Reits are being ‘stolen’ by Dick Turpin bidders, Premier Miton warns
Boards of UK property trusts need to stop ‘Dick Turpin’ private equity firms from ‘stealing’ underpriced assets, Premier Miton’s Ian Rees has warned.
Rees, who is head of the multi-manager team at Premier Miton and oversees eight multi-asset funds, is invested in four specialist healthcare trusts: Assura (AGR ), Care Reit (CRT ), Primary Health Properties (PHP ), and Target Healthcare Reit (THRL ).
The first two have become takeover targets this year. After four rejected bids, Assura was wooed by a £1.6bn offer from private equity group KKR, while Care Reit – which was formerly known as Impact Healthcare – is set to be acquired by US-listed CareTrust Reit for £448m.
US investors swooping on the UK market may see themselves as white knights, rescuing property trusts in an undeniably tough market for real estate, but Rees said they are more akin to highwayman ‘Dick Turpin’. In his opinion, they are ‘stealing absolutely great assets on the cheap’.
Investors have understandably been frustrated with wide and persistent discounts, but Rees said his frustration lies with boards. He says they have failed to be proactive and communicate ‘the tremendous value that remains in these vehicles’.
‘They have not been proactive in taking steps [to narrow the discounts] and this is causing people to get quite disgruntled,’ he said.
‘That comes with a real danger that more trusts will have bids coming and more boards will capitulate.’
Rees has been in contact with the boards of the four specialist healthcare trusts and has urged them to ‘revalue’ their portfolios. He says they should consider options like asset management, asset disposals and buybacks to keep the discount in check and shareholders onside.
Undervalued assets
M&A activity has been fast and ferocious as UK stocks have remained out of favour, leaving valuations at depressed levels.
Rees said private equity firms and US investors have swooped on real estate investment trusts (Reits) at a ‘period of max pain’.
Care Reit was trading at its widest ever discount when CareTrust Reit pounced. Although the bid of 108p per share has been backed by the board, the shares are currently trading at 108.5p which Rees said ‘is telling me the market is saying [the offer] is cheap and it is expecting another approach’.
‘I hope there is. [CareTrust Reit] is not paying for the asset scarcity,’ said Rees. ‘The value is immense and the bid undervalues the fund.’
Both Care Reit and Assura offer investors decent income with strong asset and cashflow profiles, he added. This means investors will be forced to give up yields that are impossible to replicate elsewhere.
CareReit currently yields 6.7% with 2.2 times cover, while Assura has a fully covered yield of 6.8% in a sector that benefits from structural demand, Rees pointed out.
‘Shareholders should not see these funds go at this level [offered by buyers]…because you cannot replace [the yields] anywhere,’ he explained.
The ‘obvious and considerable’ opportunity for the healthcare property sector in particular is being overshadowed by interest rate movements. Rees said healthcare property has a high correlation with general commercial property, which in turn is correlated to the interest rate cycle.
‘Commercial property is interest rate sensitive because of the cyclicality of tenants and rental streams,’ he said.
‘But it is different with alternative property tenancies, cashflow, and rental growth because they are not economically-sensitive assets. The fact that these alternative properties have been caught up in interest rate sensitivity is barmy and sensible investors should look at them like the great assets they are.’
