No. of Recommendations: 7
> "Buying Empiric in this environment was a mistake. They could probably have bought it cheaper at a later date in hindsight."
Maybe, maybe not. You'd need to know in advance what would happen to the costs of REIT-accessible debt in future, you'd need to be making a bold bet on the direction of the market/REITs and property development costs in general.
There's a reason why the UK REIT sector has been emptying out in the last 12-24 months. Unite was one of the *last* companies to make a bid and it appears they timed it right at the exact low of the 'cheap REIT' period.
It's also an *extremely* small takeover, compared to what e.g. LMP and PHP and US PE money have all been doing. Add up the scale of the acquisition, deduct properties sold off in the last 12-18 months, see what number you get and compare it to the size of the Unite portfolio or even the much-reduced market cap.
There are also non-linear effects.
For example, if you want to focus your portfolio on certain cities, you can't just plop down buildings anywhere you like. Empiric have properties in particular places where it's hard to put things, e.g. near univerities in university towns. Those buildings come with long term contracts for rental which are hard to negotiate into place. Their NAV for the bricks and mortar really doesn't quite reflect the 'difficulty of duplication' or net benefits of the bid.
Consider too, if you're the biggest operator, and there's a smaller competitor operating in the same places you do, and you can yum them up fairly cheaply in a moment of market weakness, why not do it?
There are also subtle things like, when you acquire a REIT, you can acquire its debt with it. That can be quite handy if it has borrowed money cheaply in the past, more cheaply and more long term than you can borrow money now.
Another non-linearity, suppose company A has 110 students wanting accom and 100 places, and company B has 90 students and 100 places. It's much easier to ensure you don't lose them to e.g. private housing, by putting everthing on a single integrated platform. You can even convert accomodation more conveniently as needs change, e.g. oddly high demand for first year students this year? let's convert some 2nd year accom to first year accom this year. Let's mix in some first years with second years, if we have to.
If you read the presentation last year, it's quite clear that the main argument was: 'we couldn't ever hope to build a comparable portfolio this cheaply ourselves, or have it up and running so quickly compared vs our traditional mode of property development', when it comes to Empiric's portfolio. They basically brought forward 5-10 years of property development, far cheaper than they could do it themselves.
People are retro-fitting the acquisition as the explanation for the price of UTG being low 'it must have been a terrible acquisition to have damaged the price so much!'. But the acquisition was very small, and it was offset by asset sales in non-core areas.
Let me put it bluntly. Assume for the moment that Unite bought Empiric and it turned out, it was a grift. Empiric wasn't even real. They had no buildings at all. The entire bid money bought just a piece of paper and a dream. So the entire bid had to be written off against equity 100%. Total disaster! In this fantasy scenario, what would be the total damage caused to the Unite market capitalisation? (e.g. market cap teh day before the bid, minus, price paid for Empiric). Do the calculation, (I did), it might surprise you.
TRS
