SINGAPORE (Dec 2): On Nov 28, Frasers Logistics and Industrial Trust and Frasers Commercial Trust announced trading halts before the market opened, prompting market watchers to go into overdrive on what form a merger could take.
The real estate investment trust sector has been a hive of activity this year. The merger of CapitaLand and Ascendas-Singbridge, announced in January, set off a slew of mergers and potential mergers. In April, OUE Commercial REIT announced a merger with OUE Hospitality Trust, paying OUE Hospitality Trust security holders $40.75 in cash and 1,358 OUE Commercial REIT units for 1,000 OUE Hospitality Trust securities.
Last year, ESR-REIT acquired Viva Industrial Trust, paying 96 cents to VIT security holders, of which 10% was in cash and 90% was with ESR-REIT units issued at 54 cents each.
In July this year, Ascott Residence Trust announced a merger with Ascendas Hospitality Trust paying $1.0868 per A-HTrust stapled unit, comprising 5.43 cents in cash and 0.7942 Ascott REIT unit issued at $1.30 a unit.
Other than mergers and acquisitions, large REITs have grown larger through meaningful acquisitions. The two most notable acquisitions were by Mapletree Commercial Trust and Ascendas REIT. MCT acquired Mapletree Business City Phase II for $1,550 million, raising $918 million through a placement and preferential equity fund-raising combination.
Ascendas REIT plans to acquire 28 business parks in the US and two business parks in Singapore for $1.66 billion — the largest acquisition this year. All 30 business parks will be partly funded by a $1.31 billion rights issue, which closed at 9.30pm on Nov 28.
What would an FLT-FCOT merger look like? Most likely, the transaction would involve cash and units, much like recent REIT mergers such as those of ESR-REIT/VIT, OUE Commercial REIT and Ascott REIT/ A-HTrust, which were done largely with units and a small portion of cash.
So, FCOT unitholders will be rewarded with, say, 10% in cash, with the remainder priced in FLT units. At present, FLT is trading at 1.31 times net asset value, while FCOT is at 1.04 times NAV. In addition, FLT is trading at lower yields, of 5.58% versus FCOT’s yield of 5.75%. Thus, the acquisition would be mildly accretive for FLT’s unitholders.
Of course, the more cash that is used in the formula, the more distribution per unit (DPU) accretive, but there would be less debt headroom available post-merger, as in the case of OUE Commercial REIT and ESR-REIT. Ascott REIT’s cash outlay is less than 5% of the total consideration paid to A-HTrust’s security holders, leaving Ascott REIT with debt headroom of $1 billion.
FLT is already in the FTSE EPRA NAREIT Developed market index and is unlikely to be included in the Straits Times Index. Both Suntec REIT and Mapletree Logistics Trust are in the reserve list and significantly larger than a merged FLT-FCOT entity, which would have assets under management of $5 billion.
Moreover, most investors prefer a single asset class, and FCOT has around 34% of its assets in business parks, comprising Alexandra Technopark and 50% of Farnborough Business Park in the UK.
Perhaps the price performance of the merged REITs, coupled with their DPUs, are the best testament to whether merged REITs offer their unitholders better returns
