Custodian Property Income REIT has purchased a £22.1m portfolio of assets via the all-share acquisition of Merlin Properties.
The REIT has acquired a £19.4m portfolio of 28 smaller lot-size regional UK investment properties and circa £2.7m of newly built housing stock from the family property company.
The investment portfolio is primarily located in the East Midlands and generates an annual aggregate passing rent of £1.7m. The REIT has already identified a number of opportunities to drive further value from the portfolio by increasing rental income from lease events and improving the environmental credentials of some properties.
Richard Shepherd-Cross, managing director of Custodian Capital, the REIT’s investment manager, said: “We have been clear that a key element of our strategy is to seek opportunities to scale the business through corporate and/or portfolio acquisitions. In an environment where current market conditions make further capital raisings through the stock market challenging, this strategic transaction via an all-share acquisition on an adjusted NAV-for-NAV basis allows us to circumnavigate that issue and continue to grow.
“In addition to enhancing earnings per share and decreasing net gearing, the transaction provides us with a portfolio that is both a strong fit with our income focused strategy and highly complementary to our existing property portfolio, augmenting our regional, industrial bias and adding further diversification by tenant.
“For Custodian Property Income REIT shareholders, the transaction also offers compelling economic benefits for the company versus acquiring the properties directly, demonstrating our commitment to enhancing shareholder value and securing economies of scale through growth.
“The transaction presented an attractive opportunity for the sellers to solve a family succession issue, defer crystallisation of a latent capital gain and obtain a more liquid investment, whilst maintaining the focus of their family wealth on regional real estate investments with attractive income characteristics.
“We believe many other family property companies in the UK will face similar succession and tax issues and we hope to use the transaction as a blueprint for further opportunities to achieve scale in the current environment.”
David MacLellan, chairman of Custodian Property Income REIT, added: “I am confident the transaction will benefit both our new and existing shareholders, delivering increased earnings and supporting a fully covered dividend. The property portfolios of each company are highly complementary and will further enhance tenant diversification, offering defensiveness of income to help mitigate against downside risk, as well as reducing our ongoing charges ratio.”
Hubert Lynch, founder director of Merlin Properties, said: “Operating the Merlin portfolio, which our family has compiled and managed over the last 40 years, has become increasingly demanding in today’s complex environment. We have undertaken the transaction in a tax efficient manner to ensure our family’s continued exposure to property investment both currently and for future generations through a professionally managed fund with a strong track record. As already significant, supportive shareholders of Custodian Property Income REIT we have a strong relationship with the investment team which we look forward to continuing for many years.”
