Picton Property: We want to be part of consolidating UK Reits

Picton Property Income boss Michael Morris wants to see more mergers and acquisitions among real estate investment trusts this year and is holding out his £580m company as a potential bidder.

Picton Property Income (PCTN ) boss Michael Morris wants to see more consolidation among real estate investment trusts (Reits) this year and is holding out his £580m company as a potential bidder.

Morris, chief executive of the self-managed Reit for six years, told Investment Trust Insider too many listed property funds trading at ‘unsustainable’ discounts were holding back the sector.

Last year’s M&A surge on the UK stock market saw a flurry of mergers and acquisitions in property investment companies: Land Securities (LAND) snapped up regeneration specialist U+I; Custodian (CREI ) took over Drum Income Plus (DRIP ), and RDI Reit (RDI ) delisted after its takeover by Starwood Capital; and in another private equity deal property developer St Modwen was bought by Blackstone for £1.3bn.

Consolidation was ‘a debate’ the Reit industry still needed to have, Morris said, because ‘it is very unhelpful to have a lot of businesses trading at a significant discount’.

Share prices of generalist UK commercial property trusts rebounded strongly from pandemic lows, but on average they remain 15% below the underlying net asset values (NAVs) of their portfolios, according to Numis Securities.

Picton, the third largest diversified UK Reit, is one of the higher rated in the peer group with its shares 5% below Numis’ estimate of 109.7p NAV per share. That looks good against the 21-27% discounts on rivals such as BMO Commercial Property (BCPT ), BMO Real Estate Investments (BREI ), Schroder Real Estate (SREI ) and Abrdn-managed UK Commercial Property (UKCM ).

Although a range of Reits means more choice for investors, he said it was no good if there ‘are lots of the same [trusts]’ being offered in the market.

‘To be continuously trading at a 20% discount to NAV is unsustainable and not good for the sector,’ he said.

He believed the big discounts weakened demand for Picton’s 3.3%-yielding stock. ‘Our share price is around 105p and we are trading close to NAV…but if you are looking at a spreadsheet and looking at the discounts then Picton is expensive,’ said Morris.

‘But you get what you pay for.’

He said the discount ‘does not feel right’ for a trust that has nearly 60% invested in industrials, the top-performing property asset class last year, returning 28%.

While Morris (pictured) would not be drawn on whether Picton had a target in mind, he said: ‘Picton would like to grow and either consolidation or takeovers in the sector are inevitable.’

‘We are wanting to grow Picton in the wider sense as it is important to us…and feedback from our investors is that they would like it to be larger,’ he said.

‘If Picton is bigger it can be more efficient…and secondly, many of our investors are growing business [investment companies] and need to have suitably sized investments to grow into. We need to grow to remain relevant.’

On the push for consolidation, he said: ‘We would like to be part of that in some shape or form.’

Morris will need the support of wealth manager Investec if he is to embark on an acquisition. According to Refinitiv data, Investec Wealth is not only Picton’s largest shareholder with a 14% stake, it is also a top three investor in BCPT, SREI and UKCM.

Other possible smaller targets for Picton could in theory include Value & Indexed Property Income (VIP ), a £106m trust on a 13% discount, according to Numis. However, its founder and fund manager Matthew Oakeshott owns over a quarter of the shares and may be difficult to move.

Paul Bassi, chief executive of Real Estate Investors (RLE), the £72m Midlands-focused Reit, has previously complained of its wide discount and indicated he was open to a bid. Fund managers and top RLE shareholders JO Hambro, Premier Miton and Ruffer might be keen to see a takeover too given the shares at 57.7p languish at a 42% discount to their asset value last June. 

Morris welcomes consolidation within Reits, but he does not want to see too many property companies taken private as instead of creating a ‘more prosperous sector’ it is ‘shrinking and becoming less relevant’.

By combining smaller Reits, he said costs are reduced for investors as the fund only has to have one stock market listing, one board, and one set of management fees.

With Covid-19 hopefully in the rear view mirror, with the caveat of omicron’s spread, Morris said Picton can now afford to be more outward looking. However, despite posting strong half-year results in November, he is not considering raising new equity this year and any acquisition of new property assets, or larger, more consolidating purchases, will be done by increasing Picton’s gearing, which is currently at just 17%.

‘I do not think the equity market is there,’ said Morris. ‘It’s hard to raise money when you have lots of companies trading at a massive discount. Why would you invest [in Picton’s raise] when you have X, Y, and Z at a 20% discount?’

He said there is ‘value in the listed sector’ but whether Picton is ‘a success in consolidation, consolidation will be a good thing for the sector as a whole’.

With the open-ended property fund market shrinking, he said now is the time for ‘the listed sector to take up the baton and charge – be the choice for investors in property’.

Picton has been a top performer in the UK commercial property sector over one, three, and five years. Over the past 12 months, Morris has delivered a 21.7% NAV increase and the shares have returned 39%.

Over three years, the fund portfolio is up 30.5% and over five years, the NAV has grown 63.6%.



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