Festival Walk, located in the heart of Kowloon Tong, and arguably the flagship property of Mapletree North Asia Commercial Trust (MNACT), is likely to be the most important property in the merged entity, Mapletree Pan Asia Commercial Trust (MPACT). On Dec 31, the last trading day of the year, Mapletree Commercial Trust and MNACT announced a merger to form MPACT. But what will Festival Walk do for MCT's cost of capital?
Taking a step back, MNACT’s unit price had been creeping for more than a week, rising from around $1 to $1.11 before the respective managers decided to request for a trading halt. “We were very much in the thick of the heavy negotiation, very close to an announcement … but not really ready so we decided to call a trading halt and to announce it today,” says Sharon Lim, CEO of MCT’s manager, on Dec 31. The finanicial advisers were DBS Bank for MCT and HSBC for MNACT.
The merger will be effected by a scheme of arrangement (SOA). MNACT unitholders will receive a scheme consideration of $1.1949 to be satisfied by either 0.5963 new MCT units at an issue price of $2.0039 per MNACT unit (scrip only), or a combination of 0.5009 new MCT units and $0.1912 in cash (scrip and cash). The aggregate scheme consideration is $4,215.6 million.
The scheme meetings are likely to be held in April 2022, and completion is scheduled for end-May or early June. MCT requires three resolutions to be approved by unitholders. Approving the merger and issuance of new MCT units require a simple majority. Amendments to MCT’s trust deed including the new fee structure require 75% approval. All resolutions are interconditional.
MNACT’s scheme meeting requires two approvals, proposed amendments to MNACT’s Trust Deed to introduce provisions to facilitate the implementation of a trust scheme of arrangement, and to approve the merger. The first resolution requires 75% threshold of votes, and the second resolution requires at least 50% of those present and by proxy casting at least 75% of votes by value.
MCT unitholders are expected to benefit from accretion to DPU and NAV of 8.9% and 6.5% respectively on a pro forma basis. MCT unitholders also get a growth platform in MNACT. Hang on. Not so fast.
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“I love Singapore”
In Lim’s own words, MCT is a rare breed of S-REIT. “I love Singapore. Operationally it is very stable. Because we are only in Singapore, and one of the Last of the Mohicans left with Singapore-centric assets, for me to move overseas, my maiden move has to be significant,” Lim says.
“I shared with analysts and investors, for MCT to move it has to be significant and meaningful otherwise there will be questions asked if I were only to buy a small property in Europe. For [a move] overseas we have to be mindful we need a platform to run. We have to have an operating platform. Operating on the ground without a platform is very hard to execute in driving those assets,” she explains.
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In past briefings and again on Dec 31, Lim says she looks at asset fit, strategic fit and financial metrics. “In terms of financial metrics we look at DPU accretion, NAV accretion and NPI accretion. From the acquisitions we have done, of Mapletree Business City Phases 1 and 2, we have attained that and at the back-end we have to ensure we have an asset fit … into our quality portfolio,” Lim reiterates.
Is scheme consideration fair?
According to a joint announcement by the managers of both REITs, the pricing was arrived at such that it is a premium to various MNACT price points. “The Scheme Consideration is equivalent to the NAV. It is at an attractive premium of 7.6%, 11.6%, 14.4%, 17.5%, 17.8% and 17.3% over MNACT’s trading price as of 27 December 2021, 5-trading day, 1-month, 3-month, 6-month, and 12-month VWAP of $1.1100, $1.0707, $1.0449, $1.0173, $1.0142 and $1.0184 per MNACT Unit, respectively,” the announcement said.
Over and above the premium over the price, the premiums are equivalent to at least a one year of MNACT’s DPU and up to 18 months DPU. “MNACT’s unitholders will celebrate this deal. If you consider the price rise from $1 to $1.11, they already did,” notes a local broker.
Of course, in all fairness, the transaction is DPU-dilutive to MNACT’s unitholders. They received 6.18 cents in FY2020/FY2021, for the 12 months to Mar 31. On a pro forma basis, MNACT unitholders would receive 5.6 cents in an all scrip transaction and 5.67 cents in a scrip-and-cash transaction.
Cost of capital
It’s not gone unnoticed that MNACT traditionally trades at a discount to NAV while MCT trades at a premium to NAV (see chart). MNACT also trades at higher yields of traditionally more than 6%, although this is likely to compress when trading resumes on Jan 3. MCT trades at DPU yields of below 5%.
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“When we looked at the offer from MCT it’s in line with our NAV and we’ve been trading below NAV. We are being priced at our asset’s worth. If you were to look at our historical trading against NAV we’ve been trading below NAV and one of the reasons is the exposure in terms of the market we are in. We are exposed to markets like Hong Kong and China and most of players in these markets trade below NAV,” acknowledges Cindy Chow, CEO of MNACT’s manager.
MCT has consistently traded above NAV because of its Singapore dollar assets, the quality of the manager and sponsor support. “We have been awarded by investors with a premium and I would like to thank them for it and it has always been a consistent premium. I’ve gotten a lot of feedback from investors. They like our assets. The premium is accorded by investors,” Lim says.
As for the future, that is a blank canvass. “We are are convinced by the merits of this merger and I’ve taken on board a lot of investors’ comments about growing inorganically. I’m comfortable they will look at the true strength of MCT, while riding on MNACT’s growth platform,” Lim adds assuredly.
“We definitely will be complementary to what MCT is looking at, to quickly diversify and grow. [The merger] will enable us to [diversify and grow] much quickly than growing incrementally. The consideration is at NAV and reasonable and fair and gives immediate benefit to unitholders in terms of upfront premium and cash component; and we are able to leverage on the larger platform to grow [larger] and faster. That’s the perspective from MNACT,” Chow says.
Festival Walk
The wild card is Festival Walk. During the height of the Hong Kong protests in 2019, Festival Walk faced physical damage. Most of this was covered by insurance, and as at the latest valuation of $4.45 billion as at Oct 31, it appears to have suffered minimal or no longer term damage to its valuation.
On the other hand, Festival Walk has a land tenure of up to June 2047. At its capitalisation rate of 4.15% its owners should recoup all the capital value through its income.
“For Festival Walk and for all the assets, we have taken into consideration the valuation done by independent third party valuers and there’s a cross audit to make sure the valuation can withstand scrutiny,” Lim says.
Does that mean there is no residual value after 25 years asks a market participant. Of course rents could rise during the next 25 years. For Festival Walk and properties with relatively lower land tenures, the return to investors is through income and DPU. Hence, MNACT trades at higher DPU yield and lower P/NAV than MCT.
Festival Walk will account for 26% of MPACT’s significantly larger AUM of $17.1 billion. The merged market cap of MPACT is likely to be $10.5 billion. MPACT needs to grow even larger to lessen the Festival Walk impact. And for that it can make use of its debt headroom of $3.785 billion based on 50% aggregate leverage, and AEI and development headroom of $1.71 billion based on 10% of deposited property.
