Since REITs began listing in Singapore in 2002, they have experienced at least one Great Recession following the Global Financial crisis of 2008-2009 and one pandemic, which we are still fighting against. Yet, over the two decades, REITs have delivered some of the best gains compared to other asset classes.
This year marks the 20th anniversary of the first S-REIT to be listed on the Singapore Exchange (SGX). CapitaLand Mall Trust’s (CMT) IPO price in July 2002 was 96 cents and its IPO yield was around 7%. Fast forward 20 years. On Nov 3, 2020, CMT merged with CapitaLand Commercial Trust and became CapitaLand Integrated Commercial Trust.
While the CapitaLand group provided the spark for the securitisation of real estate, it was ESR-REIT that led the REIT consolidation wave. In 2018 (see Table 1), it announced plans to acquire Viva Industrial Trust (VIT), making ESR-REIT and VIT the first two REITs to merge.
On Dec 31, 2021, a seventh merger was announced, between Mapletree Commercial Trust (MCT) and Mapletree North Asia Commercial Trust (MNACT) to form Mapletree Pan Asia Trust (MPACT). When trading resumed on Jan 3, MCT suffered its worst sell-off since IPO. As at Dec 4, units in MCT have fallen by more than 8% since the pre-announcement price of $2 on Dec 30.
The merger will provide MCT with growth from higher yielding but more risky assets like the inclusion of Festival Walk shopping centre in Hong Kong from MNACT. “Fund managers may not want Hong Kong exposure since Hong Kong has been a drag on the portfolio since 2019,” notes a fund manager.
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Permutations and combinations
Market watchers including brokers and fund managers expect further consolidation among the Mapletree REITs over the next two years, and an IPO of its purpose-built student accommodation (PBSA) within the next 12 to 18 months.
If REITs are aiming for size, a merger between Mapletree Logistics Trust and Mapletree Industrial Trust is likely to create a mega-REIT with assets under management (AUM) of around $20 billion, leapfrogging Ascendas REIT with $15 billion of AUM into the second-largest REIT by AUM among the S-REITs.
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The MINT-MLT merger would create a REIT with the most desired asset base of any REIT, with logistics, data centres and hi-tech buildings. MINT could divest its business parks to MPACT. As at Sept 30, business parks and hi-tech buildings comprised 6.7% and 16.7% of MINT’s AUM respectively while stack-up and ramp-up buildings comprised 5.7% and flatted factories 17.3%. The ramp-up buildings could be converted to state-of-the-art warehouses while the flatted factories could be redeveloped into hi-tech buildings or higher value assets. MINT is redeveloping its Kolam Ayer 2 cluster which was flatted factories into new hi-tech buildings. A larger base would enable the enlarged MINT MLT entity to redevelop the flatted factories.
The case for a super logistics and data centre REIT would be an echo of some of the rationale put forward by MCT-MNACT in their announcement. These include more liquidity, higher weightage in indices and lower concentration risk, although MINT and MLT have low concentration risks.
Chinese S-REITs ripe for corporate action
Meanwhile, corporate developments could materialise among S-REITs with Chinese assets, as market watchers suggest. Dasin Retail Trust, which is styled as a business trust, last October announced New Harvest Investment, an affiliate of Sino-Ocean Capital, had acquired 70% of the trustee manager for $8.3 million. Last July, New Harvest was granted a one-year call option to purchase either the total units owned by Aqua Wealth or 26% of the total units, whichever is lower. Another affiliate of Sino-Ocean, Glory Class Ventures, owns 6.36% of Dasin Retail Trust’s units.
Units in Dasin Retail Trust are trading at an annualised DPU yield of 15% based on DPU of 5.95 cents and at a P/NAV of 0.25 times. This is partly due to its reliance on short-term debt. Its lenders appear reluctant to lend to the REIT on a long-term basis. On Dec 20, 2021, the trustee-manager said: ”The trustee-manager wishes to update that the lenders of both the Onshore and Offshore Facilities have granted an extension of three months from Dec 20, 2021, to allow lenders more time to discuss new requests made by minority lenders.”
With unit price up almost 20 cents in December, BHG Retail REIT’s units could be experiencing some collection, say REIT watchers. Currently, its DPU yield is a low 3.7% and P/NAV is at around 0.69 times. Among the S-REITs with Chinese assets, BHG Retail REIT has the most reputable sponsor outside of Singapore developers.
With the exception of Digital Core REIT, S-REITs with US assets continue to trade at high yields. Keppel Pacific Oak US REIT (KORE) was the best performer among them, gaining 15.9% last year. However, its DPU yield is 7.9%. On the other hand, Manulife US REIT was the worst performer, down 10% last year. The problem with these US REITs, excluding Digital Core REIT, could be a lack of institutional following. Trading at high yields makes accretive acquisitions and growth challenging. And, as US interest rates rise, US S-REITs could have their work cut out for them.
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Following the merger of ARA Asset Management with ESR Cayman, market watchers reckon that Suntec REIT could be the next REIT after ESR-REIT and ARA LOGOS Logistics Trust (ALOG) to experience corporate action. ”With the recent announcement of the merger between ESR and ARA Group, we believe that Suntec could be an attractive acquisition/privatisation target given the attractive valuation,” notes a DBS Research report. “The merger of ESR and ARA with a focus on new economy assets could drive potential portfolio optimisation post the merger,” DBS says.
Among the candidates that could be Suntec REIT’s sponsor and major unitholder is none other than Straits Trading Company, which already holds 11.2%, and is the REIT’s largest unitholder. Gordon Tang, another large unitholder, has divested some of his units and is left with 8.2%.
“Straits Trading will retain its existing right to appoint the chairperson of the manager of Suntec REIT for so long as it remains a significant shareholder (by reference, to a numerical threshold to be discussed and agreed, to asset value) in the company,” says the ESR circular. The chairman of Suntec REIT’s manager is Chew Gek Khim, who is also chairman of Straits Trading. Whether Straits Trading raises its stake by acquiring John Lim’s 8.6% stake remains to be seen.
DBS Research says Suntec REIT is undervalued because it trades at a P/NAV of 0.73 times. The problem with Suntec REIT is its capital structure and capital management. As at Sept 30, 2021, its gearing stood at 44.3% and its interest coverage ratio (ICR) was just 2.7 times. The gearing ceiling for REITs with ICR of less than 2.5 times is 45%. To lower gearing, Suntec REIT may revalue its properties upwards but that would not eradicate its low ICR. At any rate, investors are very astute.
IPOs, acquisitions
A third pure logistics REIT is headed to list on SGX after ALOG, MLT and Daiwa House Logistics Trust, according to the market. GLP, which used to be listed on SGX as Global Logistic Properties, is believed to be planning a listing of its logistics assets. Elsewhere, City Developments has announced plans to list UK commercial properties in a REIT on SGX.
An asset class absent among S-REITs is the PBSA. Mapletree Global Student Accommodation Private Trust with US$1.3 billion in AUM comprises 35 student accommodation assets with 14,273 beds and some ancillary commercial units located in 22 university cities across the UK and US.
Mapletree is part of the Cuscaden Peak consortium bidding for Singapore Press Holdings (SPH) with an all-cash offer of $2.36 per SPH share. The consortium comprises Hotel Properties, Mapletree and CLA Real Estate, CapitaLand Investment’s ultimate parent. SPH’s $1.4 billion PBSA situated largely in the UK would fit nicely into a PBSA REIT managed by Mapletree.
Elsewhere, Clementi Mall owned by SPH REIT and Seletar Mall owned by SPH would add to CICT’s pipeline. CICT has a call option to acquire the 55% of CapitaSpring it does not own. Another possible pipeline property is 79 Robinson Road. With CICT’s $22.8 billion in assets, these acquisitions may not move the needle much but they would add incremental DPU. The mall at Sengkang Grand and the new Liang Court would also be a pipeline for CICT.
Creating value?
Mergers have yet to deliver the gains the individual REITs delivered in the past two decades of 200% to 300%. That is because mergers have been relatively recent, the first one taking place in 2018.
In all fairness, CICT started trading only on Nov 3, 2020, when it closed at $1.80. This is well below the closing price of CMT at $2.59 on Jan 21, 2020, being the last trading day prior to the announcement of the merger. As at Jan 4, CICT was tradeing at $2.09, well above the price it traded at on its debut but well below $2.59.
Neither $1.80 nor $2.09 were the prices at which new CMT units were issued though. It was $2.59. According to CMT’s circular, “the issue price of $2.59 of each consideration unit may not be equivalent to the market price of, nor reflective of the fair value of, the consideration units as at the effective date and/or the date of settlement of the scheme consideration”. It is the ratio that is key in these mergers. Each CCT unit was exchanged for 0.72 new CMT units and $0.259 in cash.
To be sure, there will be CICT detractors who claim that the merger did not create value. While CICT’s current price of $2.09 as at Jan 4 is lower than $2.59, it is higher than $1.80. In fact, since the merger, CICT’s unit price is up more than 16% and has provided its investors with a total return of 22.8% including distributions (see table 2).
In 2020, CMT’s circular indicated that the merger would provide a DPU accretion of 4.1%, raising pro forma DPU to 10.95 cents. It would also have a net asset value accretion of 2.1%, raising pro forma NAV to $2.02. Investment bankers that were not involved in the CMT-CCT merger had noted that it took place in the thick of the pandemic with restrictions that discouraged the population from visiting malls and going to office.
Even in the face of these challenges, CICT’s 1HFY2021 DPU was 5.18 cents and its cleaned-up DPU announced on Dec 7, 2021 and prior to a placement in the same month, was 4.85 cents. During the placement announcement, CICT’s pro forma NAV was $2.03. CICT’s pro forma DPU following the acquisition of three Australian properties in December is likely to be 10.52 cents on a pro forma basis.
More corporate action
ESR-REIT’s proposed merger with ALOG was announced on Oct 18, 2021, in the wake of the merger between ESR Cayman and ARA Asset Management. ARA had a stake in LOGOS, ALOG’s sponsor. The merger will be effected through a trust scheme. The EGMs will be held on Jan 27 for both ESR-REIT and ALOG. The deadline for lodgement of ALOG’s proxy forms is on Jan 25 at 3pm. ESR-REIT’s EGM is at 11am on Jan 27, while ALOG’s is at 3pm.
If unitholders vote for the resolutions, the enlarged REIT will be named ESR LOGOS REIT or E-LOG. E-LOG would have a larger focus on logistics assets, diversifying the portfolio and lessening concentration risk; the merger would deepen E-LOG’s network of customers; E-LOG would have a larger free float and would carry more weight in indices including the gold standard of indices, FTSE EPRA NAREIT Developed Index; and E-LOG would have access to a large pipeline of ESR’s ‘new economy’ logistics, data centre and healthtec developments in various funds and joint ventures amounting to some US$53 billion ($72 billion).
Since ESR became sponsor of ESR-REIT in 2017, it has supported the REIT in all its capital raisings. In addition, ESR has one of the largest new economy AUM in Asia-Pacific along with GLP, Prologis and Goodman, which are the major players in this asset class.
The advantage for ALOG, according to the EGM circular, is an 8.2% accretion to its 2020 DPU that will take it to 5.512 cents and a 2.2% accretion to its 2020 NAV that will take it to $0.708.
ING, the independent financial adviser to ALOG, says: “We are of the opinion that on balance, the terms of the Scheme are fair and reasonable from the financial point of view”. The independent directors also recommend that ”ALOG unitholders vote in favour of the scheme resolution at the scheme meeting”.
ESR-REIT has a merger under its belt. It merged with VIT back in October 2018. At the time, market watchers believed the merger was to save VIT which had higher risk assets such as ESR Bizpark@Chai Chee and Jackson Square. The business park is one of the largest assets in ESR-REIT by net lettable area but with just 10 years of lease left on the land.
ESR-REIT paid for VIT with units and cash in the ratio of 90:10. This has become something of a template for REIT mergers. When OUE Commercial REIT acquired OUE Hospitality Trust, it paid for OUEHT with a 5% cash outlay and the rest with units.
The most successful merger was Frasers Logistics and Industrial Trust and Frasers Commercial Trust to create Frasers Logistics and Commercial Trust, completed at the height of the pandemic in April 2020.
Anything will be accretive
When will ParkwayLife REIT make its big move? The REIT’s manager secured a right of first refusal for Mount Elizabeth Novena for the REIT. At a DPU yield of 2.7%, surely Mount E Novena is accretive even if PLife REIT acquires the asset with 100% equity.
The spate of corporate action in recent weeks comes just as the US Federal Reserve plans to taper its quantitative easing programme. In the Federal Open Market Committee (FOMC) meeting on Dec 13-14, 2021, the Fed governors were particularly hawkish, communicating the likelihood of three rate hikes in the Federal Funds Rate this year.
Interest rates impact REITs in three main ways. First, REIT unit prices are priced off risk free rates through a yield spread. If risk free rates - usually the 10-year government bond yield - rise, then REIT DPU yields usually rise in tandem to maintain the yield spread, causing REIT prices to fall.
S-REITs carry significant debt. A simple average of gearing levels for the 40 S-REITs - excluding Dasin Retail Trust and Ascendas India Trust which are styled as business trusts - is at around 37%. Any rise in interest rates is likely to impact DPU because finance is usually the REIT’s largest expense.
Finally, interest rates impact capital values through the discount and capitalisation rates. The impact is indirect and if there are sufficient trades at high prices, capitalisation rates can stay relatively compressed.
The REIT that is likely to outperform would probably have revenue and net property income (NPI) growth in excess of inflation and the rise in interest cost. Interestingly, a couple of outperformers in 2021 were underperformers in 2020 - ALOG and First REIT.
In terms of price, the worst-performing REIT in 2021 was CapitaLand China Trust because of the challenges faced by Chinese property developers. Still, in terms of fundamentals, CLCT has delivered. Its nine month NPI is up 81.1% to $903 million. CLCT is likely to be less impacted by rising interest rates as the People’s Bank of China is, to an extent, independent of the Fed.
It is difficult to forecast the next 20 years for REITs. However, as Asia Pacific ages, REITs will continue to be a necessary asset class. This year, whether the pandemic fades away or not, CICT is probably a proxy for Singapore. After all, Raffles City is a Singaporean icon of sorts.
Happy 20th anniversary S-REITs.
