Risk versus reward in the REIT regime

EDITOR’S COMMENT How long do you wait, hoping the tide will turn? Investment house Columbia Threadneedle wishes shareholders in Balanced Commercial Property Trust, a UK real estate fund it has managed for almost 20 years, would hold on a little longer rather than sell out to Starwood Capital Group. This week Starwood announced a £673m take-private bid for BCPT, which underwent a strategic review and essentially hoisted a “for sale” sign over its assets and itself earlier this year. BCPT’s board has recommended that shareholders accept the offer. Shareholders representing roughly a quarter of its stock, including Aviva and AVI, have said they will. It isn’t hard to see why, although the buyer and target have spelt it out all the same: BCPT has been facing “significant challenges with a difficult economic and property market backdrop in a higher interest rate environment”, and over the year before it started its strategic review its shares had traded at a discount of more than a third to its net asset value. In that situation, as chairman Paul Marcuse puts it, the Starwood offer can be seen as “a successful outcome for our shareholders”. It comes in at a near-25% premium to the stock’s three-month average price before the trust invited takeover offers. Starwood, meanwhile, would get the portfolio – office, industrial and retail warehouse assets – for an 8.7% discount to NAV. Everyone wins. As an investor in BCPT posting on a stock trading forum said: “Sort of expected it, but a very nice and fair price.” Maybe. Columbia Threadneedle suggests that BCPT’s shareholders could win even more if the trust stayed its course during a long-awaited recovery in the UK real estate market. “In our view, the current portfolio is well positioned to take advantage of an improving market environment, with lower interest rates, pricing stability and improving sentiment,” a Columbia Threadneedle spokesperson said. “We are disappointed by the [BCPT] board’s decision to recommend the offer, as we believe there remains considerable upside to the portfolio of assets, particularly at this point in the market cycle, which we would like all long-term shareholders to benefit from.” But such are the risk of running a public REIT today. The gaps between share price and NAV are yawning, the outlook for improvement is unclear and the opportunities to raise fresh equity on the public markets dwindling. And even if you think as a leader that you’re delivering the goods, investors can still rally to turf you out – just ask the team at PRS REIT. Look back at our recent interview with Custodian Capital managing director Richard Shepherd-Cross, reflecting on the market conditions Custodian Property Income REIT operates in and bemoaning investors’ “undue” focus on NAV: “We should be following the architects of the REIT regime, the US, and be looking at earnings. Every trading company that anyone has ever invested in, the key metric is earnings. [But when] it comes to real estate, they say, ‘Oh, it’s all about asset value’. But it’s not, because it’s the earnings that come from the rent that support the dividend.” Starwood’s approach to BCPT was one of 12 the trust received. It’s conceivable the others included proposals from public companies (Starwood’s offer was announced the same morning as SEGRO’s bid for Tritax EuroBox). But faced with the challenges above, life as a REIT away from the public markets may be preferable. A recent study from accountancy firm Lubbock Fine found the number of new UK REIT launches jumped by 61% in the past year. But the firm said a big driver of that was the removal of the requirement for a REIT to be listed on a stock market. Neil Williams, a partner at Lubbock Fine, said the rule change “is already producing huge cost savings” for new REITs. Starwood thinks the “full potential of [BCPT] is best achieved as a private company”. It will now want the shareholders behind another 50% or so of the target’s stock to agree. The arguments are compelling. But there will of course be a chance some side with Columbia Threadneedle’s view. Until the deal is done, as the old stock market announcement caveat goes, “there can be no guarantee”.