The investment story behind one of central Birmingham’s largest commercial assets

The asset

The Mailbox has a 4.8-acre footprint. It is a 680,000-square feet office-led site that is independently valued at £179mln. It is home to high-quality tenants such as the BBC, WSP, Harvey Nichols and Advanced Business Software & Solutions. It also has a long-term tenant base giving a weighted unexpired lease term of 14 years. It provides Grade-A offices sought out by companies that are departing London for the ‘regions’.  Pull factors for the likes of AXA Arup, and the UK government that have headed to Birmingham is its central location, road and rail access and the build-out of HS2, which will cut travelling time between the capital and the West Midlands to just 49 minutes. For the September quarter, the company received 82.3% of contracted rent, including 100% of what it was due from office tenants and car parking.

The image above provides some sense of the scale of the Mailbox 

IWG

The REIT’s manager, M7 Real Estate, has agreed heads of terms with the flexible office provider that owns the Regus chain. Once the deal has been formally approved, IWG will be given a 10-year contract to manage 50,000 square-feet on Level-One of the Mailbox, much of which is being converted from retail use. It will do so under the ‘Spaces’ coworking fascia from the third quarter of next year. The aim is to lift the operating income for Level-One from £1 per square foot to around £27.50. “Based on comparable IWG locations in central Birmingham and other similar sites this could be achieved in two years,” M7 said in a recent market update. Occupancy of 85% would equate to £34 per square foot. The cost to fit out the new space is put at £3.5mln. The size of the initial public offer has therefore increased to £66mln from £62.5mln.

The manager

Established 11 years ago, M7 Real Estate manages over 830 assets worth a £4.5bn for real estate investors such as Blackstone, Centerbridge, M&G and HIG Capital. It describes its approach as value-oriented. As of June 30, M7 had realised a cumulative net internal rate of return of 27.9% (post fees and taxes) and 2.12-times on over £2bn of assets held across 14 fully exited joint ventures and funds.

The offer

is looking to raise £66mln at £1 a share when it lists next month, which would give it a market capitalisation of £119.5mln. Post-IPO, the debt will be £70mln, giving gearing of 38%. M7 will be keeping a 45% stake in the business, meaning its and investors’ goals are completely aligned. The offer closes at 11am on December 8 with dealings commencing on December 14.

The investment proposition

The 5% dividend yield flashes like a Belisha beacon that marks Mailbox out as solid income investment. A delve into the prospectus reveals the quarterly pay-out can be supported solely from the income generated by office rents and car-parking. It means the REIT isn’t reliant on the retail, food and beverage activities, which were getting back into their stride before the latest countrywide lockdown. There is the opportunity to push that yield up further if the IWG partnership works out as planned. In a recent update, M7 said it believes it can get the figure to 7% or above over the medium-term.

The effort to enhance the yield will also be helped by asset management strategies such as optimising space utilisation, reducing the retail content of the asset, while enhancing the food and beverage offering. M7 also plans to reduce the historic service charge ‘under-recovery’ and has laid out various management initiatives designed to improve net gross rental income.

There is also scope for capital appreciation of the asset, particularly as the world emerges from Covid. The discovery of a reliable vaccine brings that prospect closer. A little research, meanwhile, reveals investors are buying into the asset at below construction cost, which suggests investors are well protected from any further downside. The city centre location, the move out to the…