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MCT and MNACT S-REIT Merger – everything you need to know

REITs

Written by:

Alex Yeo

The Singapore REIT (S-REIT) space in 2021 is ending with a blockbuster merger that will form a behemoth that is likely to be one of the top 3 REITs in Singapore and top 10 REIT in Asia.

On 31 December 2021, Mapletree Commercial Trust (MCT) has announced a proposed merger with Mapletree North Asia Commercial Trust (MNACT) which will be effected through the acquisition by MCT of MNACT.

The combined REIT which will be named Mapletree Pan Asia Commercial Trust (MPACT) will have 18 properties valued at $17.1 billion.

Source: Mapletree slides on 31 December 2021

S-REIT mergers are common

REIT mergers have been aplenty in Singapore as it brings scale, attracting institutional investment and benefits such as lowered cost of funds.

Some noteworthy examples of S-REIT mergers in the past two years such as the combination of CMT & CCT which formed CICT has been well received by the market as it allowed for segmental diversification, thus reducing concentration risk.

The merger of FLT and FCOT into FLCT also enabled FLCT to become among the top 10 largest S-REITs, giving it a chance of index inclusion and also diversification by sector and geography.

There is always the other side of the coin and it is not always a win-win situation as the Sabana REIT and ESR REIT merger was voted down, partially due to activist investors who took the view that the terms were plainly unfair for Sabana REIT and undervalued Sabana REIT significantly. The market reacted positively after the vote as Sabana’s share price outperformed in the subsequent months. ESR REIT is now attempting a merger with ARA Logos Logistics Trust, mainly because the two REITs now share the same substantial shareholder.

Rationale of the MCT-MNACT merger

The five rationale provided by the management of the REITs are provided in the slide below. The noteworthy ones which we will further discuss on are Rationale #1 and #4.

Source: Mapletree slides on 31 December 2021

Rationale #1: Expanding to a wider market

MCT’s investment mandate has now expanded from being a pure Singapore commercial REIT to being a Pan Asia REIT, with growth opportunities in key gateway markets of Asia such as China, Japan, Korea and Hong Kong SAR.

MCT’s investment opportunities were previously very limited due to its lacklustre right of first refusal pipeline. It also faced challenges from carrying out accretive acquisitions in Singapore due to the low yields provided by Singapore commercial assets.

This problem has now gone away with the proposed merger.

Rationale #4: Positioning for growth

Source: Mapletree slides on 31 December 2021

The enlarged REIT is now better positioned to pursue larger acquisitions and capital recycling opportunities. It is also able to undertake sizeable AEI and development initiatives.

With a debt headroom of nearly S$3.8 billion, it can quickly acquire large assets without needing to carry out equity fund raising. In these volatile times, this means that the REIT could potentially acquire prime assets held by distressed companies in a fire sale should the opportunity surfaces.

The AEI and development headroom would mean that it can carry out large redevelopments such as the redevelopment of Golden Shoe Car Park by CICT which was valued at S$1.82 billion.

Details of the MCT-MNACT Merger

The acquisition by MCT is valued at S$1.1949 per unit for MNACT’s unitholders.

MCT’s revised scheme on 21 March 2022

The value is derived based on a per unit price of $2.0039 and the offer provides 3 options to MNACT’s unitholders:

  1. Option 1 – Cash of S$0.1912 and 0.5009 MCT units valued at $1.0037
  2. Option 2 – 0.5963 MCT units valued at $1.1949
  3. Option 3 – On 21 March 2022, MCT added a third option to MNACT shareholders for a 100% cash consideration of S$1.1949

How is it funded?

Source: Mapletree slides on 31 December 2021

As mentioned above, the bulk of the acquisition will likely be funded by the issue of new units.

The assumption made by MCT includes an expected cash outlay of S$437.9 million which will be funded by S$237.9 million in debt and S$200 million in perpetuals which are accounted for as equity.

The third option will be funded via a preferential offering to the sponsor and other institutional investors for up to S$2.2 billion

Is it financially accretive to unitholders?

The Mapletree REITS have always pride their acquisitions on being accretive both from a DPU and NAV perspective. This merger is no different.

Source: Mapletree slides on 31 December 2021

The DPU is projected to increase by 7.5% to 8.9%, while the NAV is projected to increase by 6.5% to 7.1% with the combined entity aggregate leverage ratio increasing to 39.2%.

Source: Mapletree slides on 31 December 2021

Are there any negatives?

Geographical fragmentation

There are only 4 REITS in Singapore that have only Singapore assets, namely MCT, Sabana Industrial REIT, Frasers Centrepoint Trust and Far East Hospitality Trust. Of these four reits, MCT is the only REIT in Singapore with a well diversified best in class portfolio, having assets in retail, offices and business parks.

As we have seen from the 2019 protests in Hong Kong damaging Festival Walk and causing a more than month long shuttering of the property, there is probably no safer place of business than Singapore.

There is a scarcity and valuation premium for a REIT like MCT whose assets are based solely in Singapore which will now be diluted.

Asset quality dilution

MNACT’s assets are also of high quality with properties such as Festival Walk in Hong Kong SAR, Gateway Plaza in Beijing and Sandhill Plaza in Shanghai with a total property value of more then S$6.3 billion but are no competition to MCT’s assets which are by far the best in class and location.

The assets in Japan are mostly quite small and do not have a unique selling point while the asset in Korea is grade A with quality tenants such as Qualcomm, Huvis, JustCo, Ralph Lauren and Echo Marketing.

However, these tenants are not in the class and stability that MCT’s tenants such as Google, Bank of America, HSBC and SAP can provide.

What does it mean for unitholders?

The proposed merger requires approval at an EGM to be carried out in the next quarter and the merger is then expected to be completed by June 2022.

Source: Mapletree slides on 31 December 2021

MNACT unitholders

MNACT unitholders have benefited considerably as the acquisition allows for unlocking of value as the consideration is a premium over its trading prices.

While the offer price is significantly below the all time high of S$1.46, it is a substantial premium over the trading prices of the past 1 year which is more reflective of the current MNACT’s value.

MCT unitholders

MCT unitholders will benefit from an expanded investment mandate, NAV and DPU accretion.

With a sub-par right of first refusal pipeline and a relatively low gearing ratio of 33.7%, it was envisaged by analysts that MCT would have to look into the open market for its next sizeable acquisition.

The merger brings up the DPU and also puts the gearing ratio at a more efficient level of 39.2%.

Timeline of merger

Timeline as updated on 21 March 2022:

Conclusion

Mapletree is ending the calendar year with a blockbuster merger of its two commercial REITs, forming a flagship Asia commercial REIT that is expected to provide not only stability but also scale. It envisions the REIT to become a proxy to key gateway markets in Asia, anchored by a high quality and diversified portfolio.

With the enlarged AUM providing for significant debt and development headroom, it is well placed to not only pursue growth opportunities but also AEIs.

The acquisition provides attractive financial benefits to unitholders of both MCT & MNACT as it is both DPU and NAV accretive.

It also allows MNACT unitholders to unlock value in a REIT that has seen worse days as a result of the Hong Kong protests and COVID-19 pandemic while MCT unitholders benefit from an enlarged investment mandate and broader scale.

If you like REITs, you may find my framework on picking the best REITs useful. Also, here’re some of the best S-REITs you can invest in 2022.

P.S. if you’re interested in REITs and want to build a dividend portfolio, join Chris at his next live webinar to learn from someone who has retired doing just that.

3 thoughts on “MCT and MNACT S-REIT Merger – everything you need to know”

    • Some investors might be looking to invest their funds for returns as MNACT’s shares not only comes with the cash consideration of $1.1949 but also the 2H22 dividend of $0.03393 and the 1H23 clean up distribution should the merger be successful.
      Based on what has been guided, the merger would likely be around end July/Aug and correspondingly, the 1H23 clean up distribution is likely to be for 4/5 months of distributable income.

      Reply

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