A recommended all-share merger has been announced between Abrdn Property Income Trust and Custodian Property Income REIT.
The merger plans follow hot on the heels of LondonMetric's blockbuster tie-up with LXi REIT as listed companies look to improve returns by increasing scale and reducing running costs.
The boards said the transaction will see Custodian buy the share capital of API with CREI shareholders holding 59.7% and API shareholders 40.3%. The closing share price for Custodian was 79.6 pence on 18 January so the merger values each API share at 62.1 pence, and the entire issued and to-be-issued share capital of API at approximately £237 million.
The boards of CREI and API will retain their current dividend policies for the period to the date of the merger.
Custodian Capital will provide investment management, administrative and advisory services to the group while API's existing investment management agreement will be terminated. Following the integration of the API portfolio, the CREI board expects to conduct a review of its succession plan.
The boards said the two listed companies shared an income-focused investment strategy with an emphasis on regional, below-institutional-sized assets. The merger, they said, would bring together two complementary portfolios to create a differentiated REIT with "enhanced diversification and share liquidity and a fully covered and sustainable dividend".
It will create a larger portfolio with approximately 200 assets and a combined property value in excess of £1 billion as at 31 December 2023.
The portfolio would have more asset, geography and tenant diversification with broad-based regional exposure, with 50% of the income derived from the top 54 tenants and 90% of the income derived from the top 204 tenants, an average lot size of approximately £5.1 million and similar tenant covenant profiles.
The portfolio has significant exposure to the industrial sector at 44% of the estimated rental value. There is also "meaningful reversionary potential" with the combined ERV of £84.3 million exceeding the combined passing rent of £68.1 million by 24% at 31 December 2023.
In terms of sustainability, 81% of the combined portfolio holds an EPC rating of C or above.
The boards also flagged cost savings, including £1 million of recurring annual cost savings from a reduction in management fees due to CREI's tiered fee structure and the removal of duplicated corporate expenses and other potential operational efficiencies. There would be a £2.1 million reduction of additional non-recurring cost savings during the transition period as a result of a reduction in management fees payable to Custodian Capital.
The creation of an enlarged REIT would also mean an "enhanced market profile, broader appeal to investors, greater share liquidity, and the scale to support a larger weighting in key indices with potential for inclusion in the FTSE 250 Index in due course".
There would also be diversification of the shareholder register with a broad mix of private and institutional investors, while enabling mutual shareholders to consolidate their holdings across the two companies.
The API Board added that the wider difficulties facing UK real estate, not least rising interest rates, had been compounded by the relatively small scale of the company and its need to refinance its debt facility in late 2022, ahead of the previous maturity date in April 2023, at a time when politically induced gilt market volatility was at its height.
API pays an annualised dividend of 4 pence per share which is not covered by EPRA earnings, with cover of approximately 80% for the last reported quarter ended 30 September 2023. Because of this and the impact on API's share price and discount to EPRA net tangible assets per share, the board undertook a comprehensive review of API's strategic options in the third quarter of 2023.
Custodian REIT was established in 2013 and its portfolio was valued at £602 million as at 31 December 2023. Established in 2003, API's portfolio was valued at £439 million as at the same date.