Life Science REIT starts sale process to address massive discount

Life Science REIT (LABS ) is considering a sale or managed wind-down after a strategic review it has announced today. 

The real estate investment trust (Reit) holds properties leased, or intended to be leased, to occupiers in the life science sector. These are largely located in the ‘golden triangle’ research hubs of Oxford, Cambridge and London’s ‘knowledge quarter’ around King’s Cross. 

In interim results released in September, the board acknowledged that the trust had faced ‘significant headwinds’ since its inception, in common with the wider property sector. The directors cited ‘higher inflation’ and ‘elevated interest rates’ as drivers of a ‘fundamental slowdown’ in leasing activity.

These external factors, along with the investment company’s size – closing on a £136m market value yesterday – and low liquidity levels, have led to a consistent underperformance in shareholder returns, which has proved unsustainable for the trust.

Since its November 2021 IPO, the trust’s shareholders are down about 56% and it is currently trading at a hefty 46.8% discount. 

In the view of Numis analyst Andrew Rees, the disappointing returns are also symptomatic of a general ‘slowdown’ in the funding environment for early-stage and venture life science and technology businesses, which has led to the underwhelming pace of new lettings. 

This is evident in the board’s admission that only £1.3m of new estimated rental value has been secured over the past six months versus the guidance of £3.2m. 

On a more positive note, if a sale does go ahead, the trust’s board is confident the portfolio will attract buyers, and has already held a number of preliminary conversations with interested parties. 

The shares responded positively to the announcement today, rising nearly 11% to 43p. 

According to Rees: ‘LABS’s concentrated portfolio (which is principally composed of just four main assets – Oxford Tech Park, Rolling Stock Yard, Cambourne Park, and Herbrand Street) should mean both that a portfolio sale is possible and that the sale of assets individually could be achieved in a relatively short timeframe.’

He added: ‘The relatively flat December net asset value (-1.5% in the second half of 2024) implies broadly stable asset valuations. However, we note several assets are owned with longer-term repositionings in mind that carry significant capex requirements. Therefore, the board’s ability to extract a price near book value will depend on a buyer’s confidence in underwriting these extensive refurbishments.’

Winterflood’s Emma Bird was more doubtful about how quickly an outcome might be reached, saying it ‘remains unclear how much value can be unlocked for shareholders in the near future, with a prolonged managed wind-down still an option on the table’.

Dividends, already cut in March last year, were suspended as part of the announcement. 

The board also noted it was in the final stages of negotiating a ‘significant reduction’ in fees paid to fund manager Ironstone.