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CAPITAL MARKETS | TEAM OF THE MONTH JEFFERIES JEFFERIES THINKS INSIDE THE BOX Team of the month •••••••••••••••••••••••••••••••••••••••••••••••••••••••••• •••••••••••••••••••••••••••••••••••••••••••••••••••••••••• The UK REITs sector is finding success in becoming more specialised, as Jefferies discovered when it acted as global coordinator and bookrunner for distribution centre owner Tritax Big Box, in a series of equity offerings. Edward Russell-Walling reports. In recent years, the real estate Invest- ment trust (reIt) market has become IncreasIngly sector-specIfIc, with vehi- cles focusing on a particular type of property. Tritax Big Box REIT specialises in large dis- tribution centres, and recently completed its ninth equity raising in less than four years. Jefferies has been sole global coordinator and bookrunner all along. For many, REITs’ attractiveness comes down to tax. Investors in conventional property firms are effectively taxed twice on From left: Michael Old, Mark James, Gary Gould company profits, however REITs, which must pay 90% of their property income to Investors approve. For many of them, it head of primary distribution in the invest- shareholders each year, pay no corporation suits their investment strategy to be able to ment companies team at Jefferies. tax. Instead, these dividends are treated as target narrow segments and, in a low-inter- The initial public offering (IPO) of Tri- property income to the investor, who is est-rate environment, they also like the strong tax Big Box took place in December 2013, taxed accordingly. dividend yield associated with these vehicles. with Jefferies and Akur acting as joint finan- REITs were introduced in the UK a dec- Tritax was launched in 1995 as a property cial advisers, and Jefferies as sponsor, global ade ago, joining long-established jurisdictions management and development firm. It pro- coordinator and bookrunner. The offer set such as the US and Australia. Since then, most vided investors with exposure to commercial out to raise £200m ($256m), and was struc- quoted British property companies, including property largely through one-off, standalone tured as a ‘blind pool’. That meant that man- British Land, Hammerson and Land Securi- funds – one fund for each property – for pri- agement did not reveal its shopping list, for ties, have converted to REIT status. vate clients and family offices. At the same strategic reasons, so as not to tip the market time, it had done a lot of work in logistics, against it. It merely undertook to have all GREATER SPECIALISATION including developing a distribution centre the money invested in appropriate assets “Like the US, UK REITs are becoming very for UK retailer Next that was, at the time, the within six months. sector-specific,” says Michael Old, Jefferies’ largest commercial building in the UK. “It’s a good management team and it saw European head of real estate investment In 2013, Jefferies was introduced to Tritax a lot of investors, who all bought into the con- banking. “The most successful companies in by Akur Capital, a small corporate finance cept,” says Gary Gould, a managing director terms of returns have moved to specialise.” adviser that specialises in REITs. “We imme- on Jefferies’ UK investment banking team. The range of specialisations is diverse and diately recognised the attractive qualities of He and Mr James both worked in Hoare includes student accommodation, self-stor- big distribution centres in the UK as an asset Govett’s corporate broking business, acquired age and doctors’ surgeries. class for a new listed REIT,” says Mark James, by Jefferies in 2012, and now form part of a THE BANKER | July 2017 TEAM OF THE MONTH | CAPITAL MARKETS JEFFERIES specialist investment funds team acting for already done a lot of the work, and the inves- managers across a range of asset classes. tors feel comfortable,” he says. The £200m was duly raised, at 100p a The latest equity offering in May was the share. With some leverage (currently about first of 2017. Like the others, it was a follow- 35% on invested assets), the company on rather than a rights issue proper. Some Like the US, Uk ReitS acquired six distribution centres for UK shares were set aside for existing sharehold- retail chain clients including household ers in an open offer, while others went to new aRe becoming veRy names such as Marks & Spencer, Sainsbury’s, investors via a placing and offer for subscrip- SectoR-Specific. the moSt Tesco, Next and Morrisons. tion. An ‘intermediaries offer’ was made available for wealth management platforms SUcceSSfUL companieS in ATTRACTIVE LEASES to offer on to their own clients. teRmS of RetURnS have “Investors are very comfortable with that “There was a fixed price to all, announced level of leverage,” says Mr Old. He adds that at the launch,” says Mr Gould. It was set at moved to SpeciaLiSe one of the company’s major selling points is a 136p per share, midway between the prevail- Michael Old high weighted average unexpired lease term ing market price and net asset value (NAV). (Wault) – considered desirable, particularly A feature of Tritax Big Box stock is that it has when property markets are soft. “In other traded at a premium to NAV ever since the sectors, lease lengths are coming down,” he IPO. The offering was priced at a 6.6% dis- says. “But in this sector, planning permission count to the company’s pre-announcement is difficult to get, so availability is scarce and closing price, and a 6.7% premium to NAV. tenants are happy to sign long leases.” Tritax That was its largest offer premium yet. Big Box’s Wault is 15 years, compared with The original idea was to raise £200m, but the five to 10 years typical in other sectors. the offer was significantly oversubscribed, Part of the attraction of these distribu- with more than £1bn of demand. So the offer- tion centres, or ‘big boxes’, is that they lie at ing was increased to £350m, of which £213m the heart of the current surge in e-commerce came from new investors and £137m, via the and click-to-buy shopping culture. In the open offer, from existing shareholders. context of sheds, they are very hi-tech. “They typically spend more on fitting them out BROAD INVESTOR POOL than the cost of building them,” says Mr Old. Aviva has been a shareholder from the start, “So the tenants are very ‘sticky’.” and BlackRock has been on the register Other attractions for investors include since 2014. But the shareholder base has the UK focus and high-quality investment been evolving over time. “In the IPO, many portfolio. The company offers geographical dedicated REITs investors stayed away and tenant diversification throughout the because they don’t want a blind pool,” says UK. The quality of the tenants is a plus, as Mr James. are the upwards-only rent reviews, often So the investor base has been broad from with inflation protection. “Because of the the start, including private banks, family undersupply, there is an upwards pressure offices and multi-asset investors. “But as the on rents that you’re not seeing in other sec- company has grown and as we have continued tors,” says Mr Gould. to engage investors, dedicated REIT investors and other larger institutions have started to A QUICK RETURN come on board,” says Mr James. The compa- The company did not wait long before ny’s portfolio is now valued at £1.92bn. It says returning to the market for more money. It that supply remains highly constrained, and raised a total of £281m in three separate fol- that the UK has the greatest big box need in low-ons in 2014, another £229m in two visits Europe, requiring 1.7 million square metres of in 2015, and a further £550m in two offer- additional space a year to 2020. ings in 2016. With one exception, in June Jefferies has raised more than £1.6bn for 2014, each offering was priced higher than its the company, whose appetite for measured predecessor, rising to 132p in October 2016. growth shows no sign of waning. Nor does The marketing is an ongoing process – as that of investors. Mr Old points out that UK it needs to be. “I have done four trips with rental yields are very strong and that the mar- management to the US in the past two years,” ket anticipates only limited further tightening. says Mr James. “We have done non-deal “But capital growth in real estate can be roadshows, seeing institutional investors driven by increasing rentals, and by smart that can back the company, telling the story, asset management,” he says. “Tritax Big Box then going back to meet them again.” is a very special case, where the management The exercise is repeated regularly in dif- team, the sector focus, and the demand/sup- ferent parts of Europe. “So if and when the ply dynamics of the UK listed sector give it company wants to raise equity, we have the ability to drive rental value.” July 2017 | THE BANKER.

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