Just over a year ago, Property Week called it: the great REITs mergers and acquisitions (M&A) extravaganza was about to begin.

At the time, listed REITs were being hit by rising interest rates and increased vacancy rates, which led to many trading at a significant discount to net asset value (NAV).

As a result, mergers and takeovers among REITs accelerated so that they could increase scale and liquidity of shares, gain stronger combined balance sheets and access alternative forms of debt finance from a wider pool of providers.

The biggest moves last year included Tritax Big Box REIT’s £924m merger with UK Commercial Property REIT, creating a £4bn market cap combined company, and LondonMetric’s £1.9bn takeover of Nick Leslau’s LXi REIT to create a £6.2bn combined portfolio.

Fast-forward to today and the race for REITs has been renewed. While interest rates have fallen, they have not reduced as quickly as many had predicted and the gap between NAV and share price remains a troubling one for REITs.

The recent news that healthcare group Assura was likely to recommend a £1.61bn bid from investment giants KKR and Stonepeak follows its rejection of a previous and similar bid from KKR, which last month joined forces with Universities Superannuation Scheme (USS) on the offer.

Property companies are open to opportunistic bids due to the wide discounts to NAV they have traded at since mid-2022
Richard Williams

Assura also confirmed it had rejected a bid from rival healthcare facility operator Primary Health Properties (PHP), a speculative offer that valued its rival at around £1.4bn.

In a note to shareholders, Assura said: “The consortium of KKR and Stonepeak, both long-term infrastructure investors, recognises that Assura’s leading platform and portfolio are important social infrastructure assets for the UK, and has indicated its intention to deploy further capital to the portfolio to continue its growth.” The group’s board that added it was “minded to accept” the indicative offer.

Oli Creasey, property analyst at Quilter Cheviot, says: “We are disappointed that Assura’s board is ‘minded to recommend’ a 49.4p bid from the KKR-led consortium, if it arrives. In our view, the net disposal value [NDV] of 55p is the relevant figure, and a bid approximately 10% below that does not adequately compensate shareholders.”

Creasey also highlights disappointment with the PHP offer, which he says “falls significantly short”. He adds: “It is hard to imagine many investors accepting a bid that values Assura at around 43p, especially given the cash offer that seems likely to appear in due course.”

While some investors may value an all-share offer to keep the capital in the public market, Creasey says it is doubtful they would accept a 6p reduction. Conversely, other investors may prefer the cash offer for a clean exit.

Private equity priorities

Quite why KKR is so interested in Assura has not been spelled out by the investment group; but observers believe the carrot is the company’s infrastructure fund, which has a low cost of capital. Private equity buyers generally prioritise future cashflows and seek to expand platforms using higher debt levels than public markets are willing to accept.

The Assura bid is not the only game in town. Hot on the heels of KKR and USS’s initial bid for the healthcare landlord, US financial powerhouses Blackstone and Sixth Street aimed to put a £470m target on industrial group Warehouse REIT’s back. Somewhat unusually, rather than rebuffing the approach immediately, Warehouse REIT took five days to reject the offer on 4 March and has not since made any public statement on its reasons for doing so.

However, the consortium, which has until 31 March to make its bid official, claimed the offer “provides a highly deliverable and compelling alternative to shareholders, attributing a full valuation for the company and its future prospects”.

Richard Williams, property analyst at QuotedData, describes the Warehouse REIT bid as “very opportunistic” due to the wide discount to NAV that the REIT’s shares have traded at for several years. “The board of Warehouse REIT should be commended for rebuffing it,” he adds.

Shore Capital analyst Andrew Saunders says the offer from the private equity groups “undervalues [the] attractive outlook” for the REIT. He adds:

Industrial takeover: Warehouse REIT, which owns Gateway Park in Birmingham, rejected a bid from Blackstone and Sixth Street

“After a couple of tough years, Warehouse REIT is seeing improved momentum in its investment case, driven by strong rental growth, reduced debt, the impending Radway Green [logistics development] disposal and a recently announced reduction in the management fee payable to its adviser Tilstone.”

Creasey believes the bid highlights the significant gap between the firm’s share price and the appraised value of the underlying properties. The bid represents a 17% discount to the EPRA NDV, the book value for the company that takes into account the fair value of the debt book as well as the properties.

Creasey says: “That NDV was dated September 2024, and given the recovery in industrial property values since then, it is likely that today’s NDV is slightly higher than this figure.”

Warehouse REIT was highlighted as a potential takeover target by Justin Bell, sales director at Deutsche Numis, weeks before the bid came in. He believes that despite the wide discount to NAV, the multi-let industrial sector is undergoing a “long-term resurgence” that could offer upside to any buyer.

Pull factors

As for the factors driving this swathe of M&A activity in the REIT sector, the experts are agreed. “Property companies are open to these opportunistic bids due to the wide discounts to NAV that they have traded on since mid-2022 when interest rates started to rise,” says Williams.

Despite many takeovers at substantial premiums to share prices, there has been little movement in share prices in reaction, according to Williams.

Meanwhile, the sector will continue to be targeted by private equity companies that do recognise the value on offer. The average discount to NAV stands at around 20% – a fact that is not going unnoticed by asset-hungry private investment groups.

Additionally, the REIT sector’s correlation with long-dated gilts held true in 2024, ending with broadly the same return. Bell says: “This came, albeit with a greater degree of volatility, as a result of leverage inherent in the asset class increasing sensitivity to rates.”

Tom Bacon, partner at law firm Bryan Cave Leighton Paisner, says: “Ultimately, these businesses trade at a discount – and at significant discounts to asset value, you’re going to get the likes of private equity houses looking at potentially trying to realise the upside of value between that share price and the NAV.”

As for why REITs are so inclined to reject bids, Bacon has another theory. “What you’re seeing is perhaps more of a robustness of directors to turn around and say ‘what you’re offering us is a premium to the share price, while we feel that share price isn’t really reflective of the true value’,” he says.

“This is all purely optimistic about where we are in the market cycle. But a NAV is only true at the point of a valuation; that is basically purely theoretical and doesn’t necessarily reflect the value of the underlying assets.”

Of course, there is one REIT merger that people have been touting since long before the days of tax-efficient property companies: the age-old talk of combining British Land and Landsec is still doing the rounds.

In 2018, a deal looked possible, but by 2022 it had not transpired and had begun to seem highly unlikely. Today, given the level of uncertainty in the market, whether the prospect might surface again is anyone’s guess.