Update: Another Abrdn investment trust is to bite the dust after Abrdn Property Income (API ) agreed to an all-share merger with Custodian Property Income (CREI ), which has achieved its goal of striking a significant blow for consolidation in its sector.

API shareholders will benefit as the enlarged company will offer economies of scale and an enhanced and covered dividend.

In Custodian’s annual results in June last year, the then chair, David Hunter, said he and his board were seeking opportunities to purchase complementary portfolios as there was a ‘strong case’ for consolidation among real estate investment companies (Reits).

This has come to fruition as the £615m trust, now chaired by David MacLellan, is to take over £454m Abrdn Property.

Under the deal, API shareholders will receive 0.78 new CREI shares for every share they own. The exchange ratio is based on the trusts’ latest unaudited net asset values (NAVs) adjusted for recent property sales, debts, derivatives, merger costs and the relative levels of dividend cover.

CREI shares closed yesterday at 79.6p, which values API shares at 62.1p, a 26.5% premium to the three-month volume-weighted average price of 49.1p. However, it is a 26% discount to API’s NAV per share of 84p estimated by Morningstar.  

MacLellan said the merger ‘creates a well-positioned Reit of significant scale’ and all shareholders will benefit from ‘material cost savings and efficiencies’ along with ‘future growth opportunities’ to enhance returns.

API investors saw a bigger immediate gain, however, with their lower-rated shares rallying 5p, or 10.4%, to 53p on Friday. 

By contrast, CREI tumbled 12.5%, or 10p, to 69.7p. 

‘CREI  shareholders are likely to be less pleased than API’s, as it rating has widened, likely reflecting a possible overhang from API shareholders looking to capture the paper gains, as there is no cash option,’ commented JPMorgan Cazenove analyst Christopher Brown.

Dividend uplift

After the merger, CREI shareholders will hold 59.7% and API shareholders 40.3% of the enlarged company.

API said it had agreed to the transaction, which is expected to complete in early April subject to shareholder approval, in part because it was forced to refinance its debt facility in late 2022, when ‘politically induced gilt market volatility was at its height’, and the company’s 4p-per-share dividend is not covered by EPRA earnings.

These factors, along with the derating of the sector as interest rates rose, have led to a severe depression in the share price as the company traded on an average discount of 37% over the past year. Custodian traded on an 11% discount.

Along with being in a larger, more liquid vehicle, API shareholders will benefit from a 7.3% uplift in dividends. CREI has a target dividend of 5.5p per share, which is fully covered.

Under the terms of the agreement, Custodian Capital will provide the investment management of the enlarged company, which will have more than £1bn of property assets. Custodian, which receives a fee of 0.9% of  NAV within thresholds, has agreed not to account for Abrdn’s assets for nine months following the merger. There will also be a reduction in fees for two years. In exchange, the manager will remain in place until the end of the transition period, after which the 12-month notice period will be reinstated.

The board of Custodian will be enlarged to eight, with two API directors – Jill May and Sarah Slater – being added.

The board of the Abrdn trust has given irrevocable undertakings to approve the deal and CREI has received a letter of intent from Brooks Macdonald, which owns almost 3% of shares in the Abrdn trust, that it will vote for the merger.

Private investors have a large stake in Abrdn Property Income through broker Hargreaves Lansdown, which holds 12.4% of the shares, while Mattioli Woods, the parent company of CREI’s fund manager Custodian Capital, owns 5.5%, and wealth manager RBC Brewin Dolphin just under 5%.

Custodian’s major shareholders are BlackRock Investment Management with 5%, Mattioli Woods with 3.8%, and BlackRock Advisors with 1.6%.