Richard Shepherd-Cross is channelling his inner Roman philosopher as he sits down with EG to discuss his latest deal: “Good luck is when good preparation meets opportunity,” says the managing director of Custodian Capital, citing Seneca. It’s not quite the verbatim quote you get when you Google Seneca’s best-known lines, but it’s close enough. Besides, Shepherd-Cross has had plenty else on his mind.
This morning, Custodian Property Income REIT and Abrdn Property Income Trust revealed the terms of an all-share merger that will create a bigger REIT with a £1bn-plus portfolio and which could well qualify for FTSE 250 inclusion.
It’s the latest transaction in a years-long shake-up for the UK’s listed real estate market. Company after company has either been plucked from the public market as the gap between its asset value and a falling share price grows, or has found another listed name with which to team up.
So is this deal, which could close in April, defensive or opportunistic? Definitely not the former, Shepherd-Cross says, but also not quite the latter.
“We are coming up in March this year to Custodian’s 10-year anniversary,” he says. “Through that period we have grown from an IPO portfolio of £90m to more than £600m of gross assets. This will take it to over £1bn. This is a trajectory that we have been on and envisaged for ourselves for 10 years. Is it opportunistic? Well, the opportunity to do it is here.”
Here comes the philosophy. “It was Seneca who said that good luck is when good preparation meets opportunity. And I feel that that’s where this deal is. We were well prepared for further growth. We had, and indeed have, a consistent strategy, and have stuck to our knitting for 10 years. And broadly, our shareholders have rewarded us with a higher rating against NAV than many of our peers.
“In markets where you can’t raise money because the share price and net asset value metrics don’t allow it, then consolidation through merger is another way to look at it. I think we have seized the opportunity rather than just being opportunistic.”
Custodian has seized the opportunity before, albeit not on this scale. In 2021, it bought Drum Income Plus REIT for £21.4m. But there has been no let-up of pressure for the sector to keep shifting. Last year, Marcus Phayre-Mudge, fund manager of TR Property Investment Trust, told EG that REITs with market caps of £200m-£500m and large trading discounts to NAV were like “space junk… just sort of floating around out there” and should be combined. Custodian has one of the smallest discounts to NAV in that group, and has long seen itself as a buyer rather than the bought.
This latest deal will change the portfolio. Industrial and logistics space will be the largest chunk of the combined asset base by ERV, at 44%, as it was for each company individually.
But offices will leap to second place from third in Custodian’s stand-alone portfolio, and retail warehousing will account for a slightly smaller percentage. Asked for his thoughts on the perfect portfolio in today’s market, Shepherd-Cross has something good to say about pretty much every asset type.
“We are all looking for rental growth, and if we’re not, we should be,” he says. “That is what is going to drive returns for shareholders. The growth is very strong and patently obvious in the industrial and logistics sector. We think there is opportunity for rental growth in retail warehousing – rents are building from a very low base and retail warehousing showed itself to be more resilient than high street retail through the last five years.
“And I think, perhaps to the surprise of many, there is opportunity for rental growth in the office sector as well. But you have to position the assets. Neither we nor Abrdn have sat back, expecting offices to let themselves. The work has been done to position those assets to pick up occupier demand.”
That diversity in the portfolio won’t be for everyone, Shepherd-Cross knows. But if and when the merger goes through, he hopes the larger-scale business will find a bigger, more engaged investor base.
“We have always tried to be fleet of foot and entrepreneurial where we can,” Shepherd-Cross says. “It would have been all too easy through the last five years to join the herd and say, ‘We are single-sector specialists,’ but we didn’t do that because we ardently believe in the benefits of a diversified portfolio for stability of income for private clients and wealth management-style shareholders.
“If the institutional investors want to follow their research teams and go single-sector, knock yourself out. But for private clients and private wealth managers who are not sitting behind great research teams, then a diversified, stable income strategy has real merit. We have stuck to that. This is another flag on that mountain, saying that this is the territory we want to occupy.”
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