6 May 2021 share price and a 24% premium to its last reported EPRA net tangible asset (NTA) in November 2020 of 437.7p. It is also a premium to its pre-COVID share price and NAV.
Unsurprisingly, SMP’s board said it would unanimously recommend the approval of the offer, which is subject to some conditions including completion of due diligence.
SMP has strong roots as a housebuilder, but turned its attentions (and massive landbank) to the industrial and logistics sector in 2016 when former chief executive Mark Allan (who left the role last year to take up the hotseat at Land Securities) spotted the growth opportunity.
It now has a fully-fledged logistics portfolio worth £666m, representing 49% of its £1.37bn portfolio. It is delivering 1.5m square foot of logistics development to the market this year and has a long-term logistics landbank totalling 19m square foot. Planned developments through to 2023 could see the logistics portfolio grow in value to more than £1bn.
It is this development pipeline and growth potential that I believe has attracted Blackstone to SMP. It could well flip the housebuilding arm (27% of the portfolio) and its legacy/non-core assets (24%) and focus its attention on driving returns through logistics development. SMP said it was forecasting an average yield on cost of 7.5% on its logistics developments.
When you compare this to the investment market, where yields for prime logistics assets start with a three, then you see the appeal. A logistics development landbank and pipeline has always been an attractive growth proposition, but this potential deal will put a value on it.
Investors can get exposure to other listed property companies with strong logistics development capabilities. Tritax Big Box REIT (BBOX) has an enormous landbank in the UK though its Tritax Symmetry business that is already paying off. SEGRO (SGRO), the largest listed property company with a market cap of £12bn, are the past masters at logistics development.
Other companies are getting exposure to logistics development through different means. On the continent, Tritax EuroBox (EBOX) has an exclusive tie-up with two developers, Dietz and LCP, that gives them first refusal on their developments.
On the smaller side, Urban Logistics REIT (SHED) is upping its exposure to developments and Standard Life Investments Property Income Trust (SLI) has said it is in talks to partner with a logistics developer in the UK.
Blackstone rarely get things wrong when it comes to real estate. Their punchy valuation of SMP shows the true scale of the future growth potential of logistics development.
QD view – Spotlight on logistics development