Momentum building

Share prices among real estate investment trusts (REITs) and listed property companies staged a recovery over the third quarter of 2024, collectively rising 5.1% on average (as shown in the chart to the right). This is still just below where they started at the start of the year, but downward interest rate expectations have improved sentiment towards the sector.

Whilst all eyes will be on this government’s first budget at the end of October, positive momentum is building in the commercial real estate sector with greater investment activity and valuation growth. Despite the uplift in share prices and narrowing of discounts to net asset values (NAVs), with the average moving from 31.2% to 27.8% over the three months, discounts in the sector are still vast.

A brighter outlook combined with the wide discounts to NAVs has made the sector a hotbed for merger and acquisition (M&A) activity. There were four corporate transactions announced during the quarter (see page 6 for details), with a further company announcing a managed wind-down. So far this year, a total of nine REITs or property companies have announced a take-private acquisition, merger or wind-down. The diminishing number of companies will leave investors with fewer options when a recovery in fortunes for the sector comes.

In this issue

• Performance data – Discounts narrowed during the quarter as macroeconomic sentiment improved

• Corporate activity – Just over £650m was raised during the quarter, while M&A activity continued

• Major news stories – Retail landlord Hammerson completed a transformational deal

Performance data

Best performing property companies

Figure 3: PRS REIT YTD

Source: Bloomberg, Marten & Co

Harworth Group’s shares have performed strongly this year as its strategy to grow to a £1bn company gathers momentum. Profitable sales of development land, land values being marked up, and new logistics developments coming through have all combined to great effect. Its share price is up 82.9% over 12 months.

Balanced Commercial Property Trust received a take-private bid from a private equity company (see page 6 for details), while abrdn Property Income accepted a bid for the majority of its portfolio as its managed wind-down moved a step closer.

After months of share price declines, Life Science REIT rallied during the quarter, boosted by lettings success and positive comments from the chair that it was willing to take any action necessary to address its steep discount to NAV.

Tritax EuroBox’s board has recommended an offer for the company by SEGRO (see page 6 for details), but since the end of the quarter, a bidding war is underway, as private equity giant Brookfield has made a recommended cash offer.

Worst performing companies

Figure 4: Grit Real Estate YTD

Source: Bloomberg, Marten & Co

The value of Ground Rents Income Fund’s portfolio continues to be negatively impacted by reforms in the leasehold sector. The company’s share price has now fallen 32.6% over 12 months.

The share price of office landlord Regional REIT continues to depress, and one wonders when the tide will turn for the company.

Cuban real estate specialist Ceiba Investments’ share price continues to de-rate as a combination of factors weigh on its prospects including botched economic reform, worsening relations with the US, and Russia’s war in Ukraine (previously a key source of tourists).

Significant rating changes

Discounts to NAV in the property sector have improved over the quarter but remain some of the widest in the investment trust world, with the average discount narrowing from 31.2% to 27.8% over the period. Figures 5 and 6 show how premiums and discounts to NAV have moved over the course of the quarter.

Figure 5: Biggest percentage point changes to ratings in Q3 2024 – the 10 greatest improvements

Source: Bloomberg, Marten & Co

Many of the names listed here were mentioned in the previous section.

The share price discount to NAV of retail giant Hammerson narrowed immensely during the quarter, re-rating from a 45.7% discount to 16.3% over the three months. The move centred around the disposal of its stake in Value Retail (see page 9) at a large discount to book value. This negatively impacted its NAV, but its share price rose almost 15% over the quarter as the company promised a large buyback programme and outlined several accretive reinvestment opportunities with the proceeds.

Primary Health Properties’s share price now trades at close to NAV as investors get behind new chief executive Mark Davies’s plans for growth.

Reflecting the improved investment landscape and downward interest rate trend, the diversified REITs – Schroder REIT, Custodian Property Income REIT and AEW UK REIT – all saw share price gains.

Figure 6: Biggest percentage point changes to ratings in Q3 2024 – the 10 biggest deteriorations

Source: Bloomberg, Marten & Co

There were just six property companies that saw their discounts to NAV widen during the quarter. London office developer Helical led the way, with its share price falling 9.1% as it grapples with high debt costs, as well as weakness in the office sector.

SEGRO’s share price weakness may have been due to its bid for Tritax EuroBox (see page 6 for details), with merger arbitrage investors looking to make gains from buying the target company and selling the bidder. The company also posted a drop in NAV during the period.

Major corporate activity

Fundraises

Just over £650m was raised during the quarter

Unite Group raised £450m in a placing, with the proceeds earmarked for a number of student accommodation acquisitions and development projects. A total of 49,686,114 new ordinary shares were placed, raising gross proceeds of £447m, with retail investors contributing an additional £3m. Shares were issued at a price of 900 pence, representing a discount of 2.6% to the prevailing share price. The company expects to deploy the proceeds by the end of the year into the acquisition of seven income producing assets and to fund the development of five new projects.

Sirius Real Estate raised £150m in a capital raise. In all, 159,574,468 new ordinary shares were placed representing 11.8% of shares prior to the capital raising. The issue price of 94p represented a discount of 3.5% to the prevailing closing share price, but is in line with the company’s adjusted NAV per share as at 31 March 2024. The capital raise will enable the company to execute on its ongoing acquisition strategy in Germany and the UK, with a pipeline worth almost £160m.

NewRiver REIT raised £50.2m in a placing at 80p per share to part fund the proposed acquisition of Capital & RegioUnite Group raised £450m in a placing, with the proceeds earmarked for a number of student accommodation acquisitions and development projects. A total of 49,686,114 new ordinary shares were placed, raising gross proceeds of £447m, with retail investors contributing an additional £3m. Shares were issued at a price of 900 pence, representing a discount of 2.6% to the prevailing share price. The company expects to deploy the proceeds by the end of the year into the acquisition of seven income producing assets and to fund the development of five new projects.

Sirius Real Estate raised £150m in a capital raise. In all, 159,574,468 new ordinary shares were placed representing 11.8% of shares prior to the capital raising. The issue price of 94p represented a discount of 3.5% to the prevailing closing share price, but is in line with the company’s adjusted NAV per share as at 31 March 2024. The capital raise will enable the company to execute on its ongoing acquisition strategy in Germany and the UK, with a pipeline worth almost £160m.

NewRiver REIT raised £50.2m in a placing at 80p per share to part fund the proposed acquisition of Capital & Regional (detailed below).nal (detailed below).

Mergers and acquisitions

Several merger and acquisitions of property companies were announced during the quarter

SEGRO and Tritax EuroBox reached agreement on the terms of a recommended all-share offer by SEGRO for Tritax EuroBox, valuing the company at £1,101m. Tritax EuroBox shareholders would receive 0.0765 new SEGRO shares as part of the deal, which valued each Tritax EuroBox share at 68.4p. This equates to a premium of 27% to the prevailing share price, but a discount of around 14% to NAV. Post quarter end, Canadian private equity giant Brookfield Asst Management made a counter bid at 69p per share, which has been recommended by Tritax EuroBox’s board.

The board of Balanced Commercial Property Trust recommended a cash offer for the company from Starwood Capital valuing the company at £673.5m. The offer, at 96p, represents a premium of 21.5% to its closing price when the board launched a strategic review into the future of the company. Relative to its last reported NAV of 105.1p at 30 June, however, the cash consideration represents an 8.7% discount.

The boards of NewRiver REIT and Capital & Regional reached agreement on the terms of a deal that would see NewRiver acquire Capital & Regional and are recommending shareholders of both companies to vote in favour of it. The deal would see each Capital & Regional share receive 31.25p in cash and 0.41946 new NewRiver shares. This valued the company at £147m (or 62.5p per share) at the date at which interest in the company started in May.

abrdn Property Income Trust agreed a deal to sell its entire share capital to funds managed by GoldenTree Asset Management. The transaction comprises the sale of 39 assets (the company’s entire portfolio, with the exception of land at Far Ralia) and the transfer of debt facilities. The cash consideration of £351m represents a discount of 8.0% to the value of the portfolio of £381.6m at 30 June 2024 (excluding assets sold and Far Ralia) and implies a pro-forma NAV of £244m, equivalent to 64.0p per share (adjusted for costs of the transaction). This represents a 12.7% discount to API’s NAV of 73.3p at 30 June 2024, a 6.7% premium to its prevailing share price, and a premium of 20.1% to its share price when shareholders approved the managed wind-down. It is also a 3.1% premium to the original merger bid made for the company by Custodian Property Income REIT in January 2024. That share-for-share offer implied a value of 62.1p per share, but fell dramatically in the weeks after the news of the offer as the share price of Custodian dropped.

The board of Home REIT proposed a managed wind down of the company after failing to secure a refinancing of its debt facility. That loan facility with Scottish Widows, which totals £114.6m, will need to be repaid by the end of the year – all the while incurring a charge on the outstanding amount of 7%. Once repaid through the proceeds of portfolio sales, the remaining portfolio will be valued at around £200m (depending on values achieved in the sales process). This, the company said, (coupled with the requirement for capital expenditure to drive an increase in rental value and valuation of the remaining portfolio) means that the only viable option would be a managed wind down of the company. The board said assets would be sold with the objectives of optimising remaining shareholder value and repaying the company’s loan balance.

Other major corporate activity

Triple Point Social Housing REIT to get a new manager

The board of Triple Point Social Housing REIT appointed Atrato Partners as the company’s new investment manager, replacing Triple Point. It decided to part ways with Triple Point after a launching a review of the investment management arrangements earlier this year. Atrato, which also manages Supermarket Income REIT and Atrato Onsite Energy, hired a team of social housing experts a couple of years ago ahead of a possible launch of a new social housing fund. The appointment of Atrato is subject to agreeing a new investment management agreement (IMA). The board said it was satisfied that the new IMA will deliver “significant cost savings” whilst maintaining the existing high levels of service provision. The formal transition of the investment management services from Triple Point Investment Management to Atrato is expected to occur in January 2025.

PRS REIT announced that chairman Steve Smith will step down at its forthcoming AGM, with Robert Naylor and Chris Mills joining the board as non-executive directors. The move follows a requisition notice from a group of shareholders requesting Smith’s removal. The search for a new chairman has commenced.

SEGRO announced the pricing of a €500m senior unsecured bond issue for an eight-year term priced at 123 basis points above euro mid-swaps with an annual coupon of 3.5%. The bond issuance was over six times subscribed at peak. The proceeds of the issue will principally be used to refinance existing indebtedness, with a focus on bank loans maturing in early 2026. As a result, the average cost of debt (including joint venture debt at share) falls to 2.6% (from 2.7% at 30 June 2024) and the average duration increases to 7.3 years (from 6.8 years at 30 June 2024).

Urban Logistics REIT refinanced its existing £100m term loan and £51m revolving credit facility (which was due to mature in August 2025) with a £140m term loan and a £50 million revolving credit facility. The debt comes with a fixed interest rate of 4.48% until August 2025 and 4.98% until maturity in 2027.

Supermarket Income REIT completed a £170m debt refinancing through a private placement debt issuance and a new unsecured bank facility. The company has signed an agreement with a group of institutional investors for a private placement of €83m of new senior unsecured notes, which have a maturity of seven years and a fixed rate coupon of 4.44%. Proceeds will be used to refinance euro drawings under an existing secured revolving credit facility with HSBC, which had been used to fund the recent acquisition of a portfolio of 17 stores from Carrefour. The company also refinanced its existing £97m secured debt facility with Deka through a new £100m unsecured debt facility with ING Bank N.V. The new facility comprises a £75m term loan and a £25m revolving credit facility. The interest-only facility has a maturity of three years and has two one-year extension options at the lender’s discretion. The facility is priced at a margin of 1.55% over SONIA and benefits from forward starting hedges, which cap the interest rate at an all-in cost of 3.0% until January 2026. Following the debt refinancing, the company has a pro-forma LTV of 37%.

Major news stories

• Hammerson sold its stake in retail outlets business Value Retail for £1.5bn, generating net cash proceeds of £600m. The disposal price represented an exit cash yield of 3.4% but was a 24% discount to its gross value of £2.0bn. The company intends to use the sales proceeds to pay down debt, reinvesting into assets at higher yields, and to fund a £140m share buyback programme.
• Assura agreed a deal to acquire Northwest Healthcare Properties’ UK private hospital portfolio for £500m. The deal adds 14 assets to its portfolio and almost £30m to Assura’s rent roll.
• LondonMetric acquired six single-let urban logistics properties for £78.0m, reflecting a blended net initial yield of 5.8%, which rises to 6.9% in two years.
• Picton Property gained planning permission to convert a vacant office to student accommodation. A sale of the property was agreed in October 2023, with the price dependent on the number of beds secured in planning. Consent for 706 bed means that the price will be the maximum of the agreed range.
• Urban Logistics REIT acquired four assets for £42.2m at a blended net initial yield of 6.6% and a blended reversionary yield of 7.1%.
• Home REIT sold a further 200 properties from its portfolio at a series of public auctions for a total of £36.9m. It has now sold 1,501 properties for £216.9m.
• Grit Real Estate Income Group continued its non-core asset sell-off with the sale of the Tamassa resort, a Mauritian hospitality asset, at an implied net initial yield of 6.5%.
• Triple Point Social Housing REIT transferred all 38 properties previously leased to struggling housing association Parasol to Westmoreland Housing Association. The company expects a material increase in rent collection.
• SEGRO sold a portfolio of four logistics warehouses in Italy for €327m. The warehouses, in Milan and Rome, were developed by Vailog SEGRO and are fully leased to three tenants active in the online and traditional retail sectors.
• Balanced Commercial Property Trust sold three offices, 17A Curzon Street and 7 Birchin Lane, in London, and 82 King Street in Manchester, rounding off its office sell-off. The company has sold seven offices since December 2023 for a total of £129.5m at an average discount of 4.1% to the then-preceding valuations. These sales reduce its exposure to offices to 16.0% by capital value, down from 29.6% as at June 2023.

Selected QuotedData views

• Real estate’s Rocky moment?
• The first cut is the deepest
• An update on our analysts’ top picks for 2024

Real estate research notes

A result analysis note on Urban Logistics REIT (SHED). The company reported resilient performance in a rising interest rate environment, with its focus on growing earnings to provide dividend cover.

An annual overview note on Lar España Real Estate (LRE SM). Impressive rental growth allowed the company to declared the largest dividend in its 10-year history.

An annual overview note on Grit Real Estate Income Group (GR1T). Its latest act of corporate engineering has opened the door for new NAV and earnings accretive developments.

An update note on Tritax EuroBox (EBOX), which is sailing in calmer waters as demonstrated by a portfolio valuation that has changed little and a 30% uplift in earnings that now fully covers its 8.6%-yielding dividend.

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