Consolidation is in vogue in the investment trust space right now and nowhere is this more prominent than in the real estate sector, where it seems not a week goes by when another merger bid is made.
This week’s latest proposal saw Urban Logistics REIT (SHED) table a surprise offer for abrdn Property Income Trust (API) as it looks to muscle out Custodian Property Income REIT (CREI), which had made a bid for API in January.
It is the second such merger bid made by a larger logistics-focused REIT for a traditional ‘generalist’, diversified counterpart in a matter of weeks after Tritax Big Box REIT (BBOX) made a £924m offer for UK Commercial Property REIT (UKCM).
The diversified REIT sub-sector is ripe for consolidation, with a plethora of smaller trusts (in the £100m to £300m market cap size) all with similar investment goals, but does the recent activity suggest the ‘generalist’ REIT has had its day?
Quasi-capital raising tool?
Both SHED and BBOX (pureplay logistics landlords) appear to be taking advantage of wide discounts in the sector and using the merger route as a quasi-capital raising tool – hoping to buy API’s and UKCM’s portfolios at a discount and selling off the non-logistics stuff in a (hopefully) improving investment market to give it the capital to grow.
What is interesting about the API triangle is the impact of share price reactions of CREI. After CREI’s share-for-share deal (approved by both boards) was originally made (at an exchange ratio of 0.78 shares, valuing API at 62.1p), its share price plummeted (more than the usual fall when a merger bid is made) – bringing the bid price for API down with it (to around 52.4p on 19 February – the day before the SHED announcement). Probably to a level that made the deal undesirable for API shareholders.
SHED’s offer (at an exchange ratio of 0.469 shares) however, resulted in the share price of CREI bouncing in apparent relief that its deal had been derailed. SHED’s share price also slid, meaning that now CREI’s bid is more attractive – valuing API at 55.46p versus SHED’s 54.85p (at their closing prices on 22 February).
The share price of all three will bounce around from here, but both offer prices are significant discounts to API’s net asset value (NAV – of 82.2p at 30 September 2023, now more likely around 78/79p) of between 28% to 30%.
Shareholders will have to weigh up what they want and whether they can stomach that kind of discount (but to be fair API shares have been trading at a wide discount to NAV for many months). Presumably shareholders bought API for its generalist, diversified approach – therefore a marriage with CREI would make sense.
The portfolios are certainly complementary (small lot sizes, looking for a dislocation in pricing), and a combined company would have assets of £1bn and a market cap of around £510m.
A tie-up with SHED is also be appealing for API shareholders. They would be getting access to a sub-sector of the logistics market that has delivered, and is forecast to continue to deliver, one of the highest rental growth rates in commercial real estate and a skilled management team that has focused on real estate fundamentals through the cycle, with asset management enhancements tempering the capital value declines that has plagued real estate over the past 18 months.
Scale seeking
A cycle of scale seeking is well underway in the real estate sector. The BBOX/UKCM announcement followed hot on the heels of LondonMetric’s proposed tie up with LXi REIT (announced in January). Both will create REITs with a market cap of around £3.9bn. Last year Shaftesbury and Capital & Counties merged to form the £2.5bn Shaftesbury Capital.
Larger, more liquid REITs is certainly a good thing. A few ‘generalist’, diversified REITs of scale undoubtedly have their place in the sector too.
I do not think the advantages of the diversified approach is lost on investors. Recent history shows that they are adept at moving with the times. For example, the generalist REITs were agile enough to get out of retail before it imploded in the mid-to-late-2010s (which resulted in the demise of the specialist-focused REIT Intu). It also allowed them to ramp up exposure to the booming logistics sector. And again, in recent years most have moved away from the challenged office sector.
With the largest diversified REIT, UKCM, about to be swallowed by a specialist and API perhaps following, there is certainly a big hole to be filled. More consolidation is undoubtedly on the cards – I just hope a large generalist REIT or two are left to fill the void.