SINGAPORE (Feb 12): On Jan 29, ESR-REIT announced that its manager was in exclusive discussions with the manager of Viva Industrial Trust to acquire all the units in VIT by way of a trust scheme of arrangement. The period of exclusivity expires on March 31.
This is not the first time that ESR-REIT has attempted to acquire another industrial real estate investment trust. Just to recap, in November 2009, Cambridge Industrial Trust, as ESR-REIT was then known, made a hostile takeover bid. It attempted to oust the manager of MacarthurCook Industrial REIT and replace it with its own manager. It did this by accumulating a 10% stake in MacarthurCook Industrial REIT. It then publicised that it had no plans to merge the two REITs. The Monetary Authority of Singapore announced in the same month that year that the same manager should not be able to manage two REITs, as that breached regulations on conflict of interest.
In addition, Cambridge did not have the solution or the financing in place to resolve MacarthurCook Industrial REIT’s debt problems.
In July 2009, as part of a distressed sale, AIMS Financial Group acquired a troubled ASX-listed property fund manager called MacarthurCook for around A$12 million. The Singapore-listed MacarthurCook Industrial REIT came as part of the acquisition — and it was renamed AIMS AMP Capital Industrial REIT.
What happens to the REIT managers?
This time around, ESR-REIT has announced that it will make an offer to acquire all the units in VIT, but nothing has been articulated about buying the manager. “There is only room for one REIT manager. VIT’s manager might subsequently be amalgamated with ESR-REIT’s manager or simply wound up,” says Florian Leber, a lawyer with Luther, a German law firm headquartered in Singapore.
Both REITs suffered declines following the steepening of the yield curve and the sharp rise in risk-free rates. The local risk-free benchmark, 10-year Singapore Government Securities, is at 2.31%, the highest level this year and up 15.5% since the beginning of the year. ESR-REIT’s units have been relatively resilient, down by just 1.75%. VIT has fallen 5.3%.
VIT’s weaker performance is despite its property valuation rising to $1,287.4 million for FY2017, from $1,199.7 million as at end-2016. However, its gearing is at 39.8% and any write-down in valuation would impact gearing and take it above 40%. VIT is trading at 1.1 times its net asset value, but yields are high at 8.1%. ESR-REIT’s valuations appear somewhat conservative and it is trading at 0.94 times its NAV, but its yield is just 6.1%.
At these valuations, and depending on ESR-REIT’s due diligence, the ratio of ESR-REIT units to VIT units may not necessarily favour VIT. Portfolio quality may be key in this M&A deal. For instance, sponsor ESR may have walked away from Sabana Shari’ah Compliant Industrial REIT last November because of the quality of its portfolio.
At any rate, ESR-REIT has become more muscular since ESR became its sponsor in January 2017, when it acquired 80% of the manager and a 12.6% stake in the REIT. ESR is a pan-Asian logistics developer/owner. It is in effect a smaller version of Global Logistic Properties, developing and managing modern logistics facilities that are leased to third-party logistics providers, e-commerce companies, retailers, cold-chain logistics providers and industrial companies. It was co-founded by Warburg Pincus and has some nine million sq m of projects owned and under development in China, Japan, South Korea and India as well as a funds management business in Hong Kong. Along with ESR-REIT, ESR has assets under management of US$10 billion ($13.2 billion).
A rejuvenated, improved portfolio
Last year, ESR-REIT sold three properties at above valuation and their original purchase price. These were 55 Ubi Avenue 3 for $22.1 million, 87 Defu Lane 10 for $17.5 million and 23 Woodlands Terrace for $17.7 million. It reinvested the proceeds into newer properties with the potential of longer land tenures and weighted average lease to expiry.
On Dec 13, ESR-REIT acquired 8 Tuas South Lane from Hyflux, paying $111 million for the property, land premium, stamp duty and other costs. The property, with a gross floor area of 72,569 sq m and land area of 77,175 sq m, cost $95 million. The upfront land premium paid to JTC Corp to extend the lease is $11.4 million, including stamp duties, fees and other costs.
On Dec 14, ESR-REIT announced the acquisition of 80% of 7000 Ang Mo Kio Avenue 5, which has high specifications and is suitable for data centre tenants, and power and utility tenants such as SP Services and StarHub. ESR-REIT paid $240 million for the property.
On Jan 30, ESR-REIT announced that on a pro forma basis, the accretion from the Tuas and Ang Mo Kio properties could be as high as 6.8%, based on FY2017 distribution per unit of 3.85 cents. The accretion includes a preferential equity fundraising (EFR) exercise where it will issue up to 263 million new units.
ESR-REIT has announced an extraordinary general meeting to be held on Feb 27 to add to the trust deed a document called “the unit issue supplement” to determine the issue price and number of new units and obtain unitholders’ approval for the issue of these units.
“The EFR will rebalance our capital structure to give us headroom because we’re evaluating a number of opportunities [in Singapore] and regionally. The criteria for new assets will be those that attract higher-value tenants such as data centre operators and logistics operators. We are also looking at underlying land leases,” says Adrian Chui, CEO of ESR-REIT’s manager, during a results call. “The EFR sends two signals. The first is it shows the acquisitions are yield-accretive even with EFR. Secondly, it shows the sponsor stands behind this transaction [EFR] and validates that it is good.”
He is also tweaking the tenant mix. “Our philosophy is for multi- and single-tenanted properties to make up 50% to 60% of our portfolio. I lean towards multi-tenanted properties because we’re landlords and our job is to manage properties.”
Ready for M&A
Previous acquisitions by acquirers of REITs involved a stake in the manager. These included Starhill Global REIT (formerly Macquarie MEAG Prime REIT), Frasers Commercial Trust (Allco Commercial REIT) and ESR-REIT itself.
ESR-REIT’s rationale for the merger with VIT is that it creates a diversified, sizeable and liquid Pan-Asian, developer-backed, Singapore-based industrial property REIT with greater financial strength, larger market capitalisation and higher liquidity. “The objective is to create a sizeable and liquid industrial REIT with an Asian footprint well supported by a developer-sponsor financially and across the real estate value chain,” ESR-REIT says in an announcement on Jan 29.
The only precedent for a REIT merger was the acquisition in 2014 of Keppel Infrastructure Trust by CitySpring Infrastructure Trust, both business trusts (see “Trust scheme of arrangement” below).
A bigger REIT, argues ESR-REIT, will command a lower cost of capital and enjoy a positive rerating of its unit price. It would then benefit from longer debt tenors at a lower cost of funds, as well as better access to alternative funds and pools of capital.
In addition, of course, ESR is the stronger sponsor. If the purpose is for the enlarged entity to have a strong sponsor with a strong pipeline and the ability to stand behind the REIT to backstop funding, then unitholders of VIT would be best served to accept the offer when or if it materialises. Moreover, ESR-REIT’s manager appears to have a better grasp of valuation and land tenure.
Based on the quality of portfolios, ESR-REIT would benefit less if the M&A went through. UE BizHub East, arguably VIT’s best asset, would be part of ESR-REIT’s portfolio, which is a good thing. The merged entity will, however, have to grapple with short land tenures at Viva Business Park and Jackson Square, and the uncertainty of land premiums and conditions when it is time for renewal.
Interestingly, 7000 Ang Mo Kio Avenue 5 was a pipeline property for VIT, but VIT was not able to acquire it on an accretive basis, and it would have required significant equity fundraising for the purpose.
DBS Research likes the proposed deal. “We remain excited about the prospects for the combined entity (ESR-REIT-VIT), as we see both sets of unitholders able to benefit and ride together with a potentially fourth-largest industrial REIT (potentially $1.7 billion market cap, $3.1 billion AUM) in Singapore, backed by a reputable sponsor in ESR, which offers a sizeable pipeline of acquisition prospects and deal flow,” it says in a report.
If the merger goes through, this will be a first for Singapore REITs in their 15-year history. It would also provide a blueprint for future M&A deals among the bevy of smaller REITs that are unable to gain an investor following.
Trust scheme of arrangement
A trust scheme of arrangement enables the transfer of the existing shares of the target real estate investment trust (REIT) to the offeror. The scheme must be approved by a majority in number representing 75% in value of unitholders present and voting either in person or by proxy at the extraordinary general meeting convened to approve the scheme; and the scheme must be approved by the court. This allows the acquirer to obtain 100% control without having to compulsorily acquire dissenting unitholders. Common substantial unitholders have to abstain from voting.
When CitySpring Infrastructure Trust acquired Keppel Infrastructure Trust, it put forward five resolutions. In addition to approving the trust scheme of arrangement, CitySpring unitholders voted to approve a change in the conditions of the general mandate and also to change the trust deed. In the case of the CIT-KIT merger, the manager of KIT became the manager of the merged entity, which is now called KIT.
A trust deed of a collective investment scheme or REIT states the rights of unitholders and also the duties and responsibilities of the REIT manager. As part of the resolutions, unitholders have to vote to alter the trust deed to authorise the manager to implement the trust scheme.
