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Latest property sector merger highlights cheap valuations on offer, 19 Jan 2024 11:15


  • Custodian and Abrdn Property Income combine
  • Deal values API at a 29% premium
  • ‘More of the same’ for Custodian

Having banged the drum repeatedly on how cheap the UK listed property sector is in terms of discounts to NAV (net asset value), we’re not surprised to see more insider buying with Custodian Property Income REIT (CREI) snapping up Abrdn Property Income (API) in an all-share deal.

Shares in Custodian were down 4.6p or 5.8% to 75p in early trading while API shares were up 8.4p or 17.4% to 56.4p, reflecting part of the premium being paid.

VALUE AND INCOME

The reasons for the deal, which has been pitched as an all-share merger, are three-fold: value, income and strategic fit.

Investor sentiment towards the whole listed property sector has been negative for over a year as rising rates have impacted real estate capital values, transaction volumes and stock market liquidity, despite the strength of the operational markets to which API and firms like it have exposure.

The shares have traded at a continual discount to NAV, with poor liquidity, and the lack of ‘love’ for the stock was compounded by its dividend only being covered some 80% by earnings.

By combining with Custodian, API shareholders get an automatic uplift in the value of their holdings – the merger values API shares at 62.1p, a 29.4% premium to last night’s close – as well as a substantial increase in dividend income, which is fully covered, and in theory better liquidity.

Both firms have an income-focused strategy, as their names suggest, and a shared exposure to regional, below-institutional sized assets which have greater rental growth and potential for capital appreciation.

The resulting company will have a portfolio of around 200 assets with a value of over £1 billion, ie an average lot size of around £5 million, and significant exposure to the industrial sector which benefits from low vacancy levels, limited new supply, strong occupier demand and therefore rental growth.

It will also have a stronger and more resilient balance sheet with an estimated LTV (loan-to-value) of around 30% as of the end of 2023.

STRATEGIC FIT

Speaking with Shares, Custodian managing director and investment manager Richard Shepherd-Cross said: ‘The strategic alignment between the two companies is striking. We approached the API board last year about an all-share merger and following reciprocal due diligence I’m delighted with today’s announcement of a firm offer.

‘We have always seen API as our closest direct competitor so this is very much ‘more of the same’ not just growth for growth’s sake’, added Cross.

The shareholder base of both companies is largely retail, except for a small residual shareholding in Custodian by wealth management firm Mattioli Woods (MTW) and the Mattioli family.

Recurring annual cost savings from combining the two companies are seen at £1 million due to operational efficiencies and removing duplication, while a reduction in management fees payable by API shareholders will contribute towards another £2.1 million of non-recurring cost savings.


Issue Date: 19 Jan 2024



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