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James Carthew: has Tritax paid too much as Hansteen hands back cash?

James Carthew: has Tritax paid too much as Hansteen hands back cash?

In the past week we have seen a very large tender offer from Hansteen Holdings (HSTN), a real estate investment trust specialising in industrial property, and a deal where Tritax Big Box (BBOX) bought a large logistics facility from LondonMetric Property (LMP).

Hansteen has announced a £580 million tender offer for its shares, equivalent to half of its issued share capital. The tender offer price is 140p per share, a premium to the 133p net asset value at the end of June 2017 and a small premium to the prevailing share price before the announcement of the tender offer. Buying back shares at a premium is dilutive for ongoing shareholders.

The tender offer is being funded from the sale proceeds of Hansteen’s portfolio of German and Dutch property portfolio. This deal was announced in March, around the same time as Hansteen was snapping up Industrial Multi Property Trust (IMPT). The proceeds of the sale were €1.28 billion which looked like a good price for assets that had been valued, in euros, at less than two thirds of this figure five years earlier.

Hansteen justified the sale by saying that it was achieved at a time when both rents and occupancy were high, and the euro/sterling exchange rate had moved in their favour. They also pointed out that the deal was in line with their policy of buying at a low point in the cycle, when occupancy and rents are low, adding value through asset management and selling the investment towards the top of the cycle.

Within the tender offer announcement, Hansteen said that ‘the board believes that, with the current high level of demand for industrial property investments, opportunities to reinvest the cash sales proceeds at prices which offer appropriate value and future growth potential are limited’.

It is unusual for investment companies to repurchase shares at a premium. The fact that Hansteen is doing so might suggest that its board is very keen that shareholders take up the offer!

Tritax Big Box real estate investment trust announced on 2 October it had bought the Royal Mail National Distribution Centre in Daventry for £48.8 million. The vendor was LondonMetric Property and the deal was done on a yield of 5%. The property benefits from upward only, RPI-linked annual rent reviews.

This is the second Royal Mail facility that Tritax has bought. The first of these cost them £32.7 million, equivalent to a yield of 6.1%, but it differs from Daventry in that rent reviews are based on open market rates and the next one isn’t due until 2021. Royal Mail is a good tenant but it is faced with a strike, the first since its privatisation, that could cripple the company in the run up to Christmas.

The Daventry facility was bought by LondonMetric in 2014 for £36 million, equivalent to a yield of 6.7%. LondonMetric has made close to 50% on this investment (including rental income) in just three years. Its sizeable profit has come from buying at a wide yield and selling on a tighter one rather than anything it has done to enhance the property. It has also been achieved over a period when Tritax has poured money into this popular part of the market.

LondonMetric has just acquired a 40-acre development site in Bedford, where it hopes to build four regional distribution warehouses, which it says will deliver yields of 7%. This deal comes after it bought 14 urban and regional distribution warehouses for £117 million in August. These were acquired on a prospective yield of 6.6%.

LondonMetric believes that the seismic shift underway in the retail market (as more is bought online) favours regional and last-mile urban warehouses. This is also the focus for the Warehouse (WHR) and Pacific Industrial & Logistics (PILR) real estate investment trusts.

Industrial property and national distribution centres are slightly different asset classes but, looking at the Tritax deal against the context of the Hansteen tender, has Tritax paid a top-of-the-market price for Daventry? LondonMetric clearly thinks it can make more money elsewhere.

Tritax might argue that there is still a shortage of this type of property in the UK (hence why it plans pre-let developments at the land they recently acquired in Dartford). It can also get finance for the portfolio at attractive rates – in March they borrowed £90 million for ten years at a fixed rate of 2.54%.

So how will these companies fare over the next few years? Much may depend on the strength of the UK economy and what happens to interest rates. In the meantime, Hansteen will retrench and wait for more opportune times.

 James Carthew is a director of Maarten & Co. 

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