10 February 2024
If you are covering reports that Tritax Big Box has agreed a merger UK Commercial Property REIT, please see the following comment from Oli Creasey, property research analyst at Quilter Cheviot:
“A merger of Tritax Big Box and UK Commercial Property REIT (UKCM) would make a c. £4bn market cap combined property company, potentially the fourth largest in the UK and a contender for future inclusion in the FTSE100.
“No details have yet been announced, and both companies have declined to comment. However, it should be noted that if true, this would not be the first possible merger involving UKCM – late last year talks between the trust and Picton Property over a possible merger were called off, primarily owing to opposition from UKCM’s largest shareholder, Phoenix Life Limited, which did not support the transaction and controlled c. 43% of the trust. It would make sense if the trust manager, abrdn, was now looking for a different deal that would help the trust build scale, presumably with input from the largest shareholder.
“It is also worth noting that abrdn, purchased a large stake in the Tritax management company in 2020, which might make this tie up easier to pull off. We also observe that abrdn appears to be in the process of getting rid of all directly-managed property investment trusts – abrdn Property Income Trust is pursuing a merger with Custodian REIT, while their European logistics trust is undergoing a strategic review which could well result in a sale of the business at its conclusion.
“Does the deal make sense for Tritax? It is the first public M&A the company has been involved in, though it did buy in DB Symmetry, the private industrial development company in 2019. It follows a recent trend of consolidation in the property industry, with the other notable transaction currently ongoing between LondonMetric and LXi being another example of two companies looking to build scale.
“Our only concern is the more diverse nature of UKCM’s portfolio. Tritax is an industrial/logistics pure-play and has only ever owned large, logistics sheds or land for industrial development. Approximately 60% of the UKCM portfolio matches this profile, but the other 40% is a mix of office, retail, hotels, cinemas and more. Tritax may be able to argue that a handful of these other assets – some supermarkets and a large out-of-town B&Q for example are existing tenants and the properties are not wildly dissimilar – might still fit their profile, but the company has no experience, and previously has shown no interest, in owning assets in these other sectors.
“The other issue surrounds the lease length. Tritax has tended to focus on long-lease assets, and has a 12 year unexpired lease term on average. Almost half of the UKCM portfolio has a remaining term of under five years. This may make them challenging to sell on. We would expect Tritax to dispose of much of this non-industrial portfolio fairly promptly as it falls outside of their current strategy, but may also present an asset management headache – needing to re-let assets not in their core area of expertise. There are advantages to this transaction, if it is to take place, but it isn’t a slam dunk.”
