17th October 2025
Hawksmoor are shareholders of Tritax Big Box on behalf of our clients
The Real Estate Investment Trust (REIT) sector is a wonderful place where two types of companies doing exactly the same thing reside but under different listing rules. There are investment company REITs – with non-executive boards appointing external investment managers on fixed term contracts, and there are commercial company REITs, with executive boards and salaried employees. They all own buildings, rent them out, and pay out the vast majority (according to REIT rules) of what’s left after costs as income to shareholders.
Investment company REITs report portfolio net asset values (NAVs) calculated by third parties and their investment advisors are paid a percentage of that NAV. Share prices are quoted with reference to that NAV with discounts and (not so much anymore) premia often the determinant of ‘value’. This is the metric of choice for their shareholders, who tend to come from the fund-buying community. Commercial company REITs tend to be analysed using earnings metrics – as with many other listed corporate entities. The shareholders tend to be equity investors.
Both types of companies can be analysed with reference to NAVs and earnings – yet the two constituencies of shareholders choose different methods to determine cheapness because of their listing structure.
This matters.
Tritax Big Box is an investment company REIT. Their £1bn deal to purchase a portfolio of smaller urban distribution units and larger megabox units from Blackstone is being part funded by issuing Blackstone shares in Tritax Big Box at a premium to the prevailing share price, but at a discount to the portfolio NAV. In investment company land, this is a big no-no (indeed, issuance below NAV for cash needs to be approved by shareholders). Shareholders hate the ‘dilution’ this entails. It involves giving the new shareholder a greater portion of the NAV than they ‘deserve’ from their share of the company. If I own all 100 shares of a company worth £100 and then sell 100 new shares to someone else for £50, they end up with 50% of a company worth £150 (i.e £75 of value for £50), taking £25 of value from me. This is dilution.
However, this sort of thing is fairly routine in commercial company REIT land. If the money raised is used to purchase assets generating more earnings (i.e. higher return on assets than the existing portfolio), shareholders may approve. Instead of looking at the deal through a NAV lens, it can be accretive on an earnings per share basis (EPS being greater after the deal than before).
In Tritax Big Box’s case, they are issuing Blackstone shares below NAV, resulting in the PE giant owning just shy of 9% of the company, but earnings per share after the deal will increase in the year immediately after the acquisition. The implication being that proceeds from the issuance at a discount to NAV is being used to buy assets at a wider discount to a (theoretical) NAV.
There are further nuances. With a commercial company, the management team are salaried employees. Yes, there may be incentive schemes meaning they are paid a bit more as their company grows, but generally speaking, when the company gets bigger and returns improve, shareholders benefit from this scale with a cost base that is largely fixed. With an investment company REIT, the management team are part of the investment advisor, who are paid according to a management contract that calculates compensation typically based on a percentage of assets. As assets grow, so do costs to shareholders via higher fees. Tritax Big Box does have a fee tiering system, but many would expect a deal of this size to see some of the scale economies benefit shareholders with a new lower fee tier.
The investment company sector (including the now much-diminished REIT part of it) remains in crisis. Too few are large enough to be relevant to the UK’s large pools of institutional investment capital. A large number of investment companies have been taken private or are in the process of being wound up because discounts to NAV became too wide and persistent. If shareholders do not accept some issuance at a discount to grow these vehicles, then the incumbent companies are becalmed.
Indeed, being wedded to the notion that dilution on a NAV basis is forbidden could be argued to be far too obstinate when many question whether NAVs are accurate. For illiquid assets, portfolios are really only worth what someone is prepared to pay for them. This applies to offices, wind farms, batteries, roads, hospitals, prisons, care homes, houses…… Indeed, one well respected property investor likes to label ‘NAV’ as “not actual value”. Is it therefore sensible to prevent earnings-accretive growth on the basis of a highly subjective notion such as the NAV of an infrequently traded and idiosyncratic pool of assets? Shareholders don’t receive or even own the ephemeral concept of a ‘NAV’ determined by a third party. They ultimately own and receive the earnings due to them. If a deal enhances these earnings, why shouldn’t it be approved? It must be especially galling for investment company REITs when they see their commercial company cousins routinely issuing at discounts.
Sometimes we see NAV-for-NAV mergers in the investment company space. This effectively involves issuance at a discount to purchase a company at a discount that neutralises any dilution. This is also sensible behaviour to create larger, more relevant vehicles – but obviously involves two willing counterparty Boards, with one set of directors losing their jobs.
As investors in the investment company space, we are urging Boards of trusts owning illiquid assets to be ever-more creative, and we are not against issuance at discounts to NAV. The following criteria should ideally be met:
- Issuance should be at a decent premium to prevailing share price
- It should be to an investor that might reasonably be expected to buy more shares in the secondary market
- The proceeds from issuance should purchase earnings accretive assets
- It should grow the company meaningfully, increasing relevance and liquidity and in doing so open the company to a further new pool of investors
Our thoughts in this regard have been much motivated by the difficulties the sector currently finds itself in, as well as the advent of LTAFs. We think pension funds should be significant participants in the investment company sector. As you may know from our previous blogs, it is befuddling to us that sophisticated investors would choose to invest in assets via the LTAF structure that involves them effectively paying a large premium (due to liquidity requirements and resulting cash drag), often at higher fee rates to investment advisors, when the investment company sector is sitting there owning similar assets on wide discounts. The oft-cited argument of lack of liquidity in investment company shares rings in our ears. This kind of issuance might help. It might have the added benefit of the investor following their investment up with further purchases in the secondary market – especially if discounts prevail.
The Tritax Big Box deal ticks some of these boxes. While it increases the size of the company, we doubt Blackstone will help secondary market liquidity or will be a persistent follow-on buyer (we’d love to be proved wrong). In addition, we are slightly wary of the recent dynamics between the two parties. Tritax Big Box tried to buy Warehouse REIT, losing out to Blackstone, who are now selling them another portfolio of similar-ish assets. We should also recognise that last week we praised the management team of Tritax for having a sensible pipeline of accretive growth. Perhaps some benefit of the doubt is deserved with this acquisition. One area of this deal where we would like to see improvement is in the benefits of the scale it brings falling down to shareholders via lower incremental fees.
In conclusion, we are prepared to suspend some of our natural cynicism in recognition of the merits of the deal: creating a much larger company – possibly a contender for the FTSE 100. We need relevant (i.e. large) successful investment company REITs. The structure has clear advantages over commercial companies. We urge more Boards to consider similar deals – particularly if they can issue to shareholders providing new and ongoing incremental buying to the investment company sector.
Ben Conway – Head of Fund Management
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