QD view – Who’s next on the M&A conveyor belt?

It has been interesting to watch the different merger and acquisition (M&A) activity play out in the real estate sector – and the different boards’ approaches to it.

Last week, the proposed deal, that would have seen abrdn Property Income Trust (API) swallowed by Custodian Property Income REIT, collapsed after it failed to get the requisite backing from API shareholders – although an astonishingly low 36% of shares were voted for such a huge event.

API’s board and chairman James Clifton-Brown recommended the deal from the get go and, despite counter bids from Urban Logistics REIT, were steadfast in their view that this presented good value for shareholders – even though it was a substantial discount to NAV and as Custodian’s share price tanked following the announcement.

The nail in the coffin for the deal seemed to be the announcement of the sale by API of two assets at NAV. A managed wind down of the company seems likely to be the next step now.

Contrast API chairman’s stance with that of UK Commercial Property REIT’s (UKCM) chairman Peter Pereira Gray. Despite terms being agreed on the merger of UKCM and Tritax Big Box REIT, Pereira Gray is unequivocally against the deal.

He believes that “other parties would have come forward had there been a more open and comprehensive sales process”, which could have led to “a potentially improved proposal”.

Whether UKCM and API could have got better deals had they launched formal sales may never be known. UKCM’s largest shareholder Phoenix Life (which owns 43.4% of the company), as well as its second largest shareholder Investec (13.1%) both back the deal, meaning that there are unlikely to be any road bumps – despite Pereira Gray’s (and some other UKCM shareholders’) reservations.

Next up on the M&A conveyor belt?

Another property fund in the abrdn stable, abrdn European Logistics Income (ASLI), went the other way in effectively putting itself up for sale back in November 2023. Its chairman, Tony Roper, launched a strategic review into the future of the company with all options on the table.

Some movement on this may be a step closer after the company sorted out some of its problem children in recent weeks.

First, it agreed the surrender of its lease with Arrival – the failed electric vehicle manufacturer – at its 27,000 sqm warehouse in Getafe, Madrid, and relet part of the space – 5,131 sqm – to Spanish transportation company METHOD Advanced Logistics.

This was at an 8.7% premium to the rent that Arrival was paying. Obviously, there is still some work to go on reletting the remaining space, but it was a step in the right direction and at a good rental uplift.

Secondly, the company last week sold its vacant 30,180 sqm warehouse in Meung sur Loire, France, for €17.5m – in line with book value. The asset has been vacant since former tenant Office Depot went bust in 2021. Despite its advantageous logistics location in Central France, serving Paris, Central and the South of France, the company has not been able to relet the property and has decided to cut it loose and pay down the €11m debt secured against it.

This work to tidy up the portfolio puts a nice red bow on top of the company as it undergoes a beauty parade with potential buyers.

An obvious outcome, which has been mooted on many occasions, would be a merger with its closest peer Tritax EuroBox.

This would make sense to us. The two companies have complementary portfolios, with ASLI’s portfolio now consisting of 25 mid-box and urban logistics assets, located in the Netherlands, France, Germany, Spain and Poland, valued at around €616.3m.

Tritax EuroBox, on the other hand, is currently more focused on the big box side of the logistics sector, with a portfolio of 23 assets in the same countries plus Sweden, Belgium and Italy and worth around €1.5bn.

A marriage of the businesses would create a company with £663m market cap, which would firmly establish it in the FTSE 250 (Tritax EuroBox is currently at the lower end of the index), and a NAV of around €1.1bn.

As with the Big Box/UKCM tie-up, the common denominator in this deal would be the two managers. EuroBox’s manager Tritax Management is 60% owned by abrdn, which makes a merger of the two funds more amicable.

Of course, this may not come to pass (with continuation of ASLI as it is very much still on the table) but it does seem a logical outcome to the strategic review.

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