The ability of real estate to generate both income and stock prices has given a special place in the hearts of retail investors. As Mark Twain famously said, “Buy the land, they don’t make it anymore.” Beds and sheds – the housing and warehouse sector – have become particularly popular in recent years.
That enthusiasm is easy to understand. The rise in online shopping and the growing need for huge data centers meant recording record demand for warehouse space and ultra-low vacancy rates, both being driven by coronavirus lockdowns. These factors have driven shared assessments. Tritax Big Box, one of the UK’s largest industrial real estate investment trusts (REITs), counts most of the UK’s leading supermarkets and retailers among its customers.
However, asset classes have endured painful times. Brexit is a blow, with warehouses, offices and retailers struggling with high interest rates and the fear of recession. The last two also feel the impact of the growth of the home and hybrid functions. The fog has only recently been lifted from the outlook for sectors such as offices.
Integration is one pathway for REITs to restore financial stability. Tritax Big Box merged with UK commercial real estate last year, while Newriver merged with rival Capital & Regional in the troubled town centre shopping centre arena. Both created larger, more powerful entities. London Metric is acquiring urban logistics. Meanwhile, the potential value of this sector is portrayed in private equity. The US PE giant, KKR is fighting the primary health characteristics of GP Surgery Specialist Assura’s awards. Warehouse REITs have been hit by a macroeconomic poor background and high interest rates, and this week accepted a £470 million offer from Blackstone. As REITs try to scale up and build a diverse, resilient portfolio, they cannot eliminate more bids and integrations.
Purchase: Mitie (MTO)
The acquisition of Marlowe is expected to accelerate the Mighty pivot into a more grown, higher margin market, writes Valeria Martinez.
Mitie is a company in transition, but that shift has paid off so far. A year after a three-year plan to pivot from traditional facility management to a technology-driven “facilities transformation” model, the FTSE 250 outsolemer shows solid progress.
Last year, organic revenues rose 9%, driven by new contract wins, project upselling and pricing profits. The company secured a record £7.5 billion in contract awards, jumping to £15.4 billion in its total purchase order. It cut the renewal rate to 59% despite losing two public sector transactions.
Operating profit margins were only immersed in 4.6% due to inflation, strategic investment and wobble in the telecommunications sector. Mitie hopes to reach its 5% margin target by 2027, supporting its cost reductions and efforts to offset higher national insurance costs.
Cash flow was another bright spot. Free cash flow is well above the guidance of at least £100 million, approaching its £150 million target. Net debt rose from £81 million at the end of 2024 to £1.989 billion, but leverage remains comfortable within target range.
Mighty is active on the M&A front, and today announced that it will be dipping for £336 million for Marlowe, a compliance specialist that AIM trades. Movement has raised its place in compliance space, particularly in fire, water and air quality, and spending will only grow.
The stock has been flooded with news that the group has suspended £125 million buybacks to acquire funds, but it is almost the fifth highest in the past year. With a successful shift to higher margin work and demand is rising, the 11.2x revenue valuation remains attractive.
Hold: B&M (BME)
The retailer’s stocks are trading on nine forecast revenues, writes Michael Fahe.
Alex Russo, retired CEO of B&M European Value Retail, told investors that buying insight meant that customers were essentially still paying for the price of the product despite an overall increase in inflation experienced in the wider market over the past five years.
B&M’s topline increased by about 40% over that period, but the physical amount it handled increased in the same amount.
Of course, the difficulty of this is that its own costs increase. Without contributions from new stores, similar sales for Core B&M UK business fell 3.1% from 52 weeks to March 29th. Both reported earnings per share and earnings fell 13%.
This reflects the fact that B&M was a very cash-generating business, but its balance sheet has weakened. Chief Financial Officer Mike Schmidt said its adjusted cash profit net liabilities of 1.2x is “comfortable in the lower half” 1-1.5x the company’s target operating range. However, if lease liabilities are included, this increases by 2.5 times, and there are many other things you want to spend on, including more new stores and buybacks (if your business is redmiciled into jersey).
B&M stock price fell 44% over the past 12 months, nine times Factset’s forecast revenue. Analysts think this is too cheap. The consensus target price is 40% higher than the current level. However, the reported revenue momentum has been basically flat for four years, which remains a business in the transition. Therefore, I think the current assessments reflect the risks quite a bit.
Sold by: Penon (PNN)
Alex Hamer writes that water companies are increasing spending as regulatory pressure on the sector increases.
Headline figures for the year Penon results through March 31 – revenues increased 15% to £1.055 million, with a loss of £73 million before tax, which doesn’t make the big picture. The Southwest Water owns the company is shifting to a new regulatory period, hitting an exceptional £38 million cost.
This last figure includes £21 million for the outbreak of parasites in drinking water supplied to Brixham, Devon. Pennon Management is looking forward to a return to profitability this year.
However, even if interest rates drop, financial costs are expected to continue to rise. Net financing expenses increased by approximately £30 million this year, up from £171 million in 2025.
For investors, the biggest impact of investing pushing so far is the dividends held at previous levels despite the higher Shet accounts. This knocked out 14% of total payments per share in 201025.
To get back to basics, Penon needs to maintain the risk of cases such as Brixham and juggle between the balance sheet and potentially interventionist regulators.
