SINGAPORE (Oct 14): During a recent joint roadshow by the managers of Ascott Residence Trust (Ascott REIT) and Ascendas Hospitality Trust (A-HTrust), an Ascott REIT unitholder wondered why its unit price had not moved since July 3, when the merger between Ascott REIT and A-HTrust was announced. In contrast, A-HTrust’s unit price is up 11.2%. Since the start of the year, A-HTrust is up 41%, while Ascott REIT has gained 22%.
Usually, the acquired entity outperforms and the acquirer underperforms. Still, Ascott REIT continues to gain ground despite being the acquirer, partly because the US Federal Reserve has articulated that it is committed to an easier interest rate policy. OUE Commercial Real Estate Investment Trust — which acquired OUE Hospitality Trust — is up 17%.
The Ascott REIT unitholder will have to be patient, as benefits for Ascott REIT may not be as immediate as the price uplift that was advantageous to the stapled security holders of A-HTrust. Ascott REIT unitholders will have to be satisfied by its future prospects as laid out in the unitholders’ circular.
In FY2018, for instance, 75% of Ascott REIT’s earnings before interest, tax, depreciation and amortisation (Ebitda) was from developed markets. Following its merger with A-HTrust, 82% of the enlarged Ascot REIT’s Ebitda will be from developed markets. The free float market capitalisation of the enlarged Ascott REIT will rise to $2.4 billion, from $1.6 billion. The threshold for qualification for inclusion into the FTSE EPRA NAREIT Global Real Estate Index Series is $1.7 billion. During Ascott REIT’s FY2018 results briefing on Feb 29, Beh Siew Kim, CEO of Ascott REIT’s manager, had already articulated that the manager was working towards inclusion in this index.
Inclusion in the index generally provides a lift for prices. “If unitholders approve the combination, we expect trading of the units of the combined entity to commence trading on Jan 2, 2020. The FTSE EPRA Nareit Global Real Estate Index Series is reviewed on a quarterly basis and inclusion could take place in the first half of 2020,” Beh says via email.
Ascott REIT will pay $1.08698 for each A-HTrust unit, comprising 5.43 cents in cash, and 0.7942 new Ascott REIT units issued at $1.30 each.
“Historically, when a stock is included in this index, it gets an uplift because institutional investors buy into the index,” notes Tan Juay Hiang, CEO of A-HTrust’s manager.
After the merger, Ascott REIT’s assets under management will rise to $7.6 billion, from $5.7 billion. The advantages because of size — higher debt headroom, higher liquidity and being more noticeable — apply equally to A-HTtrust.
Ascott REIT’s unitholders will see distribution per unit rise 2.5% as a result of the merger. “The combined entity will have a higher proportion of stable income derived from master leases, well-balanced by growth income derived from management contracts,” Beh says.
More beneficial to A-HTrust security holders
In a recent interview, Tan says that, from A-HTrust’s perspective, the security holders will enjoy five benefits. The first is value creation. “The offer price of $1.08 was a 7% premium over the net asset value as at March 31, and a 32% premium to the 12-month volume weighted average price; unitholders get back 5% in cash, and they continue to enjoy being unitholders of a larger trust.” This unit price upside is clearly a benefit not enjoyed by Ascott REIT’s unitholders.
Second, A-HTrust’s unitholders will enjoy a larger and more diversified portfolio, which will ensure more resilience in income earned. No single market will have more than a 20% share of valuation, and no single property more than 7% of valuation. “This [larger] portfolio allows for diversification and, as a result, unitholders will enjoy that resilience that comes from diversification,” Tan says.
Third, after the merger, Ascott REIT, which will by then be a stapled security, will be the largest hospitality trust in Asia-Pacific and a proxy hospitality trust for the region. Fourth, as a result of size, the new Ascott REIT will have greater financial flexibility and a higher debt headroom of $1 billion. A-HTrust has a debt headroom of only $400 million, Tan says. “As a result, we can do more accretive acquisition at speed and look at some creative asset enhancement initiatives for our assets.”
Finally, the combined entity will be part of a larger group, The Ascott, and its parent CapitaLand. Ascott is an owner-operator that owns a hospitality platform and several brands. The enlarged Ascott REIT will also have a pipeline and right-of-first-refusal properties that unitholders of A-HTrust did not possess.
Headwinds Down Under
“It’s a good match from a couple of dimensions such as asset class and income stream,” Tan says. He cites, for example, that the benefits of geographical diversification will be felt almost immediately. Australia, whose gateway cities are experiencing some short-term oversupply, accounts for 34% of A-HTrust’s valuation of $1.88 billion. For the enlarged Ascott REIT, Australia will account for just 13% of its valuation of $7.6 billion.
“There is a little bit more supply coming out. The total number of rooms across Australia is 280,000, and 8,000 new rooms are coming up. There is a 3% lift in supply, and you have a short-term mismatch of demand and supply,” Tan says. “That caused a drop in the ability to drive room rates. In the last quarter (2QCY2019) RevPar [revenue per available room] dropped 2% y-o-y.”
Whatever the case, Tan remains optimistic about Australia’s long-term prospects. After all, Melbourne — which has a bigger oversupply problem than Sydney — is one of the world’s most liveable cities. Melbourne is the venue of Australia’s Formula One race and the Australian Open, which is a Grand Slam tennis tournament. “Sydney and Melbourne are very attractive for business and leisure. These [hotels] are very safe investments and we believe there is longer attractiveness in these assets,” Tan says.
In Brisbane, despite oversupply, occupancy and average room rates at Pullman and Mercure, King George Square are showing y-o-y growth, Tan says.
Schemes and resolutions
The merger between Ascott REIT and A-HTrust is being undertaken by a scheme of arrangement. The main hurdle is probably to get the approvals from Ascott REIT’s unitholders. In the remote probability that any of Ascott REIT’s resolutions are not approved, the merger will not proceed.
As part of the scheme, on Sept 9, Ascott REIT established a wholly-owned business trust (BT), Ascott BT. A-HTrust is one of the listed trusts in Singapore that have an active business trust component. To facilitate the merger, Ascott REIT has to establish Ascott BT to acquire A-HTrust’s BT, and Ascott REIT will acquire A-HTrust so that the active A-HTrust BT component can be retained as a business trust structure following the merger.
A-HTrust BT derives and may, after completion of the combination, continue to derive a certain portion of its income from non-passive income sources. Thus, following the merger, the combined entity will be a stapled group comprising units in Ascott REIT and Ascott BT.
Since the units are stapled under the stapling deed, the first of five resolutions — to be tabled at Ascott REIT’s EGM to approve the scheme of arrangement — will be to amend the new trust deed. This resolution requires the approval of at least 75% of the unitholders at the EGM by value. If it is not approved, the merger does not take place. The EGM will be held on Oct 21 at 10am.
Resolution 2, to approve the acquisition of A-HTrust, requires 50% (+1) of votes present. Resolution 3 is to approve the issuance of new Ascott REIT stapled security units to A-HTrust’s security holders; and Resolution 4 is to approve a new general mandate for the enlarged entity. Both Resolutions 3 and 4 require 50% of votes by value present. Resolutions 1 to 4 are interdependent on each other.
Resolution 5 is to amend the Ascott REIT trust deed in relation to the reference period for the determination of the price at which to issue units as payment of fees. This resolution is not conditional on the passing of the other four resolutions.
A-HTrust’s scheme meetings will be held on Oct 21 as well, at 2.30pm. This is because if any of the Ascott REIT resolutions are not carried, then the merger is unlikely to move ahead. There are only two resolutions up for vote. The first is to amend A-HTrust’s trust deeds to facilitate the implementation of the scheme, and the second is to approve the scheme — that is, the merger. Irrevocable undertaking for implementation and approval of the scheme has already been received by Gordon Tang, a unit of Accor and Ascendas Land International, which collectively hold 38.5% of A-HTrust. Thus, approvals for the two resolutions are almost a foregone conclusion. By voting in favour of the scheme, A-HTrust’s security holders will be viewed as having waived their rights to a general offer by Ascott REIT and its affiliates.
The merger and the future of an enlarged Ascott REIT is in the hands of its unitholders and, at present, it appears they are likely to vote in favour of all five resolutions.
