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QD view – REIT mergers could combat vicious discount circle

Another week in property, another M&A announcement. This time it is LondonMetric pouncing on smaller peer CT Property Trust (CTPT) with an all share offer that values the company at around £200m.

In recent weeks we have seen Industrials REIT taken private by Blackstone, Civitas Social Housing also recommending a bid for the company and Ediston Property Investment Company put itself up for sale.

All these instances have different characteristics, but there is a common theme running through the sector – depressed market valuations. Discounts to NAV of 20% plus has been commonplace in the sector for a long time now (even before the recent negative sentiment due to interest rate rises). CTPT, for example, has been trading on an average discount of 23.5% over the past five years.

A vicious cycle exists among the smaller REITs, which struggle to attract enough capital due to their size (with market caps of less than £500m). That means they trade at discounts to NAV, making it difficult to issue equity, which makes it difficult to do deals and grow.

As long as the wide discounts persist, consolidation makes complete sense. Fewer, but larger companies would open up the sector to a wider pool of investors, which in time (when interest rates stabilise) could resolve the discount issue.

LondonMetric’s deal for CTPT ticks all the right boxes for REIT mergers. CTPT shareholders are getting a company that is at the top of its game. Most commonly known for its timely pivot away from retail property into logistics in the early 2010s, the company has been busy making another tweak to its portfolio in recent years – which attracted it to CT Property Trust.

CTPT has been building up its exposure to urban logistics assets, a sub-sector of logistics focused on smaller warehouses located close to town and city centres. Here, the supply-demand dynamics are extremely favourable for rental growth.

CTPT’s portfolio is 56% weighted to urban logistics. Following the merger, LondonMetric’s £3.3bn portfolio will have a 44% weighting to urban logistics, with a further 28% in the wider logistics sector.

I suspect that more of the larger REITs are eyeing up their smaller counterparts with interest. The sector is certainly ripe for consolidation. There are too many identical REITs of a similar size, with similar investment strategies and portfolio exposure – all trading on wide discounts.

Ediston Property is currently reviewing its future having become fed up with its rating, indicating that its preferred route would be a merger with another REIT or REITs. I would imagine a few of its peers may follow suit.

Property company valuations was a recurring theme at our Property Investment Conference last week. You can watch the playback of the panel sessions here.

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