‘Space junk’ REITs are prime M&A targets, says fund manager
Smaller listed REITs trading at a hefty discount to their net asset value are ripe takeover targets, according to the fund manager behind TR Property Investment Trust.
Marcus Phayre-Mudge, who oversees an investment portfolio valued at £965m, told EG that he expected further M&A activity around REITs with market caps of £200m-£500m, on the grounds that they are “just too small”.
“We think all these REITs that are sub-£500m market cap should be amalgamated,” he said.
Smaller listed REITs trading at a hefty discount to their net asset value are ripe takeover targets, according to the fund manager behind TR Property Investment Trust.
Marcus Phayre-Mudge, who oversees an investment portfolio valued at £965m, told EG that he expected further M&A activity around REITs with market caps of £200m-£500m, on the grounds that they are “just too small”.
“We think all these REITs that are sub-£500m market cap should be amalgamated,” he said.
The main market of the London Stock Exchange is home to 12 REITs with market caps of between £200m and £500m. According to EG analysis, all are trading at double-digit discounts to NAV, the largest being Helical at a 47% discount.
“If you have lost that gravitational pull [between share price and NAV], you are what we call space junk, you are just sort of floating around out there,” Phayre-Mudge said, adding: “If the stock market is going to be too miserable about real estate and allow the share prices to drift to these big discounts to the asset value, then private capital will come in and take them out.”
Businesses that have been trading at a discount to NAV are viewed by some analysts as doing so on borrowed time. Phayre-Mudge believes that many have now seen their stock price and portfolio value drift so far apart that the clock is ticking – and that their bosses must wise up to that fact.
“In the old days you could just brush off somebody who approached you because you didn’t want to lose your job,” he said of boardroom attitudes to unsolicited takeover bids. “For most chairs [now] it would be at their peril to ignore it.”
For the buyers, Phayre-Mudge said, such deals can be a big boost to earnings – not least because of the cuts that can be made as the target is transferred.
“When LondonMetric acquired CT Property Trust, it didn’t take any of the staff,” he said. “When McKay Securities was acquired by Workspace, there were 19 employees at McKay, Workspace took one. A small number of brains can run a lot of real estate… In most sectors, M&A doesn’t actually make much money, but in real estate, it really can.”
Some REITs in Phayre-Mudge’s target bracket still see themselves as potential acquirers, including Custodian Property Income REIT. The REIT trades at a 10% discount to NAV, the smallest discount of the 12 REITs valued at £200m-£500m.
In its latest results, published in the summer, the company said: “We continue to believe that there is a strong case for consolidation among the subscale listed REITs, with much of the market trading at persistently high discounts to NAV. In this respect, and given our low discount to NAV relative to much of the listed REIT sector, we intend to seek opportunities to purchase complementary portfolios via mergers or corporate acquisitions.”
Custodian acquired Drum Income Plus REIT in 2021.
In half-year results published last week, TR Property Investment Trust said public-market M&A had been “a crucial feature of the period” for the firm. It owned a 16% stake in Ediston Property at the time it agreed to sell its assets to Realty Income and a 10% stake in CT Property Trust when it was acquired by LondonMetric.
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