Land Securities chief executive Mark Allan is betting that a £190m takeover of regeneration specialist U+I will prove to be a small deal with a big impact on the FTSE 100 REIT’s development pipeline.
The 149p per share deal has been recommended by U+I’s board, and four of the target’s shareholders – representing a third of its share capital – have already said they support the transaction. A successful takeover will give Landsec a stake in a pipeline of projects including five major schemes with a combined gross development value of more than £6bn.
“While this is a small deal in the context of our overall portfolio, I’d like to think it shows a more entrepreneurial and creative approach to how we can create value for our shareholders,” Allan (pictured) told EG.
The deal will be a big boost for one of the pillars of the new strategy launched by Allan last year – namely, Landsec’s focus on mixed-use urban regeneration projects. “The strategic rationale for this deal for us is all about accelerating that leg by providing access to and optionality over a significant pipeline of high-quality projects,” Allan said.
Landsec’s focus is on three schemes. In Manchester, U+I has a 50% share in the joint venture behind the Mayfield redevelopment, close to the main railway station, which will comprise 2m sq ft of office, retail and leisure space as well as 1,500 new homes around a 6.5-acre public park. Allan said the scheme has the opportunity to be “something akin to King’s Cross” for the city.
In London, U+I’s pipeline includes Landmark Court in Southwark, held in a joint venture with Transport for London and expected to comprise 200,000 sq ft of offices, retail and workspace as well as 36 new homes; and a 1,500-home scheme at Morden Wharf on the Greenwich Peninsula, which will also include 200,000 sq ft of warehouses and 50,000 sq ft of retail.
Those three projects have a combined GDV of £2.5bn, said Allan, and Landsec expects to deploy between £600m and £800m of capital across them in the near term. All three are “well progressed through planning”, the chief executive added, and are “much more advanced in planning than our existing pipeline”.
“It does give us the opportunity to deploy capital and generate returns more quickly than our own portfolio does,” Allan said.
At JP Morgan, real estate equity analyst Tim Leckie said the deal gives Landsec’s stock “something which has been missing lately: a story”.
“We aren’t put off by the small size of the deal, with U+I having just £427m of total assets, including £126m of non-core likely to be sold,” Leckie wrote in a note to clients. “Day one the impact isn’t huge vs [Landsec’s] total assets [of] £11.2bn, but £6bn of GDV [is] the ‘story’. In our view, Landsec is saying we can build this sooner, better, and drive improved returns with this transaction.”
Leckie added: “We don’t see much investor demand for a London office plus retail portfolio, but if Landsec can use its platform to build a diversified pipeline of urban redevelopment assets around the UK, things start to look more dynamic and interesting for potential investors.”
The offer is priced at a 9% discount to U+I’s last reported NAV, and a 3% premium to adjusted NAV. It also represents a 73% premium to U+I’s closing share price on Friday. By early afternoon on Monday, the stock had risen to meet the offer price.
Another equity analyst described the premium to Friday’s share price and the fact that Landsec is paying a premium to book value as “pretty punchy”, but added that the scale of the deal in relation to Landsec’s own balance sheet meant any overpayment would ultimately look like “a rounding error”.
U+I becomes the latest in a long list of public real estate companies bought during the pandemic, as a gulf widens between public market valuations of companies and the value of their underlying assets.
“What was very clear in the case of U+I is that it has got this pipeline of fantastic regeneration projects that it simply can’t fund itself – so it’s very difficult for the markets to ascribe any value to that when you don’t know how much of the value is going to end up being transferred to whoever comes in to fund the projects,” Allan said.
“By bringing those onto a balance sheet where you haven’t got to worry as an investor in terms of [whether you are] giving away return to other people, I think we can now value that properly and markets can value that properly.”
Allan added that there may be more fallout to come as smaller listed real estate companies weigh up whether their future lies on the public market or under another party’s ownership.
“If you’re a business with a clear business plan, it’s clearly funded and markets understand how you can execute it and you can signal the progress you are making, then things will make sense,” he said. “If you’re struggling to fund things or people have questions about the execution of your business plan, then there are going to be question marks.
“The private capital side of real estate has grown far more quickly in recent years than the public side of things. So it’s incumbent upon companies like Landsec to be really clear in what we’re trying to deliver for shareholders and in banging the drum for listed real estate.”
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