Analysts are mixed on the prospects of Mapletree Commercial Trust (MCT) and Mapletree North Asia Commercial Trust (MNACT), with some giving “buy” recommendations and others, “hold” recommendations”.
See: MCT and MNACT to merge to form flagship commercial REIT, Mapletree Pan Asia Commercial Trust
That said, all agree that there are strategic positives from the merger of both REITs.
Under the merger, which will be done via a trust scheme of arrangement, MCT will acquire all of the units in MNACT in exchange for new units in MCT, or a combination of both cash and new MCT units.
See also: The pros and cons of an MCT-MNACT merger
MCT has said that it intends to fund the acquisition with debt, the issuance of new units and perpetual securities, depending on the option chosen by shareholders.
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The transaction is currently subject to approval. MNACT’s delisting is slated to take place in mid-June.
Following the merger, the combined entity will be known as Mapletree Pan Asia Commercial Trust (MPACT), making it Asia’s seventh largest REIT in terms of market capitalisation.
The merged entity will adopt MNACT’s fee structure, where there’s a base fee of 10% of distributable income, and a performance fee of 25% of the REIT’s y-o-y growth in its distribution per unit (DPU).
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The fee structure will be more aligned to shareholders’ interests, note CGS-CIMB analysts Lock Mun Yee and Eing Kar Mei.
“Trading liquidity should also improve post the merger due to the higher free float and stronger index representation,” add the analysts in a Jan 3 report.
However, the way Lock and Eing see it, the benefits of the merger could only be felt in the longer run when MPACT delivers “accelerated growth prospects”.
In the shorter term, MCT’s shareholders will benefit from the immediate DPU and net asset value (NAV) accretion.
According to the manager of MCT, the deal will be 7.5% to 8.9% DPU accretive and 6.5% to 7.1% NAV accretive to the REIT, according to its pro forma estimates based on 1HFY2022’s numbers.
The deal, however, would be DPU dilutive by 17% to 18% for MNACT’s unitholders, based on pro forma estimates during the same period.
For MNACT unitholders, despite the dilutive DPU, the deal provides unitholders with a definite offer, as well as a premium of 8.49 cents compared to its trading price as at Dec 27, 2021.
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The premium is “more than enough to offset the pro forma DPU dilution of 0.58 to 0.62 cents (based on 1HFY2022),” say Lock and Eing.
“We also see stronger returns in the future given the better and larger portfolio of the merged entity,” they add.
Lock and Mun have kept their “hold” call on MCT with a target price of $2.32 and “add” on MNACT with a target price of $1.13.
Maybank Securities analyst Chua Su Tye has maintained “buy” on MCT with an unchanged target price of $2.35 for now.
In a report dated Jan 3, Chua says he sees “strategic merits” from the increased assets under management (AUM) diversification, stronger DPU growth, and a potentially lower cost of capital.
On the enlarged AUM, Chua says here are benefits to that, as MCT has “lagged peers in driving inorganic growth due to its Singapore-focused investment mandate and limited sponsor pipeline”.
Furthermore, the merger price is attractive for MCT without a platform premium considering MNACT has high-quality commercial assets (at 3.4% to 5.5% cap rates) that include Festival Walk in Hong Kong, where the recovery of its retail sales is gaining traction.
Festival Walk will account for 26% of MPACT’s AUM.
“Diversification across core Asian markets should add stability and reduce concentration risk by assets (VivoCity) and tenancies. A merger could lift MCT’s free float by 1.5 times and raise its MSCI Singapore index weighting from 1.6% to 2.4%, leading to increased investor attention and potentially an improved cost of capital,” adds Chua.
“MCT has executed well to achieve a strong following as a Singapore pure-play, but its Singapore net portfolio income (NPI) is set to fall to 53% with the addition of four overseas markets post-merger. This dilution may be viewed negatively by investors,” he continues.
That said, Chua says he sees “accelerated growth” from the merged entity’s higher $3.8 billion debt capacity and $1.7 billion development headroom for asset enhancement initiatives (AEIs) as he expects MPACT to “embark on more sizeable office acquisitions with its enlarged pan Asian mandate”.
In FY2022, Chua expects MCT’s DPUs to recover following the declines seen in FY2020 and FY2021 due to the capital retention and helped by the Mapletree Business City (MBC) II deal.
“Rental reversion should decelerate from strong double-digits to 1.5-2% in FY2021-2022 as VivoCity rents catch up with the market; rents at business park assets to grow at 2-3% per annum due to limited supply, and firm demand,” says Chua.
UOB Kay Hian analyst Jonathan Koh has also kept “buy” on MCT with an unchanged target price of $2.48.
In his report on Jan 3, Koh is positive on the proposed merger as it will enable MCT to become one of the largest REITs in Asia, with an enlarged scale and greater financial flexibility.
The move will also have a “significant positive impact” on MCT’s DPU and NAV, he says.
However, unlike Maybank’s Chua, Koh deems MNACT’s Festival Walk as a drag due to its extensive damage from the street protests in Hong Kong in November 2019.
Following the reopening of the mall in January 2020, it was hit almost immediately by the Covid-19 pandemic.
“[Festival Walk] suffered average rental reversion of negative 21% for retail leases in FY2021 due to lower renewed and re-let rental rates. It also granted rental reliefs of $34.9 million to support retail tenants. Festival Walk also incurred fair value loss of $428.7 million in FY2021,” he notes.
Furthermore, Hong Kong’s commitment to a zero-tolerance policy to control the Covid-19 outbreak may also put a dampener on Festival Walk’s performance.
“The restriction, one of the harshest in the world, has turned away tourists and business travellers. Festival Walk managed to maintain occupancy rate at 99.9% as of September 2021. However, average rental reversion has worsened to negative 30% in 1HFY2022,” says Koh.
Finally, the research team at OCBC Investment Research has kept “buy” on MCT with a lower fair value estimate of $2.14 from $2.20 previously.
“Notwithstanding macroeconomic and industry headwinds from the Covid-19 pandemic, we see signs of recovery and believe MCT’s strong parentage and healthy balance sheet will allow it to tide over near-term uncertainties, while its strong management team and portfolio are well positioned over the longer-term,” writes the team in a Jan 3 report.
“Whilst MCT offers investors a unique exposure to the retail, office and business park sub-sectors in Singapore, given its portfolio of best-in-class assets such as VivoCity and Mapletree Business City, this could potentially change given the proposed joint merger with MNACT,” it adds.
On the proposed merger, the team says MCT would gain new exposure to riskier markets and see dilution of its pure-play Singapore status if the merger goes through.
The merger will also bring about “strategic benefits” to MCT’s unitholders with accretion to the REIT’s DPU and NAV.
However, “MCT would have to accept a higher risk profile by entering new markets such as China and Hong Kong,” notes the team.
“While we are not overly excited about this proposed merger from MCT’s perspective, given its new exposure to riskier markets such as China and Hong Kong and dilution of its pure-play Singapore status, we acknowledge the importance of scale in the REITs industry and the strategic benefits the enlarged REIT brings,” it continues.
“We also believe MCT’s current right-of-first-refusal pipeline from its sponsor is not as attractive as in the past (such as MBC I and II prior to MCT’s acquisition). Furthermore, we like the pro forma DPU accretion to MCT unitholders from this transaction and recommend unitholders to vote in favour or the proposed merger, though we opine that this transaction is more favourable to MNACT’s unitholders than MCT’s,” adds the team.
In another report, the OCBC team has kept “hold” on MNACT with an unchanged fair value estimate of $1.15.
To the team, the merger could help “reduce MNACT’s concentration risks” in China and Hong Kong. The merger could also “significantly bolster its scale and lower its cost of capital”.
With the scheme consideration price at $1.19 for MNACT unitholders, coupled with the strategic benefits that the merger could bring, the OCBC team has recommended MNACT unitholders to vote in favour of the proposed merger.
Units in MCT and MNACT closed at $1.84 and $1.09 respectively on Jan 6.
Photo: MCT
