If you’re a small-cap, externally managed REIT that Andrew Jones likes the look of then watch out, because the LondonMetric Property chief executive is probably coming to take you out.
Fresh off announcing a more than doubling in net rental income in the six months ended 30 September to £193.1m, buoyed by its acquisition of LXi for £1.9bn earlier this year and a focus on “winning” sectors, Jones is hungry for more deals.
Not hungry, compelled. “It’s my job,” he told EG. “Just as it is my job to buy an asset or a portfolio, it is my job to buy companies.”
He said he believed there was a mispricing of many of the small-cap listed REITs and that it was “beholden upon those who can afford it, and have got the right rating, to do something about it”.
He added: “Why wouldn’t I try to buy a company at a 10% discount to NAV?”
Material discounts
While Jones would not been drawn on where he was looking to buy, he said he saw opportunity across smaller REITs where poor structures, lack of scale, limited alignment of interest and legacy investment strategies had led to material discount ratings.
“The days of easy money for externally managed small-cap REITs with little in the way of shareholder alignment seems a very distant memory,” said Jones. “As a result, we continue to believe that there are further opportunities for consolidation, with investors increasingly focused on larger, scalable and more efficient propositions. After all, boards have a duty of care to their shareholders.”
There are 19 REITs listed on the London Stock Exchange with market caps of less than £1bn. More than half are externally managed and several, including Supermarket REIT, Urban Logistics REIT, Warehouse REIT, Target Healthcare REIT and Care REIT, are within LondonMetric’s favoured asset classes.
“You have to wonder what the purpose of the small cap is,” Jones told EG. “If you’re less than £1bn and you’re externally managed then I don’t see where your future lies in the listed space.”
“That doesn’t mean we like them all, by the way,” he added.
What LondonMetric does like, however, is collecting rent, and Jones is sticking by the firm’s conviction to buy income and stay away from development.
“There are a lot of businesses out there in our sector that haven’t really embraced the REIT structure and are having to develop to buy growth in their income going forward,” he said. “We don’t have to develop anything to build growth. We just have to collect rent.”
Pregnant growth
Jones said LondonMetric had at least three or four years of “pregnant growth” that would mean its strong net rental income growth would continue. He cited some £26m of net rental uplift over the next 18 months as an example.
“We believe that income and income growth are the defining characteristics of long-term real estate investing and deliver superior total returns,” said Jones. “Our income approach and focus on macro trends frames our capital allocation into the winning sectors and mission-critical assets that are benefiting from evolving consumer behaviour.”
He added: “Our job is to allocate capital into real estate sectors where it will be treated best by looking for new trends and changes in direction. There is no substitute for being aware and always prepared to pivot.
“Our decisions remain heavily influenced by the macro environment, consumer behaviour and demand/supply dynamics. After all, no matter how great the intelligence or how hard the work, the macro will always outrun the micro.”
Photo © LondonMetric Property
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