A couple of things caught my eye this week. The first of these was a very large tender offer from Hansteen Holdings, a Reit specialising in industrial property, and the second was Tritax Big Box Reit buying a large logistics facility from LondonMetric Property.
Hansteen 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 NAV at the end of June, as well as 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 and so it makes sense to take up the tender offer in full if you are an investor in Hansteen.
The tender offer is funded from the sale proceeds from Hansteen’s German and Dutch property portfolio. This deal was announced in March, around the same time as Hansteen was snapping up Industrial Multi Property Trust.
The proceeds of the sale were €1.28 billion (£1.13 billion) which looked like a good price for assets that had been valued, in euros, at less than two-thirds this figure five years earlier.
Hansteen justified the sale by saying it was achieved at a time when both rents and occupancy were high, and the euro/sterling exchange rate had moved in their favour.
This deal is 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: ‘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 suggests that its board is very keen that shareholders take up the offer.
On 2 October, Tritax Big Box Reit announced it had bought the Royal Mail National Distribution Centre in Daventry for £48.8 million.
This is the second Royal Mail facility that Tritax has bought. The first cost £32.7 million, equivalent to a net initial yield of 6.1%, but it differs from Daventry in that rent reviews are based on open market rates and the next one is not due until 2021.
Royal Mail is a good tenant but 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, a net initial yield of 6.7%. So LondonMetric has made close to 50% on this investment (including rental income) in just three years.
Its sizeable profit has come from yield compression rather than asset management, and has been achieved over a period when Tritax has been pouring money into this popular part of the market.
LondonMetric just acquired a 40-acre development site in Bedford to build four regional distribution warehouses, which it says will deliver initial yields of 7%.
LondonMetric believes the seismic shift underway in the retail market favours regional and last mile urban warehouses.
Industrial property and national distribution centres are slightly different asset classes but, looking at the Tritax deal against the context of the Hansteen tender, I do wonder whether Tritax has paid a top of the market price for Daventry.
LondonMetric clearly thinks it can make more money elsewhere. I guess Tritax would argue that there is still a shortage of this type of property in the UK.
So how will these companies fare over the next few years? I suppose that much will 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. I would strongly advise you to consider backing them when they do come back asking for money to invest, especially if it looks as though the worst of times are upon us.
James Carthew is a director and head of investment trust research at Marten & Co