ESR-REIT (SGX:J91U)
AIMS APAC REIT (SGX:O5RU)
MAPLETREE INDUSTRIAL TRUST (SGX:ME8U)
MAPLETREE LOGISTICS TRUST (SGX:M44U)
SABANA SHARI'AH COMPLIANT REIT (SGX:M1GU)
REITs – Singapore - M&A Galore Foreshadows More Consolidation Between Smaller S-REITs
- 3 mergers among S-REITs were announced this year. The prime motivation is to enlarge scale, increase free float and aim for index inclusion. S-REITs which are small, risk being marginalised in terms of research coverage by SELL-side analysts, resulting in low trading liquidity.
- AIMS APAC REIT and Sabana REIT could be potential acquisition targets in consolidation among smaller industrial REITs, although our bets are speculative at this juncture.
- Our top BUYs are Ascott Residence Trust, Far East Hospitality Trust, Frasers Centrepoint Trust and Mapletree Industrial Trust. Maintain OVERWEIGHT.
WHAT’S NEW
Coming together to become bigger.
- The managers of FRASERS LOGISTICS & INDUSTRIAL TRUST (SGX:BUOU) and FRASERS COMMERCIAL TRUST (SGX:ND8U) have jointly proposed to merge Frasers Logistics & Industrial Trust with Frasers Commercial Trust through a trust scheme of arrangement. Frasers Logistics & Industrial Trust will acquire all units of Frasers Commercial Trust to be satisfied by:
- S$0.151 in cash,
- 1.233 new Frasers Logistics & Industrial Trust units at issue price of S$1.24.
- The total consideration of S$1,537m (S$138.1m in cash and 1,128.1m new Frasers Logistics & Industrial Trust units) or S$1.68 per Frasers Commercial Trust unit implies an exchange ratio of 1.355 times.
- The trust scheme is subject to approvals from Frasers Logistics & Industrial Trust unitholders (50% approval required) and Frasers Commercial Trust unitholders (75% approval required) during EGMs to be held in Feb/Mar 20. Sponsor Frasers Property (SGX:TQ5) currently owns 19.6% of Frasers Logistics & Industrial Trust and 25.9% of Frasers Commercial Trust.
Increased scale and diversification.
- The enlarged hybrid REIT will have a diversified portfolio across Logistics & Industrial (58.4%), CBD Commercial (21.7%) and Office & Business Parks (19.9%). It will have 98 properties spread across five countries valued at S$5.5b (Frasers Logistics & Industrial Trust: S$3.3b and Frasers Commercial Trust: S$2.2b) with 2.6m sqm of space and 300 tenants.
Potential increase in index weightage.
- The enlarged REIT will have market cap of S$4.2b (Frasers Logistics & Industrial Trust: +50%) and free float of S$3.0b (Frasers Logistics & Industrial Trust: +50%). The enlarged REIT is ranked the 9th largest S-REIT by market cap. Frasers Logistics & Industrial Trust is a component of FTSE EPRA/NAREIT Index and its weightage could increase post completion of the proposed merger.
More beneficial for Frasers Logistics & Industrial Trust unitholders.
- The proposed merger is DPU accretive on a pro forma basis for FY19 for Frasers Logistics & Industrial Trust (+0.6%) and Frasers Commercial Trust (+2.5%), assuming the proposed acquisition and acquisitions/divestments announced in FY19 were completed on 1 Oct 18. The transaction is NAV accretive at 9.5% for Frasers Logistics & Industrial Trust (Frasers Logistics & Industrial Trust was trading at P/B of 1.3x compared to 1.0x for Frasers Commercial Trust prior to announcement of proposed merger).
ACTION
Size matters to research coverage.
- Market cap and trading liquidity are important considerations when SELL-side analysts decide on their universe of coverage. Priority is given to S-REITs with large market cap that are included in major indices with well recognised sponsors. Smaller S-REITs are often overlooked by institutional funds and thinly traded.
- The on-going consolidation of smaller S-REIT to enhance scale will keep sentiment towards S-REIT buoyant and positive.
Maintain OVERWEIGHT.
- We see an environment of persistently low interest rates, which will keep interest fixated on yield plays, such as S-REITs. We highlight some potential candidates for merger:
- Mapletree Logistics Trust and Mapletree Industrial Trust have distinct mandates. Mapletree Logistics Trust invests in logistics properties, while Mapletree Industrial Trust invests in industrial properties in Singapore and data centres in Singapore and overseas. Both Mapletree Logistics Trust and Mapletree Industrial Trust are among the top-10 S-REITs.
- Both S-REITs are liquid, well covered by equity analysts and are components of the FTSE EPRA/NAREIT Index. Both S-REITs also have good relationships with banks with low cost of debt at 2.6% and 2.9% respectively.
- ESR Cayman has cross ownership of the managers of ESR-REIT and Sabana REIT, which has a similar mandate to invest in industrial properties. Conflict of interest would be removed if ESR-REIT merges with Sabana REIT. ESR Cayman owns 8.5% of ESR-REIT and 21.3% of Sabana REIT. Tong Jinquan, founder of Shanghai-based Summit Property Development, owns 30.8% of ESR-REIT and 6.6% of Sabana REIT.
- ESR Cayman, sponsor of ESR-REIT, bought 26.8m units of AIMS APAC REIT for S$37.3m in Nov 19. The transaction increased ESR Cayman’s deemed interest in AIMS APAC REIT by 3.9ppt to 9.1%.
- Both ESR-REIT and AIMS APAC REIT invest primarily in industrial properties in Singapore. ESR-REIT and AIMS APAC REIT are ranked the 22nd and 32nd S-REITs in terms of market cap. Combining the two S-REITs will propel the enlarged REIT to become the 17th largest with combined market cap of S$2.5b.
SECTOR CATALYSTS
- Environment of persistently low interest rates, which will keep interest fixated on yield plays, such as S-REITs.
- Limited new supply for office, hotel, logistics and retail segments in 2020.
ASSUMPTION CHANGES
- We keep our earnings forecast unchanged.
RISKS
- Uncertainties from US-China trade conflict.
Jonathan KOH CFA
UOB Kay Hian Research
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Peihao LOKE
UOB Kay Hian
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https://research.uobkayhian.com/
2019-12-04
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