SINGAPORE (Apr 25): Activist investor Quarz Capital Management has issued an open letter to the manager of Ascendas Hospitality Trust (A-H Trust) urging for its merger with Ascott Residence Trust (ART) to resolve the key issue of overlapping investment mandates between the two REITs and deliver substantial value to unitholders of both camps.

Quarz is proposing ART acquire A-H Trust in a cash and unit transaction where 0.75 units of ART and $0.18 of cash will be exchanged for one unit of A-H Trust. This values each unit of A-H Trust at $1.08 which is at 8% premium to book value.

“For A-H Trust unitholders, the potential offer provides an attractive takeover premium of 20% and addresses the persistent discount at which the unit price trades to its Net Asset Value partly due to its sub optimal size,” says Quarz in an open letter published on Thursday morning.

More importantly, Quarz says the merger should address corporate governance concerns about the implications of the merger between CapitaLand and Ascendas-Singbridge and solve the issue of overlapping investment mandates between the two REITs.

See: CapitaLand and Ascendas-Singbridge in $11 bil deal to create Asia’s largest diversified real estate group

In January, CapitaLand and Ascendas-Singbridge entered into an $11 billion deal to create Asia’s largest diversified real estate group. The Ascott Limited, a member of CapitaLand, is the sponsor of ART.

Quarz says ART unitholders can also benefit from a 6% jump in DPU post-merger.

“The enlarged trust with its bigger market capitalisation and float can be included as a component of major REIT indices such as the FTSE EPRA NAREIT Developed Markets Index which can drive a further rerating of its unit price,” adds Quarz.

In addition, Quarz says the merged REIT will have an unconstrained mandate in the global hospitality sector where it can leverage on the expertise of the integrated manager to make accretive and strategic acquisitions.

Increased financial flexibility and scale can also enable the trust to expand and establish itself as market leader in new and lucrative hospitality formats to the benefit of unitholders.

Due to the current overlapping investment mandate, Quarz urges A-H Trust to postpone any acquisitions until full rationalisation of the overlap is achieved.

“This is to prevent any conflict of interest and corporate governance issues which can damage the reputation of both the Trust and Sponsor which are embarking on a new phase of transformational changes,” says the activist investor.

Quarz says it is looking forward to working with Ascendas Hospitality Trust’s board and management to move forward expeditiously on delivering value to all unitholders.

As at 11.49am, units of A-H Trust are trading flat at 90.5 cents while ART is trading 1 cent lower at $1.19 with 187,000 units traded.