Custodian snaps up private property portfolio for £22m
Custodian Property Income (CREI ) has snapped up Merlin Properties, a private family-run portfolio, for £22.1m.
The £366m real estate investment trust (Reit) has found a new way to substantially grow its portfolio after its unsuccessful bid for Abrdn Property Income (API ) last year, signing an all-share acquisition with Merlin.
Merlin is comprised of 28 smaller regional properties worth £19.4m, predominantly in the industrial sector, in keeping with CREI’s existing portfolio. The remaining £2.7m is in newly built housing stock, the ongoing sale of which is expected to conclude in the next few months, providing extra cash for the Reit.
The properties in Merlin – which has been built over four decades – have an average lot size of £700,000, are primarily located in the East Midlands, and generate annual rent of £1.7m, equivalent to an 8.1% yield.
Nearly half, 46%, of the Merlin portfolio is in the industrial sector, with the remainder spread evenly between offices and retail properties, both on the high street and in retail parks.
Custodian Capital’s Richard Shepherd-Cross, who manages CREI, has identified opportunities to drive further value from the portfolio and increase rents, including by improving the properties’ environmental credentials.
Shepherd-Cross said the Reit has a clear strategy to scale up either through corporate action or deals but admitted the backdrop had been tough.
‘In an environment where current market conditions make further capital raisings through the stock market challenging, this strategic transaction via an all-share acquisition…allows us to circumnavigate that issue and continue to grow,’ he said.
As well as enhancing earnings per share and reducing gearing – falling from 27.1% loan to value to 25.8% – the purchase of Merlin was said to provide Custodian ‘with a portfolio that is both a strong fit with our income-focused strategy and highly complementary to our existing property portfolio, augmenting our regional, industrial bias and adding further diversification by tenants’.
Doing this deal rather than buying properties directly also offers ‘compelling economic benefits’ to the Reit, which spent £900,000 on its failed API bid.
Representatives of Merlin said the deal had helped solve a ‘family succession issue’ as well as helping to defer a ‘latent capital gain’.
Private family investments could be a lucrative growth avenue for CREI, and Shepherd-Cross said many other private companies will be facing similar succession and tax issues.
‘We hope to use the transaction as a blueprint for further opportunities to achieve scale in the current environment,’ he said.
Earlier this year, CREI called the bottom of the real estate market after enjoying a second quarter in a row of property price increases. The value of its 151 properties ticked up 0.5% in the three months to end of December.
According to Deutsche Numis data, over the past year the net asset value (NAV) of the fund has increased 7.4% and the shares are up 24.1%, including dividends, as the property sector shows signs of a long-awaited recovery.
The shares, which trade at a 13% discount, fell about 0.7% today after the news.
Winterflood analyst Emma Bird praised the move at a time when wide discounts have made it difficult for Reits to expand.
‘This is a positive development for the sector, and for CREI in particular, which will be able to grow its portfolio at the same time as reducing its gearing and enhancing earnings and dividend cover, without being dilutive to existing shareholders,’ she said.
‘With a market cap of £366m, CREI is already the largest diversified UK commercial property investment trust, and we expect that this transaction will improve its profile and secondary market liquidity further.’
