In the week of Feb 7-11, market talk revolved around an interloper for Mapletree North Asia Commercial Trust (MNACT). In addition, some noise around an activist Hong Kong-based hedge fund emerged. The interloper has not expressed an interest in MNACT suggesting that market talk is all it is.
When asked if MNACT’s manager would consider an offer from a third party for either the REIT or its assets, MNACT’s manager says, “the MNACT Manager will consider a third party offer for the REIT or assets that materialises, in accordance with its obligations under existing legal and contractual terms”.
To take a step back, on Dec 31, the managers of MNACT and Mapletree Commercial Trust (MCT) announced a proposed merger that valued MNACT at $4,215.6 million, comprising a combination of $417.3 million in cash from MCT, and the balance amount in new MCT units.
Unitholders of MNACT would receive either 0.5963 new units in MCT, or a combination of 0.5009 new MCT units and $0.1912 in cash, at the election of each unitholder of MNACT. Sponsor Mapletree Investments has stated that it will take all its consideration in new MCT units.
Because of the exchange ratio, MCT’s and MNACT’s unit prices have been ‘tethered’ to each other since the announcement. On Dec 31, it was announced that the scheme consideration valued MNACT at $1.1949, which was the NAV as at Oct 31, 2021, based on an issue price of $2.0039 per new MCT unit. Since the announcement of the merger, the unit price of MCT has fallen by 8.5% while MNACT’s unit price is down less than 3% from Dec 31.
Travis Lundy, an analyst at Smartkarma, reasons that MCT had a lower gearing ratio, and owned less risky Singapore-only assets accounting for the difference in price performance. The risk-free rates on 10 year Singapore government bonds, though rising is still a modest 1.86% or thereabouts. The yield on Hong Kong’s 10-yar government bond is at around 1.82%, but the yield on China’s 10-year government bond is 2.81%.
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Following the M&A, MCT’s trading yield may rise from its current 4.7% as higher gearing, foreign assets and greater risk are introduced.
Link REIT diversifies from Hong Kong
Interestingly, Link REIT is diversifying away from Hong Kong retail. In Oct last year it acquired two logistics properties in Dongguan and Foshan for RMB754 million. In Nov it announced the planned acquisition of a 50% stake in three retail properties in Sydney. On Feb 10, Link REIT announced the proposed acquisition of 49.9% stake in Investa Gateway Office (IGO) for A$596 million. These acquisitions raise Link REIT’s gearing from 19% as at Sept 30, to a pro forma 24.6%. With the IGO acquisition, Link REIT’s AUM rises to HK$224 billion, with Hong Kong accounting for 76.9%, mainland China 16.7% and overseas assets at 6.4%.
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“While Hong Kong remains our home and retail assets remains the core of our portfolio, we are expanding in other markets and will have a meaningful portion in other commercial assets and in other markets. Along our growth trajectory, we are expecting our portfolio to have 70%-75% of its assets in Hong Kong, with about 20% in Mainland China and about 10% in overseas markets,” says a Link REIT spokesman.
Bigger is better for MPACT
In a riposte to an unhappy MNACT unitholder who suggests that Festival Walk can be sold at a higher valuation than its Oct 31, 2021 valuation of $4.4 billion when the Covid situation has improved etc, Lundy points out that “the idea of selling Festival Walk in the near term is a pipe dream”.
As reported in the South China Morning Post in Jan this year, Savills is expecting a record amount of new retail space in 2023. “The amount of new space for shops could quadruple from just over a million square feet this year to about 4 million square feet in 2023, according to Savills,” SCMP says.
Simon Smith, regional head of research and consultancy for Asia-Pacific at Savills indicates that the dramatic increase in supply might lead to "some moderation" of rental growth in non-core areas in 2023.
The rationale for the merger, as outlined by the managers of MCT and MNACT on Dec 31, was for the new Mapletree Pan Asia Commercial Trust or MPACT to reduce concentration risk with a more diversified portfolio, (including reducing the impact of Festival Walk to 26% of AUM and 24% of NPI), leapfrog into the top 10 largest Asian REITs by market capitalisation, and with more liquidity attract more investors and gain entrance into more indices. MCT is already a member of FTSE EPRA NAREIT Developed Market Index, and the Straits Times Index. It’s likely MPACT will replace MCT in both.
In a recent interview, Eng-Kwok Seat Moey, managing director and head of DBS Capital Markets says one of the items on her wishlist for S-REITs is to have more S-REITs ranked in the top 10 largest REITs in Asia by market cap. An upshot of larger S-REITs with higher market capitalisations is more liquidity which in turn attracts more investors, including global investors increasing Singapore’s weightage in global indices, and this can only be a good thing for Singapore.
