SINGAPORE (Dec 9): On Dec 4, Mapletree North Asia Commercial Trust announced a proposal to acquire a 98.47% stake in two freehold, multi-tenanted office properties located in Greater Tokyo from sponsor and major unitholder Mapletree Investments, for $482.5 million (approximately JPY37,905.2 million). The proposed acquisitions are expected to result in further diversification of MNACT’s portfolio, reducing the reliance of income contribution from any single property, tenant or sector, its manager said.
In particular, the new acquisitions will help diversify away from reliance on Festival Walk in Hong Kong which had previously contributed around 62% to MNACT’s net property income. The mall and lobby of the office tower were damaged during Hong Kong’s unrest. The manager is looking to reopen the mall in the first quarter of 2020. It is also in the process of assessing insurance coverage for the damage done to Festival Walk.
Payment for the new properties will be through the issuance of units to the sponsor at no discount to the prevailing market price, and debt. The price of the new units will be based on the volume weighted average price for the 10 days prior to the issuance. In addition, the manager will waive acquisition fee which would have been 0.75% of the purchase price.
Advantages of having a strong sponsor
In the meantime, MNACT’s distribution per unit for the six-month period from October 1, 2019 to March 31, 2020 (2H FY19/20) is expected to be significantly lower compared to the same period last year, the manager says.
To mitigate DPU decline, the manager has announced a top-up plan for three quarters, the October 1-December 31 quarter, January 1 – March 31 2020 quarter and April 1 – June 30 2020. The top-ups will be based on around 40% of Festival Walk’s retail revenue, and will be included in the capital component of distributable income payable for each of the three quarters. They will be funded by funded by external borrowings till loss of revenue is recovered through insurance claims.
BHG Retail REIT’s transformational move
One of the smallest real estate investment trusts, BHG Retail REIT, announced a transformational acquisition on Dec 3. It has proposed to acquire Bandaling Outlets for $455 million. The vendor is Horizon Thrive International, owned by Chang Dingjie. Chang is a director of Beijing Hualian Group Investment Holding. Beijing Hualian Group Investment Holding Co is a major shareholder of Beijing Hualian Department Store Co (BHG Retail REIT’s sponsor) with a 25.39% stake.
The acquisition will be funded by 260 million news units paid to the vendor at the higher of 75 cents per unit or the prevailing 10-day VWAP; and a placement. BHG Retail REIT’s market cap is at around $353 million. The transaction is subject to an EGM.
“The acquisition and the issue of the consideration units, if they proceed to completion, will constitute a Very Substantial Acquisition or a Reverse Takeover,” the manager says in an announcement.
Small REITs, higher yields
The smallest REITs by market cap (see chart 4) are trading on average at higher yields than the larger REITs. Some investors may want to invest in these REITs and collect DPU.
Sometimes, the smaller REITs trade at high yields for a reason, such as selling by major investors. On Dec 5, Eagle Hospitality Trust's manager announced that Compass Cove Assets, controlled by the Yuan family, sold down its 9% stake in EHT to 4.96% on Dec 3.
Eventually, in the quest for size, these small REITs may be targets for mergers and acquisitions. Among them, Sabana Shari’ah Compliant Industrial REIT and AIMS APAC Industrial REIT count ESR Cayman as their major unitholder. ESR Cayman’s major shareholder is also a shareholder of Cache Logistics Trust’s manager (ARA Asset Management). "AIMS APAC REIT and Sabana REIT could be potential acquisition targets in consolidation among smaller industrial REITs, although our bets are speculative at this juncture," says UOB Kay Hian in a Dec 4 research note. EC-World REIT owns logistics assets in China, and could be part of a larger merged industrial REIT involving AIMS APAC REIT, Sabana REIT and Cache Logistics Trust, market observers suggest.
"Size matters to research coverage. Market cap and trading liquidity are important considerations when sell-side analysts decide on their universe of coverage. Priority is given to S-REITs with large market cap that are included in major indices with well recognised sponsors. Smaller S-REITs are often overlooked by institutional funds and thinly traded. The on-going consolidation of smaller S-REIT to enhance scale will keep sentiment towards S-REIT buoyant and positive," UOB Kay Hian says.
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