12th Feb 2024 11:20
(Alliance News) - Mergers between real estate investment trusts could help build a "more investible future" for the UK property sector, according to analysts, after two FTSE 250-listed firms agreed a merger on Monday.
Tritax Big Box REIT PLC said UK Commercial Property REIT Ltd has agreed to an all-share takeover offer to create the UK's fourth largest real estate investment trust by market capitalisation, at nearly GBP4 billion.
Tritax Big Box said it has reached an "agreement on the key terms" of a possible all-share takeover bid for UK Commercial Property.
UKCM investors stand to receive 0.444 of a new Tritax Big Box share for every UKCM share they own.
Based on Tritax Big Box's closing share price on Friday, the deal would value each UKCM share at 71.1 pence and the full company's equity at GBP924 million.
UKCM shares were up 5.0% at 67.40p on Monday morning in London for a market capitalisation of GBP875.9 million. Tritax Big Box shares were down 2.8% at 155.80p for a market cap of GBP2.96 billion.
The announcement represents the latest in a series of mergers of London-listed property companies since the year began.
Early last month, LondonMetric Property PLC and LXi REIT PLC also agreed an all-share merger, which at the time they said would make the company the UK's fourth largest REIT, citing GBP4.1 billion in EPRA net tangible assets.
Later in January, Custodian Property Income REIT PLC and abrdn Property Income Trust Ltd agreed an all-share merger to create a REIT with combined assets of GBP1.0 billion.
RBC Brewin Dolphin said the Tritax Big Box-UKCM deal is the latest indicator of a "more investible future for UK property", expecting more deals to be announced across 2024 "as more REITs and property companies adapt to higher interest rates and reassess their portfolios amid huge changes in the way property is used."
"At their current scale, the UK's REITs are limited by their size – this has an effect on the capital they can attract, the terms on which they can borrow, and ultimately the deals they can do. Combine them all and you have just one of the main North American property asset managers – they simply can't compete on a global scale," said RBC Brewin Dolphin analyst John Moore.
UK REITs have a combined market capitalisation of around GBP42.8 billion, RBC Brewin Dolphin said at the time of writing, while US-listed property asset manager Brookfield Corp has a market capitalisation of USD66.97 billion in New York as of Monday morning.
"There is a unique opportunity to invest in property, where the managers are taking self-help measures to reflect the amount of change in the sector. The closure of open-ended funds only adds to that and puts REITs in an even more interesting position," RBC Brewin Dolphin's Moore continued.
"The LondonMetric-LXi deal puts pressure on the entire sector – two mergers have followed and more could be on the way. It is the start of something, and we should soon see more activity in the sector."
UKCM had EPRA net tangible assets of 78.7p per share on December 31, while Tritax Big Box had 177.2p per share.
UKCM shareholders would own 23% of the enlarged company. A tie-up would "bring together complementary logistics-oriented investment portfolios with a shared focus on resilient and growing income", Tritax Big Box said.
For Tritax Big Box's investors, the deal will represent a second time that they "may have get used to a significant change in the investment focus of the vehicle", according to AJ Bell.
"A holder of big box warehouses used in e-commerce, in 2019 Tritax moved from buying existing assets to developing its own, at greater risk, as it struggled to find investments at the right price. Now the company could be about to take a much bigger step away from its original remit as it looks to combine with UK Commercial Property REIT, which has a more diversified portfolio of offices, shopping centres and logistics assets," said AJ Bell analyst Russ Mould."
"It's no surprise UK Commercial Property is a target for consolidation as its attractions were made clear when Picton Property attempted a merger last year, but that deal failed to get off the ground. UK Commercial Property parent abrdn PLC has a significant stake in Tritax – the asset manager behind Tritax Big Box REIT – which could also help smooth the way for this deal.
"The merger would create a business owning big box assets and having exposure to smaller units, strategically located in urban locations. These are sometimes known as 'last mile' logistics assets and are used in the final stage of the process of delivering goods to the consumer's door. A key question, assuming the tie-up goes through as planned, will be whether the enlarged entity decides to streamline the combined portfolio through the sale of less-important assets."
Tritax Big Box said UKCM's board, excluding Chair Peter Pereira Gray, deems the possible offer sweet enough to recommend to shareholders. UKCM shareholders Phoenix Life and Investec Wealth & Investment UK, which own just under 57% of UKCM shares, also would back a bid on these terms.
Shore reiterated its 'buy' rating for Tritax Big Box, saying the deal "looks to make good sense to us and we see the BBOX share price offering attractive long-term value."
Peel Hunt rates Tritax Big Box at 'add', with a target price of 150p per share. "We remain supportive of M&A within the sector, and this seems a logical deal. Both portfolios are focused on logistics, the managers share common ownership and the deal should lead to cost synergies, although perhaps they would be higher in an internal vehicle?" said Peel Hunt analysts.
Liberum rates Tritax Big box at 'buy, with a target price of 172p per share, saying: "The deal may improve potential for capital recycling and assist in driving BBOX’s development initiatives. However, we think the announcement is light on details around potential cost savings and expect more details to emerge in time."
By Greg Rosenvinge, Alliance News senior reporter
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Related Shares:
Tritax Big BoxUKCM.LCust Prop IncAbrdnAbrdn PropertyLondonMetricLXI.L