It has been a busy week in the REIT (real estate investment trust) sector with two takeovers on the table. The commercial property sector has seen discounts to NAV largely narrow, but there is still a ‘long tail’ of sub-scale trusts ripe for consolidation.
‘Positive outcome’
First, diversified property trust AEW UK (AEWU) has made an indicative takeover approach for smaller specialist trust Alternative Income REIT (AIRE). The AEWU offer is based on a share exchange ratio to be determined by both funds’ NAVs with a 3% discount for AIRE.
With a market cap of around £160 million, AEWU is more than twice the size of AIRE at £60 million. Prior to the announcement, AEWU was trading at an 8% discount to NAV and AIRE at a 12% discount.
Emma Bird, research director at Winterflood Securities, believes the deal would be ‘a particularly positive outcome for AIRE shareholders’. Investors would benefit from increased scale, better liquidity and AEWU’s history of trading at one of the tightest dicounts in the sector.
Meanwhile, AEWU shareholders would also benefit from increased scale plus a higher yield, says Bird. Moreover, there is scope for AEWU to ‘cyrstalise value’ from the sale of longer-lease assets and reinvest the proceeds.
Picton picked apart
The second takeover of the week involves LondonMetric (LMP) and Schroder Real Estate (SREI) divvying up Picton Property Income (PCTN). If a firm offer is made, Picton shareholders will receive stock in LMP and SREI in a proportion yet to be revealed.
Picton had put itself up for sale in January this year, and LMP had already shown an interest. The twist is the inclusion of SREI, in which LMP owns an 11% stake as Winterflood’s Bird points out.
According to Turtsnet’s Gavin Lumsden, LMP would take over the logistics portfolio, which represents around two thirds of Picton’s assets. SREI would take over the remainder of the portfolio, which mostly comprises retail and office properties.
On the face of it, says Lumsden, this is ‘not the greatest outcome for SREI shareholders’ although details have yet to be finalised. Picton does own some well-performing retail warehouses and offices, which at the right price ‘could provide solid income and growth potential’, adds Lumsden.
It’s good to see coprorate activity picking up again in the commercial real estate sector after a hiatus. We have already flagged Custodian’s (CREI) smart move in picking up family office-owned assets.
AEWU’s manager Laura Elkin has made no secret of the trust’s willingness to grow. As always, it depends on the assets and the price but AIRE looks like a good fit strategically and financially.
LMP is a serial consolidator and had already made it known it was running the slide rule over Picton. Bringing SREI on board spreads the cost and the risk, and again it looks like a sensible deal.
Read the AIRE press release here: https://www.alternativeincomereit.com/investors/
Read the Picton press release here: https://www.picton.co.uk/investors/
