James Carthew: Activist Achilles and the wide discounts on Chris Mills’ other trusts

Last week’s bid by Blackstone and Sixth Street Partners for Warehouse Reit (WHR ) marked another item in a long list of corporate activity aimed at exploiting discounts in the UK property investment company sector. The total offer of 110.5p was rejected by WHR’s board and for good reason since it came at a sizeable (roughly 15%) discount to the portfolio’s net asset value (NAV).

Investors may be keen to free up cash from trusts investing in property and alternative assets, but not at any price. WHR’s share price jumped, but is still barely above £1, suggesting that investors do not think a deal is doable.

Apart from the discounted offer price, some shareholders may also be reluctant to cash in their investment based on a NAV reflecting valuations that must be near cyclical lows. As UK interest rates fall, property valuations should be recovering again. The economic outlook for the UK may not be great, but the occupancy rate on WHR’s portfolio is 96.4%, rents on its portfolio have been rising, and the fund reckons that its rents are still below market levels, so there is the potential for further rental growth. 

Over the past five years, in NAV terms, WHR is the best-performing of the companies in the Association of Investment Companies’ Property - UK Logistics sector, averaging about 8.6% per annum. Nevertheless, like many of its peers, it trades on too wide a discount and investors’ patience is not infinite.

Given the discount, I had thought that WHR would be a likely target for recently launched Achilles (AIC). We are all dying to know which trusts it will target, but it may be a while yet before Achilles announces any stakes. It may even be that it had amassed a position in WHR before the news. That might be apparent if there is a material rise in Achilles’s end-March NAV.

A couple of people have asked me how Achilles can attack trusts for being on wide discounts when North Atlantic Smaller Companies (NAS ) – which is run by Harwood Capital’s Chris Mills, one of Achilles’s managers – languishes on a 35% discount. It is a fair question. Even in Achilles’s prospectus, which shows NAS’s track record, it feels a bit odd to be advertising to potential investors that the average share price return on NAS has been -7.9% per annum over the last three years.

The main reason for NAS’s discount is that it is practically bid-proof, given that Chris Mills owns about 28.9% of the trust and is part of a concert party that owns over 31%. NAS does buy back shares, although it has to get special permission for this from shareholders each year to avoid triggering a bid from the concert party. 

Over 210,000 shares or about £7.6m worth (NAS’s share price is over £36) were repurchased over the past 12 months. This boosts the NAV and provides some liquidity, but the discount is wider than it has been at any time since the financial crisis in 2008. 

There is a long-term discount narrowing angle to NAS, in that Mills has asked the board to prioritise buybacks over new investments as long as a substantial discount persists, but not until he retires, which may be some way off yet. 

CG Asset Management, which manages Capital Gearing Trust (CGT ), is the second-largest shareholder. It is known for agitating for change to narrow discounts, but seems prepared to exercise patience in this case, perhaps because of NAS’s decent long-term track record.

NAS sits in the global smaller companies sector, where its 10-year NAV returns (an annualised return of 9.8%) are second only to Herald (HRI ). However, for many years the vast majority of the trust’s listed equity investments have been in smaller UK companies. Were it classified as a UK small-cap trust, its 10-year figures would be second only to those of Oryx International Growth (OIG ) – this £151m market-cap trust is also managed by the Harwood team, has a number of holdings in common with NAS, and is also NAS’s largest investment.

It has often been asked why the two trusts do not just merge, but my guess is that Harwood does not see the point of incurring the associated costs and the inevitable clamour for a cash exit option. There is another differentiator in that NAS has some unquoted positions whereas OIG is all listed equities. OIG might be a more natural merger fit with Odyssean (OIT ), another Harwood Capital trust and another significant position in NAS’s portfolio.

NAS is not very forthcoming with up-to-date information on its portfolio. It does not list all its holdings anywhere, even in the annual report. Part of the unquoted exposure comes through limited partnership vehicles managed by Harwood. We get to hear when one of these makes a successful exit, but otherwise these investments are fairly opaque, which may put off some investors. 

NAS’s NAV peaked in 2021 and suffered as interest rates rose, but it has been on a recovering trend for a couple of years now. The discount looks even more extreme when you consider the NAV is based on depressed valuations for UK small caps. At some point, this will be a spectacularly successful investment. 

As to whether North Atlantic Smaller Companies’ discount issue inhibits Achilles’s ability to do its job, I think the answer is no. The frustration with discounts on alternatives has reached a fever pitch and arguments about people in glass houses not throwing stones won’t wash.

James Carthew is head of investment company research at QuotedData

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