REIT - CIMB Research 2017-03-05: Consolidation at the gates

REIT - CIMB Research 2017-03-05: Consolidation at the gates Singapore REITs e-Shang Redwood MAPLETREE INDUSTRIAL TRUST ME8U.SI PARKWAYLIFE REIT C2PU.SI

REIT - Consolidation at the gates

  • ESR has made its next chess move. It is now 5% unitholder of SSREIT, following it recently becoming c.12% unitholder of CREIT and acquiring an 80% stake in CITM.
  • This appears to be a precursor to consolidation of small- to mid-cap industrial REITs.
  • However, we think that the M&As are unlikely to lead to sector re-rating. 
  • Underweight maintained, with defensive REITs MINT and PREIT as our preferred picks.

ESR has emerged as 5.01% unitholder of SSREIT

  • Through its subsidiary e-Shang Infinity Cayman, e-Shang Redwood (ESR) has emerged as a 5.01% unitholder of Sabana REIT (SSREIT, Not Rated). This development is certainly raising eyebrows on the embattled REIT, which recently appointed Morgan Stanley as its financial advisor for the strategic review of the trust.
  • SSREIT is a diversified industrial REIT that owns 21 properties with AUM of c.S$1bn and GFA of 4.4m sq ft. 
  • As at end-16, its portfolio occupancy stood at 87.2%, lower than its peers. Aggregate gearing is expected to decrease from 43.2% at end-16 to c.40%, following the completion of its rights issue. SSREIT trades at 9.7% FY16 dividend yield and 0.57x FY16 P/BV.

Consolidation at the gates

  • We view ESR’s move as a precursor to potential consolidation of the small- to midcap industrial REITs. Together with Tong Jingquan’s estimated 6% stake, these two unitholders collectively own c.11% of SSREIT, matching the 12% stake of Eric Khua’s Vibrant Group. Vibrant Group also owns 51% of Sabana Real Estate Investment Management, the REIT manager, and is SSREIT’s largest tenant.
  • On 20 Feb 17, the Business Times reported that SSREIT’s minority unitholders have requisitioned a special meeting to, among other things, force the manager out. Under the Code on Collective Investment Schemes, a REIT manager can be removed through a simple majority vote of unitholders. 

Should the REIT manager be removed, how would a potential consolidation take place? 

  • ESR owns 80% of Cambridge Industrial Trust Management Ltd (CITM), the manager of Cambridge Industrial Trust. But we do not believe CITM will be the replacement manager of SSREIT due to conflict of interests. 
  • We believe that the consolidation may take the structure of Keppel Infrastructure Trust’s combination with CitySpring Infrastructure Trust (asset sale in exchange for new units).

Smart money understands scale

  • Backed by private equity firm Warburg Pincus, ESR is the second-largest developer in North Asia, with more than US$5bn AUM across China, Korea and Japan. The company focuses on modern logistics and warehouses. It has 6.5m sq m of projects in operation or under development, with an additional 6m sq m in the pipeline.
  • We believe that ESR understands the importance of scale, and that bigger-cap REITs would enjoy operational economies of scale, better access to capital markets and lower capital costs. 
  • From the stock perspective, bigger-cap REITs would have higher trading liquidity, more research coverage and possibly, improved valuations. In addition, higher AUM would boost the value of the manager.
  • M&As unlikely to lead to re-rating; Underweight maintained

REITs are trading closer to book than developers. 

  • Considering the form of consolidation (asset-equity swap vs. straight buyout), we think that increased M&A activities would not cause the sector to significantly re-rate. 
  • Sector Underweight maintained, with defensive REITs MINT and PREIT as our preferred picks.

Highlighted companies 

Mapletree Industrial Trust 

  • ADD, TP S$1.68, S$1.67 close 
  • Given the build-to-suit (BTS) project for Hewlett-Packard and the asset enhancement initiative (AEI) at Kallang Basin 4, we forecast that MINT will deliver 3-year DPU CAGR of 2.7% in FY16-19F, one of the highest in the sector.

Parkway Life REIT 

  • ADD, TP S$2.58, S$2.44 close 
  • PREIT’s long weighted average lease expiry (WALE), deflation-protected Singapore revenue stream and lease structure in Japan make it the most defensive S-REIT, in our view. 
  • Distributions are also supported by a S$5.3m net disposal gain to be disbursed in FY17F.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2017-03-05
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