SINGAPORE (July 17): The managers of ESR-REIT and Sabana Shariah Compliant Industrial REIT — both controlled by ESR Cayman — have announced the proposed merger of the two REITs via a trust scheme of arrangement. The terms are “at market”. A Sabana REIT unitholder will receive 0.94 units in ESR-REIT for every one unit in Sabana REIT. Assuming an issue price of $0.401 (based on the one-month volume weighted average price (VWAP) of ESR-REIT units) and the gross exchange ratio of 0.940x, the implied scheme consideration is $0.377 per Sabana unit.
The merger is conditional on approval by unitholders of both Sabana REIT and ESR-REIT in an extraordinary general meeting (EGM), at a yet-to-be-decided date. For Sabana REIT, the amendment of its trust deed requires not less than 75% of the votes cast. Approval of the merger requires 50% of the votes representing at least 75% of the value of Sabana REIT unitholders. The common substantial ESR-REIT unitholders / Sabana REIT unitholders, including Tong Jinquan, Wealthy Fountain Holdings, e-Shang Infinity Cayman and ESR Cayman need to abstain from voting.
According to Bloomberg, Tong and his affiliates hold around 4.72% Sabana REIT, Black Crane owns 5%, UBS which holds funds for third-party investors, owns 5% and BlackRock owns 4.98%. E-shang Infinity Cayman owns 19.77% of Sabana REIT.
Based on 1HFY2020 financials, the merger is distribution per unit (DPU) accretive to both REITs, and NAV accretive for ESR-REIT. For Sabana REIT, some 12.9% accretes to its DPU. “The DPU accretion on a pro forma basis of 12.9% is the highest DPU accretion in a Singapore [REIT] merger,” notes Donald Han, CEO of Sabana REIT’s manager, in a teleconference.
Sabana REIT’s pro forma DPU rises from 2.342 cents to 2.643 cents based on 1HFY2020 DPU. However, its NAV falls from 51.2 cents as at June 30, to 40.6 cents. This is a moot point if the merger goes ahead, because Sabana REIT’s unitholders will own ESR-REIT.
The kicker for the acquirer — ESR-REIT —is that it is both DPU accretive and NAV accretive, although the DPU accretion is 3.5% based on 1HFY2020 financials, and less than Sabana REIT’s accretion. For ESR-REIT, the accretion to NAV is 5.2%. Hence, ESR-REIT’s NAV rises from 41 cents as at June 30, to 43.2 cents post-merger.
According to Adrian Chui, CEO of ESR-REIT’s manager, the merger is advantageous for both REITs. “Post-merger, the enlarged REIT will be a 100% pure-play Singapore REIT, with growth prospects and opportunities to optimise the portfolio. The enlarged REIT results in a larger market capitalisation and free float, and positions us for inclusion in key [global] indices,” he says.
Undoubtedly, Chui is referring to a covet-ed place in the FTSE EPRA NAREIT Developed Index. This would lead to portfolios and ETFs rebalancing in favour of the enlarged ESR-REIT. After the merger, ESR-RE-IT would have an asset size of $4.1 billion, putting it in fifth place behind Ascendas REIT, Mapletree Logistics Trust, Frasers Logistics and Commercial Trust, and Mapletree Industrial Trust.
Most recently, Ascott Residence Trust has been included in this index. Last year, Manulife US REIT, Frasers Centrepoint Trust and Frasers Logistics and Industrial Trust were included. If ESR-REIT is included, the FTSE EPRA NAREIT Developed Index could have a higher Singapore weightage, which could result in more liquidity for the Singapore REIT sector.
Chui adds that a larger, more liquid REIT would lead to a more competitive cost of capital and cheaper debt. ESR-REIT’s portfolio would be more diversified, with its largest tenant accounting for no more than 4.1% of gross rental income, compared with 5.2% in 1HFY2020.
While gearing levels are likely to remain at around 41%, weighted average debt expiry (WADE) is extended for the enlarged ESR-REIT, rising to 3.2 years from 2.7 years and 1.6 years WADE respectively for ESR-REIT and Sabana REIT.
If all goes according to plan, and all approvals are obtained in the EGMs — most likely in October — the enlarged ESR-REIT could start trading by November this year. By then, its major unitholders would be ESR Cayman with 12.2%, Tong with 18.5% and minority unitholders owning the rest. ESR-REIT’s manager would be held by ESR Cayman (67.3%), Tong (25%) and Mitsui (7.7%).
