Real Estate Investment Trusts (REIT’s) are vehicles that own and in many cases, operate income generating real estate. On the surface REITs may appear simple however once you drill into the detail you uncover how complicated they are, including one unusual characteristic of listed REITs – the cross ownership of the vehicles.
The simplest and most easily understood REIT analysis is the asset class or classes they are exposed to. Further to this, geographic exposure materially changes the attractiveness of certain asset classes, an interesting example of which is residential projects in Melbourne. An influx of supply and a squeeze on foreign buyers has seen the CBD apartment market lose a lot of momentum where in extreme examples apartment prices are 10-20% below the pre-sale prices. This compares to the broader Melbourne market where dwelling prices have risen by 11.6% over the past year.
Further complicating the matter is the structure of the vehicle, is it externally managed or a stapled security that’s internally managed? Or is it a pure asset manager?
Each one of these structures come with different economic implications. For example, asset managers can charge a myriad of fees to the external trust, ranging from basic management fees, through to leasing, transaction and performance fees. There are benefits of external structures for both its unit holders, and clearly for the manager – however the manager must ward off competitors as with a 50% vote you can usurp the manager and replace them with say, yourself.
Recent register raids
Growthpoint, an internally managed REIT, recently acquired an 18% stake in the externally managed Industria REIT. Shopping Centres Australia (Internal) has a 4.9% stake in CQR (external), Cromwell (internal) recently held 9.8% of IOF (external) whose manager, Investa, fought off what became a hostile takeover attempt. Interestingly, Folkestone Education Trust (external) holds a <5% stake in their internally managed competitor Arena.
A more recent and entertaining example of register raids was Centuria’s (CNI) on Propertylink’s (PLG), where CNI acquired a roughly 17% stake in PLG at a 9% price premium. The story was not over as ESR, a Singaporean listed REIT backed by Warburg Pincus (US$44b under management) went on to acquire an 18% stake in PLG. Suddenly you have a listed, internally managed vehicle with 35% of the company held by two “competitors”. ESR were aware of the complications arising from such a situation, so they decided to buy 15% of CNI at a 14% premium! As shareholders of both PLG and CNI at the time, we were very pleased with the events that were unfolding.
Propertylink share price (PLG)
Centuria share price (CNI)
The history of the listed REIT sector is littered with examples of both successful and failed corporate activity. The reasons for these strategic manoeuvres vary. Perhaps the acquirer wants exposure to a certain asset class or geography? Or to quickly grow assets under management? Or maybe because they are borrowing at roughly 4%, parking their capital in a vehicle paying a 7% yield isn’t a bad idea. Whatever the reasons may be, it signals to the market that potential M&A is on the cards, which, if positioned correctly, can be lucrative.