THE proposed merger between Mapletree Commercial Trust (MCT) and Mapletree North Asia Commercial Trust (MNACT) is being presented as a win-win deal. The reality though is that MCT holders are being asked to approve the acquisition of an underperforming real estate investment trust (Reit) at a hefty premium.

 

While MCT has demonstrated steady growth over the years, MNACT' s performance has been choppy - as seen by data on MNACT' s own website and in the appendix of the presentation shared by both Reits. For instance, MCT' s distribution per unit has grown by an average of 4.8 per cent per annum since its initial public offering. MNACT' s, on the other hand, has increased by just 1.9 per cent.

 

MNACT has a much higher gearing, and its listed units have greatly underperformed MCT' s.

 

I used to regard Mapletree Investments as one of the better Reit sponsors in terms of how it treats minority shareholders. I no longer hold this view.

THE managers of Mapletree Commercial Trust (MCT) and Mapletree North Asia Commercial Trust (MNACT) have proposed a merger that will propel the combined entity to become one of Asia&rsquo s 10 largest real estate investment trusts (Reits).

 

&ldquo The enlarged platform will also be better positioned to unlock upside potential,&rdquo said Sharon Lim, chief executive officer of MCT&rsquo s manager, at a briefing on Friday (Dec 31). &ldquo We are very convinced with the merits of this merger&hellip It&rsquo s truly putting strength and growth into a single vehicle.&rdquo

 

The merged entity, to be named Mapletree Pan Asia Commercial Trust (MPACT), will have a theoretical market capitalisation of approximately S$10.5 billion.

 

This will rank the enlarged platform within the top 3 Reits listed in Singapore, behind CapitaLand Integrated Commercial Trust (CICT) and Ascendas Reit.

 

The combined portfolio will comprise 18 commercial assets across Singapore, China, Hong Kong, Japan and South Korea, with assets under management (AUM) of approximately S$17.1 billion.

 

Lim said that while Singapore properties have been very stable and given good returns over the years, there have been questions on the Reit&rsquo s ability to grow in the longer term.

 

&ldquo Organically in Singapore, in our assets, we still do see things that we can do. But if we look at really meaningful, long term expansion, we' d have to grow inorganically. We are proposing this merger to set ourselves up to be in a better place to take on new opportunities overseas,&rdquo she said.

 

The merger will dilute MCT&rsquo s 100 per cent concentration in Singapore to just over half of the enlarged portfolio. Hong Kong will account for 26 per cent of the merged entity&rsquo s portfolio, with China at 11 per cent, Japan at 10 per cent and South Korea at 2 per cent.

 

The investment mandate for the enlarged Reit will also be expanded geographically to include other key Asian gateway markets.

 

However, the Reit manager said the enlarged Reit will focus on the 5 markets it has presence in for a start.

 

To be done via a trust scheme, the merger will see MNACT unitholders receive a scheme consideration of S$1.1949 for each MNACT unit held as at the record date to be announced.

 

For each MNACT unit held, unitholders will receive either 0.5963 new MCT units at an issue price of S$2.0039 apiece, or a combination of 0.5009 consideration units and S$0.1912 in cash. 

 

For illustrative purposes, this means that a unitholder holding 10,000 MNACT units will receive 5,963 MCT units should they elect to receive the scrip-only consideration or 5,009 MCT units and S$1,912 in cash should they elect to receive the cash-and-scrip consideration.

 

This implies a gross exchange ratio of 0.5963 times.

 

The scheme consideration price of S$1.1949 is in line with MNACT&rsquo s net asset value (NAV).

 

Since its listing in 2013, MNACT units have only occasionally traded above their book values: briefly in 2015 for a short period from December 2017 to February 2018, when they traded as high as 1.03 times book and for a few months in 2019.

 

The scheme consideration price represents a 7.6 per cent premium to MNACT&rsquo s trading price on Dec 27 and a 17.3 per cent premium to its 12-month volume-weighted average price.

 

The Reit managers said this translates to a 1-year total return of 32.2 per cent to MNACT unitholders.

 

&ldquo Historically, we have been trading below NAV,&rdquo said Cindy Chow, chief executive officer of MNACT&rsquo s manager. &ldquo So we think that the scheme consideration being at our net asset value, being at what we are worth, is reasonable, fair, and at the same time gives that immediate benefit to our unitholders in terms of the upfront offer premium.&rdquo

 

The merger appears to have been anticipated by the market. Over the 2-week period before a trading halt was called, MNACT units had risen 5.4 per cent &ndash from S$1.05 to S$1.11 &ndash on high trading volumes.

 

Meanwhile, for MCT unitholders, the merger will be 8.9 per cent accretive to distribution per unit (DPU) and 6.5 per cent accretive to NAV on a pro forma basis.

 

The total scheme consideration amounts to some S$4.2 billion. No more than S$417.3 million, or 9.9 per cent of the total consideration, will be fulfilled in cash, with the remaining amount to be satisfied via consideration units.

 

MPACT is expected to have a gearing ratio of 39.2 per cent as at Sep 30, 2021, on a pro forma basis, and will have a debt funding capacity of approximately S$3.8 billion.

 

&ldquo On a strategic level, we believe this is a once-in-a-lifetime opportunity to bring together 2 leading commercial Reits with highly complementary qualities. Nearly every Reit has been focused on growing through the acquisition of assets. However, we believe that the key to sustained growth is a platform with scale and reach,&rdquo said Lim.

 

Said Chow: &ldquo With a strengthened portfolio, higher financial flexibility and debt headroom, MPACT will be well placed to accelerate its growth, pursue larger value-creating acquisitions and ride on the recovery and long-term growth of Asia.&rdquo

 

The proposed merger will require unitholders&rsquo approvals at respective extraordinary general meetings (EGMs) to be convened.

 

MCT unitholders holding more than half of the total number of votes cast have to first approve the trust scheme as an interested party transaction and agree to the issuance of new MCT units as part of the consideration.

 

Unitholders representing more than 75 per cent of total votes cast will also need to approve the change in MCT fee structure and any required subsequent changes to the trust deed.

 

The merged entity&rsquo s management fee structure will follow that of MNACT, with a base fee of 10 per cent of distributable income plus a performance fee of 25 per cent of year-on-year growth in DPU.

MCT&rsquo s current management fee structure is a base fee set at 0.25 per cent per annum of total assets plus 4 per cent per annum of net property income.

 

Meanwhile, over at MNACT, unitholders representing more than 75 per cent of total votes cast will need to approve proposed amendments to MNACT&rsquo s trust deed to introduce provisions to facilitate the implementation of the trust scheme.

 

In addition, the merger must be approved by a majority in number of MNACT unitholders present and voting in person or by proxy representing at least three-fourths in value of the MNACT units held by these unitholders.

 

If approved, the merger is expected to be completed around mid June 2022.

The managers of Mapletree Commercial Trust (MCT) and Mapletree North Asia Commercial Trust (MNACT) have, on Dec 31, announced the proposed merger of both REITs.

  MCT is Singapore&rsquo s largest pure-play commercial REIT while MNACT is the first and only North Asia-focused REIT to be listed in Singapore.

 

  Post-merger, the new REIT will be named Mapletree Pan Asia Commercial Trust (MPACT). It will be Mapletree&rsquo s flagship commercial REIT positioned to be the proxy to key gateway markets of Asia.

  Upon the completion of the merger, the new combined REIT will have a market capitalisation of around $10.5 billion, making it one of the top 10 largest REITs in Asia.

  Together, MPACT will hold a diversified and high-quality portfolio of 18 assets across Singapore, China, Hong Kong, Japan and South Korea with assets under management (AUM) of around $17.1 billion.

 

 

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  Trust scheme of arrangement

  The merger will be done via a trust scheme of arrangement with MCT acquiring all MNACT units in exchange for new units in MCT or a mix of cash and MCT units.

  Unitholders of MNACT will receive a scheme consideration of $1.1949 for each unit held as at the record date, bringing the total scheme consideration to $4.215 billion.

  The total consideration will comprise of no more than $417.3 million in cash, and the balance amount being in consideration units.

 

 

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See also:  Singapore office REIT sector still ' attractive' mixed commercial S-REITs preferred: DBS

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  The consideration will be made up of either 0.5963 new MCT units at an issue price of $2.0039 per MNACT unit, or a combination of 0.5009 new units in MCT and 19.12 cents in cash.

  The consideration implies a gross exchange ratio of 0.5963 times.

  The manager of MCT has waived its entitlement to its acquisition fees under the deed of trust constituting MCT dated Aug 25, 2005.

  Mapletree Investments, the sponsor of both MCT and MNACT, will also undertake to receive its scheme consideration in 100% consideration units.

  Following the merger, Mapletree Investments will hold around 36.1% of the total issued units in the merged entity. The management fee in the merged entity will also be pegged to distributable income and distribution per unit (DPU) growth.

  Rationale

  According to the managers, the new combined REIT seeks to create a &ldquo robust platform&rdquo that combines both the individual strengths of MCT and MNACT, &ldquo thereby unlocking the full potential of a multi-geography Asian platform&rdquo .

 

 

  The REIT will also be able to tap into some of the largest real estate markets in Asia and benefit from the &ldquo long-term rise of Asia&rdquo .

  The merger is also said to be able to improve cashflow stability from high-quality tenants while reducing income concentration.

  As a combined entity, the new REIT is said to maintain a high portfolio occupancy and well-staggered lease expiry profile.

  Furthermore, the enlarged balance sheet brought about by the merger will provide the new REIT with enhanced financial flexibility including higher debt funding capacity which will enable it to pursue bigger acquisitions.

  Finally, MCT unitholders will be able to enjoy some 8.9% and 6.5% of accretion to MCT&rsquo s DPU and net asset value (NAV) on a pro forma basis.

  The proposed merger and the allotment and issue of the consideration units will require the approval of at least 50% of MCT shareholders.

  The amendments to the MCT trust deed to change MCT&rsquo s fee structure will require the approval of at least 75% of MCT shareholders.

  Sharon Lim, CEO of the manager of MCT calls the merger a &ldquo win-win&rdquo for unitholders of both MCT and MNACT and said it was &ldquo compelling on multiple fronts&rdquo .

  &ldquo Financially, MCT unitholders can immediately enjoy approximately 8.9% and 6.5% of accretion to DPU and NAV respectively on a pro forma basis&hellip On a strategic level, we believe this is a once-in-a-lifetime opportunity to bring together two leading commercial REITs with highly complementary qualities,&rdquo says Lim.

  &ldquo Nearly every REIT has been focused on growing through the acquisition of assets. However, we believe that the key to sustained growth is a platform with scale and reach. MCT has a longstanding track record of stability and strength, while MNACT offers a ready launchpad into key gateway markets of Asia. Therefore, by merging the two REITs, we can better unlock the upside potential of a multiple-geography platform, put the merged entity onto a new growth trajectory, and crystallise MPACT&rsquo s position as a distinctive proxy to the long-term rise of Asia,&rdquo she continues.

  &ldquo We can also expect immediate benefits including enhanced geographic diversification, reduced single asset concentration and improved tenant diversification. Best-in-class assets, namely Festival Walk, Mapletree Business City I and II, and VivoCity, will continue to constitute a significant proportion of MPACT&rsquo s asset base. Together, these will improve overall cashflow stability and resilience through market cycles. We are confident that the merger, which brings together the best of both REITs, can be even more successful in driving growth and delivering value for all unitholders,&rdquo she adds.

  Cindy Chow, CEO of the manager of MNACT called the merger a &ldquo transformative milestone&rdquo for both REITs.

  &ldquo For MNACT unitholders, they will enjoy immediate and attractive financial returns with the scheme Consideration at a premium over MNACT&rsquo s trading prices while remaining invested in a bigger and more diversified platform. They will also benefit from the larger market capitalisation and increased representation in key indices through the enlarged platform that would potentially attract a wider investor base and further improve trading liquidity,&rdquo says Chow.

  &ldquo MNACT has an entrenched local presence with a portfolio of quality properties in China, Hong Kong SAR, Japan and South Korea. By combining these with MCT&rsquo s stable and resilient Singapore portfolio, the merger offers immense synergies and improved financial capability to expand into the key markets in Asia. With a strengthened portfolio, higher financial flexibility and debt headroom, MPACT will be well placed to accelerate its growth, pursue larger value-creating acquisitions and ride on the recovery and long-term growth of Asia,&rdquo she adds.

  &ldquo We are thus excited by the merits and future prospects of the merged entity where both REITs come together to build an even stronger platform where we can drive growth and deliver long-term sustainable value to all unitholders,&rdquo continues Chow.

  DBS Bank and HSBC Bank were the sole financial advisers to the managers of MCT and MNACT respectively.

  Shares in MCT and MNACT last traded at $2 and $1.11 respectively, with both REITs requesting for trading halts on the morning of Dec 28.

  Photo: MNACT