Companies & Markets
HOCK LOCK SIEW; Spooked by rate-hike fears, S-Reit sell-off could offer opportunity to dive in
Jude Chan
741 words
8 February 2022
Business Times Singapore
STBT
English
© 2022 SPH Media Limited

SINGAPORE-LISTED real estate investment trusts (S-Reits) have suffered a scathing sell-off so far in 2022, as fears over impending US Federal Reserve interest rate hikes loom. But could the run on Reits have been grossly overdone?

The iEdge S-Reit Index has fallen 5.5 per cent in the year to date. In contrast, the benchmark Straits Times Index (STI) has gained 7.8 per cent as at Feb 7.

A large part of the Reits' weakness stems from consensus expectations that the US Fed will raise interest rates between 4 and 5 times in 2022.

The market is treading with caution following a hawkish tone at the Federal Open Market Committee (FOMC) meeting in January, which has raised expectations that the first of these rate hikes will happen at the meeting in March.

Rising interest rates are generally seen as unfavourable to dividend-driven investments such as Reits due to a narrowing yield spread.

As the yield for risk-free investments like a treasury bond increases, the attractiveness of Reits tend to diminish. And with interest rates set to soar, interest in S-Reits has taken a beating

Nearly half of the 44 S-Reits are trading close to their 52-week lows following the sell-off this year. On average, the S-Reits are trading some 13 per cent below their 52-week peaks.

Some of the biggest losers so far this year include Dasin Retail Trust and Keppel DC Reit, which has seen their unit prices plunge 13.5 per cent and 13.4 per cent respectively. Mapletree Logistics Trust is also among the top decliners, falling 10.5 per cent year to date.

Across the sectors, industrial S-Reits suffered the heaviest month on month decline in January, falling 8 per cent, while healthcare Reits dropped 6.6 per cent month on month and the US-focused office Reits fell 6.1 per cent.

Another concern that could be at the back of investors' minds could be the effect of rising interest rates on the Reits' loans.

Some market watchers believe the pace of acquisitions could also slow in 2022, marking an end to the spree of acquisitions in the last 2 years as the sector took advantage of low interest rates.

S-Reits have an average leverage at around 37 per cent - well below the 50 per cent cap.

Interestingly, however, amid a flurry of S-Reits' earnings briefings over the past 2 weeks, most of the Reit managers did not seem too concerned about rising interest rates.

For example, the manager of ESR-Reit, which has an aggregate leverage of 40 per cent, said that more than 92 per cent of its interest rate exposure is on a fixed basis, with a hedge tenure of about 2 years. The manager said that this augurs well for the Reit amid the rising interest rate environment.

Meanwhile, the manager of Frasers Centrepoint Trust (FCT), which has an aggregate leverage of 34.5 per cent, noted that its debt maturity profile is spread widely, with no financing concentration risks in any single year. That said, the Reit manager said it was looking to slowly increase the proportion of its fixed-rate borrowings over time.

While investors should, generally speaking, remain circumspect despite the comforting words of Reit managers, the S-Reit sell-off so far this year could indeed have opened a window of opportunity for investors hoping to buy the dip.

Despite the recent spike in Covid-19 infections, the continued easing of restrictions is expected to boost earnings recovery on the back of an economic rebound - and drive distribution per unit (DPU) growth.

This is likely to outweigh market concerns on impending rate hikes.

Analysts also believe that the yield spread will remain attractive for Reit investors, even if rates continue to climb.

According to DBS estimates, S-Reits are forecasted to return a yield of 6.1 per cent for FY2022. "Even if we assume 10-year yields rise to close to 2.0 per cent in the longer term, we are still looking at a yield spread of 4.1 per cent - above the historical mean," DBS analysts said in a recent flash note.

SPH Media Limited

Opinion
HOCK LOCK SIEW; Undervalued Reits: selling assets trumps mergers
, Undervalued Reits: selling assets trumps mergers
968 words
10 February 2022
Business Times Singapore
STBT
English
© 2022 SPH Media Limited
IN spite of the Covid-19 pandemic, real estate investment trusts (Reits) owning retail and office assets posted decent results for 2021.

Suntec Reit, which owns retail and office properties in Singapore, Australia and the United Kingdom posted growth in distribution per unit (DPU) for the year ended Dec 31, 2021 of 17.1 per cent.

CapitaLand China Trust (CLCT), which has a portfolio of 11 shopping malls, 5 business parks and 4 logistics properties in China, saw DPU for the year ended Dec 31, 2021 rise 37.5 per cent.

Suntec Reit and CLCT are both fairly established trusts, with the former being listed in 2004 and the latter in 2006 as CapitaRetail China Trust.

Both Suntec Reit and CLCT trade at large discounts to their net asset values (NAV) as at Dec 31, 2021 - of 26 per cent and 24 per cent, respectively, based on unit prices at the close of the market on Feb 9, 2022.

Should these 2 Reits follow in the paths of other undervalued Reits that have looked to re-rate through merging with Reits with better valuations? Perhaps CLCT can merge with other Reits that share its sponsor, namely CapitaLand Investment, such as CapitaLand Integrated Commercial Trust (CICT) or Ascendas Reit.

Suntec Reit, meanwhile, is managed by a unit of Ara Asset Management, which has recently been acquired by Hong Kong-listed ESR Cayman. Its potential merger partners might include other ESR or Ara-managed Reits, or even other commercial Reits such as CICT or Mapletree Commercial Trust (MCT).

But mergers are tricky to execute. When 2 entities that trade at differing price-to-book multiples propose to come together, the entity that trades at a better multiple may be punished by investors.

The reaction of investors to the proposed merger of MCT and Mapletree North Asia Commercial Trust (MNACT) may cause Reits thinking of merging to reconsider such plans.

MNACT was trading at a discount to NAV. Under the proposed merger, unitholders of MNACT would receive either new units of MCT or a mix of new MCT units and cash. The total scheme consideration price is S$1.1949 per MNACT unit held.

The price of S$1.1949 reflects MNACT's NAV per unit as at Sep 30, 2021, adjusted to exclude MNACT's DPU for the 6 months to Sep 30, 2021, and to incorporate a valuation of the trust's investment properties and joint venture as of Oct 31, 2021.

While the valuation of MNACT appears fair to the Reit's unitholders, MCT's unitholders did not feel the same way.

MCT's units fell 4 per cent on their first day of trading after the announcement. As of Feb 9, the counter has declined 9 per cent from its last price of S$2 before the proposed merger.

MNACT's unitholders now stand to receive less than the scheme consideration price of S$1.1949 per MNACT unit held.

Reits that want to avoid such a situation should instead consider divesting their portfolios of assets at book value or a premium to book value. Divestment proceeds can be returned to unitholders and the said trusts wound up. There appears to be ample liquidity from various pools of buyers of physical real estate to support the execution of such a strategy.

Last year, Suntec Reit sold strata office units at Suntec Tower One and Suntec Tower Two in Singapore's Central Business District (CBD) for a sale consideration of S$197 million or S$2,510 per square foot of strata area. The sale consideration was 8.9 per cent higher than the independent valuation.

In January, Frasers Logistics and Commercial Trust announced it had agreed to sell mixed-use commercial asset Cross Street Exchange in Singapore's CBD for S$810.8 million. This represents a premium of 28.3 per cent to book value as at end-September 2021.

Of course, resolving the issue of Reits that persistently trade below NAV by selling assets and winding up the trusts can hurt sponsors of the trusts. As the sponsors typically own the external managers of the Reits, they stand to lose very valuable management fees. Besides losing high-quality recurrent income, they would see the size of their funds under management shrink.

Suntec Reit will this year be able to ride the reopening of Singapore's economy. The trust's manager sees its office assets benefiting from more businesses setting up and strengthening their presence here because of Singapore's attractiveness as a technological and financial hub.

As for CLCT, perhaps it can continue to evolve its investment story by adding more logistics assets. The trust's manager wants to grow its exposure to new economy assets such as logistics and business park properties from around 21.9 per cent of assets under management as at end-2021 to 30 per cent over the next 5 years.

Investors can expect the managers of Suntec Reit and CLCT to continue to proactively drive growth in DPU and NAV while vigilantly monitoring borrowings in an environment in which interest rates are likely to rise. But will such efforts help these Reits to eliminate their discounts to NAV?

Should the answer be no and the optimal strategic option be that of selling assets and winding up, let us hope these trusts have the courage to pursue such a course.

The Reit sector wins if strategic actions are taken by trusts that prioritise the interest of unitholders.

* The writer holds units of Suntec Reit, MCT and MNACT.

SPH Media Limited

Quarz Capital decries 'value destructive' offer for MNACT in proposed merger with MCT
Jude Chan
1382 words
10 February 2022
Business Times Singapore
STBT
English
© 2022 SPH Media Limited

ACTIVIST fund manager Quarz Capital Management has taken issue with what it says is a "value destructive" deal for Mapletree North Asia Commercial Trust (MNACT) RW0U to merge with Mapletree Commercial Trust (MCT) N2IU.

In an open letter addressed to the board and management of MNACT, Quarz said the proposed merger price significantly undervalues MNACT and comes at a "massive" discount to its net asset value (NAV) per unit.

"The proposed merger offer price for MNACT is at one of the highest discounts to NAV in the 20-year history of the Singapore real estate investment trust (Reit) market," Quarz said in a letter sent to MNACT on Wednesday (Feb 9) night. "We urge MNACT's board and management to protect unitholders' interest and negotiate for a higher and fairer merger offer."

Quarz claims that it has been approached by "many MNACT unitholders" regarding MCT's "inferior offer" for MNACT.

The fund manager said it advises entities that hold long term investments on behalf of institutions, endowments and families. Together with its affiliates, Quarz said the combined holdings it controls in MNACT would rank it among the top 10 unitholders of the trust.

According to Bloomberg data, Temasek Holdings - through Mapletree Investments - is the top unitholder for MNACT, with a 38.1 per cent stake in the trust. This is followed by Schroders and Vanguard Group, with 4.6 per cent and 2.3 per cent stakes, respectively.

MCT and MNACT on Dec 31, 2021, proposed the merger between the 2 Mapletree Reits to create Mapletree Pan Asia Commercial Trust (MPACT). The merged entity would leapfrog its way to become the third largest Reit in Singapore and rank among the top 10 Reits in Asia by market capitalisation.

The proposed trust scheme would see MNACT unitholders receive a scheme consideration of S$1.1949 for each MNACT unit held - either via 0.5963 new MCT units at an issue price of S$2.0039 apiece, or a combination of 0.5009 consideration units and S$0.1912 in cash.

For illustrative purposes, this means that a unitholder holding 10,000 MNACT units will receive 5,963 MCT units should they elect to receive the scrip-only consideration or 5,009 MCT units and S$1,912 in cash should they elect to receive the cash-and-scrip consideration.

This implies a gross exchange ratio of 0.5963 times.

The Reit managers said then that the scheme consideration price of S$1.1949 was in line with MNACT's NAV.

Since the announcement, however, units of MCT have dived, changing the dynamics of the proposed merger. Units of MCT have fallen 8.5 per cent or S$0.17 - from S$2.00 before the proposed merger announcement - to close at S$1.83 as at Feb 9.

Meanwhile, units of MNACT are trading flat at S$1.11 - the same level it was at before the announcement.

"With MCT's price correction, the implied scheme consideration for MNACT is now at a significantly lower level of approximately S$1.08 to S$1.10, down from S$1.1949," Quarz said.

In addition, Quarz said the implied merger offer is at a "massive discount" of about 12 per cent from MNACT's NAV of S$1.23 in October 2021. "The offer price is at an even larger approximately 14 per cent and approximately 23 per cent discounts to MNACT's NAV of S$1.27 and S$1.41 in March 2021 and March 2020, respectively," it added.

Noting that about a quarter of MNACT's current portfolio had been purchased at around NAV in the last 4 years and have mostly appreciated in value, Quarz called the merger proposal to "sell" the assets at below NAV "both ludicrous and value-destructive".

It added that this substantial discount to NAV is "unprecedented", as nearly all the Reits involved in takeovers and mergers in Singapore over the years had - like MNACT - also traded below NAV.

In its letter, Quarz claimed MNACT unitholders will see declines in distribution per unit (DPU) of between 8.2 per cent and 9.3 per cent after the merger – depending on whether they choose the scrip-only or cash-and-scrip option.

"We believe that MCT has opportunistically taken advantage of MNACT's depressed NAV and unit price to launch the merger offer and benefit from MNACT's potential sizeable DPU and unit price upside," Quarz said.

The fund manager argued that the performance of MNACT's portfolio had been "temporarily disrupted" by the stumble of its largest asset – the Festival Walk mall in Hong Kong.

Festival Walk had suffered extensive damage due to street protests in November 2019. Since it reopened in January 2020 following repairs, the mall has been bogged down by the closure of the Hong Kong-China border due to the Covid-19 pandemic.

"Despite the temporary weakness in Festival Walk, MNACT continues to yield a highly attractive dividend yield of about 6.3 per cent – one of the highest among large-cap Reits with reputable sponsors," Quarz said.

Quarz is expecting MNACT's NAV, DPU and unit price to stage a strong recovery in the second half of 2022 on the back of a number of key catalysts.

"A conservative approximately 10 per cent recovery in rental rates from the reopening of the Hong Kong-China border and the enactment of the government stimulus plans can drive MNACT's DPU to about S$0.073 and dividend yield to around 6.8 per cent," Quarz said.

It added that MNACT's unit price could rerate back to over S$1.20 in H2, with its potential inclusion into the FTSE Nareit Developed and Developed Asia indices at the June 2022 review.

"The potential increase in institutional following and passive buying following the entry into the indices can significantly rerate MNACT's unit price," Quarz said.

"The sizeable value creation benefits of the merger seem mostly skewed in favour of MCT's unitholders," it added. "It is thus disappointing and troubling that the manager of MNACT is pushing for a merger offer at such a sharp discount to NAV and forcing MNACT unitholders to forgo the trust's promising standalone prospects and suffer substantial DPU and NAV reduction."

"The proposed merger between MNACT and MCT is the second largest transaction in Singapore Reit history and will be keenly watched by the investment community," it added.

"Mapletree's treatment of MNACT minority unitholders will serve as a reference by potential new investors to evaluate their investment in Mapletree-managed Reits."

Quarz suggested the exchange ratio for the proposed MCT-MNACT merger should be 0.68 times, instead of 0.5963 times.

It noted that the scheme issue price of MCT units at S$2.0039 is a premium to MCT's NAV. "An appropriate issue price for MCT should be S$1.82 per unit and a scrip-only unit exchange ratio in excess of 0.68 MCT unit for 1 MNACT unit," Quarz said.

This is not the first time Quarz is protesting valuations in a Reit merger.

Together with Black Crane Capital, Quarz led minority unitholders to scuttle the proposed merger between ESR-Reit J91U and Sabana Reit M1GU in 2020. It had argued then that the valuation accorded to Sabana Reit in the transaction was too low.

In response to queries by The Business Times (BT), the manager of MCT said that the merits of the proposed merger are articulated in the joint announcement issued on Dec 31.

"We note that Quarz acknowledges the deal rationale, as stated in the joint announcement made on Dec 31, 2021, and sees value in MNACT," the Reit manager said. "Unitholders should also note that listed Reits are required to comply with regulatory requirements and safeguards which are in place to protect the interests of minority unitholders."

BT has also reached out to the manager of MNACT for comment.

SPH Media Limited

Companies & Markets
MARK TO MARKET; Quarz's campaign may help rather than hinder the proposed merger of MCT and MNACT
Ben Paul
1152 words
14 February 2022
Business Times Singapore
STBT
English
© 2022 SPH Media Limited
Its insistence that MNACT is being undervalued might - perversely - mollify disgruntled MCT unitholders inclined to vote against the merger

THE proposed merger of Mapletree Commercial Trust (MCT) and Mapletree North Asia Commercial Trust (MNACT) made headlines again this past week as Quarz Capital Management urged unitholders of MNACT to demand better terms or vote against the deal.

Quarz grumbled in a letter to MNACT's manager dated Feb 9 that the merger values MNACT at discount to its net asset value (NAV), and that the transaction will destroy value for unitholders.

This is an interesting twist. When the proposed merger of the two Mapletree real estate investment trusts (Reits) was announced on Dec 31, the consensus in the market seemed to be that the terms of the deal favoured unitholders of MNACT over those of MCT.

Will Quarz's campaign now rally MNACT unitholders to oppose the merger too? Or, could Quarz's insistence that MNACT is being undervalued - perversely - mollify disgruntled MCT unitholders inclined to vote against the merger?

Under the proposed merger, unitholders of MNACT will exchange each unit they own for 0.5963 of a new MCT unit; or 0.5009 of a new MCT unit plus S$0.1912 in cash.

Based on MCT's closing price before the announcement of S$2.00, each unit of MNACT was effectively being valued at about S$1.193. This was some 7.5 per cent more than MNACT's closing price before the announcement of S$1.11.

It was also very close to MNACT's NAV per share as at Sep 30, 2021, of S$1.1949 - adjusted for H1 FY2022 distribution per unit (DPU) paid on Dec 24, 2021, and the valuation of MNACT's assets as at Sep 30, 2021, as announced on Dec 31, 2021.

On Jan 3, the first post-announcement trading day, MNACT climbed 3.6 per cent to close at S$1.15 while MCT fell 4 per cent to close at S$1.92.

Since then, MCT has fallen further and pulled MNACT down with it. On Friday (Feb 11), MCT closed at S$1.83 while MNACT closed at S$1.09.

With this correction in MCT's market price, Quarz now wants the terms of the merger adjusted such that the implied valuation of MNACT is pushed back up towards its NAV. Specifically, Quarz has suggested that each unit in MNACT be exchanged for 0.68 of a new unit in MCT.

But wouldn't such a change in the merger terms only spark a further sell-off in MCT? And, wouldn't that make it even harder to convince already sceptical MCT unitholders to vote for the deal?

Bullish on MNACT

Quarz does not accept that MCT's market price sank because of the proposed merger alone.

Quarz said last week that rising interest rates have weighed heavily on the market value of several Singapore-listed Reits that were trading at compressed DPU yields - including Mapletree Logistics Trust, Mapletree Industrial Trust, Parkway Life Reit and Keppel DC Reit.

Quarz also suggested the market might be realising MCT has relatively limited growth potential, and its units were simply overvalued compared with those of its peers.

Before the merger was unveiled, MCT was trading at an annualised H1 FY2022 DPU yield of 4.4 per cent and a 16.3 per cent premium to its NAV as at Sep 30, 2021.

On the other hand, MNACT was trading at an annualised H1 FY2022 DPU yield of 6.2 per cent and a 12.3 per cent discount to NAV as at Sep 30, 2021.

MCT's superior market valuations compared to MNACT seemed justified. For one thing, MCT had delivered higher annualised growth in its DPU and NAV per share than MNACT since their respective initial public offerings.

MCT also achieved a positive 2.3 per cent portfolio rental reversion in H1 FY2022. Its office and business park assets saw a 1.5 per cent reversion. Its retail properties - including its flagship asset, VivoCity - benefited from a 3.5 per cent rental reversion.

By contrast, MNACT still seems to be reeling from the impact of Hong Kong riots in 2019 and the pandemic that began in 2020. In particular, the shopping mall at Festival Walk suffered rental reversions of negative 30 per cent in H1 FY2022.

Quarz insists things are looking up for Festival Walk though. The asset manager is betting the Covid-19 pandemic will continue waning, and the Hong Kong-China border will soon reopen.

The way Quarz sees it, MCT is acting opportunistically by proposing a merger with MNACT now. "We are confident and bullish that MNACT's NAV, DPU and unit price will stage a strong recovery from H2 2022," Quarz said in its letter of Feb 9.

Sufficient support?

The big question is whether Quarz will be able to garner sufficient support from fellow MNACT unitholders to block the merger.

So far, Quarz has only been willing to say that it is among the top 10 unitholders of MNACT.

MNACT's last annual report shows that its sponsor group Mapletree Investments had a deemed interest in 37.6 per cent of its units as at May 28 2021.

The merger is to be effected by a scheme of arrangement. Amendments to MNACT's trust deed to facilitate the scheme require 75 per cent support of all units voting at an extraordinary general meeting.

The scheme itself needs the support of the majority of unitholders holding 75 per cent of the units voting at the scheme meeting. Mapletree Investments will abstain from voting at the scheme meeting.

Neither the manager of MCT nor the manager of MNACT seem too concerned about Quarz's campaign though.

MNACT's manager said last week that it "appreciates the perspectives and feedback of unitholders, and notes that Quarz regards positively the strategic rationale of the proposed merger".

MCT's manager hinted that Quarz might be helping it dispel the notion that acquiring MNACT would be detrimental for MCT's unitholders. "We note that Quarz acknowledges the deal rationale, as stated in the joint announcement made on Dec 31, 2021, and sees value in MNACT."

It would be ironic if Quarz's campaign ultimately does more to persuade MCT unitholders to support the merger than it does to convince MNACT unitholders to vote against the deal.

* The writer owns units in Mapletree North Asia Commercial Trust.

The proposed merger of Mapletree Commercial Trust (MCT) and Mapletree North Asia Commercial Trust (MNACT) made headlines again this past week as Quarz Capital Management urged unitholders of MNACT to demand better terms or vote against the deal.

SPH Media Limited

its just next to their existing property

Just wondering if anyone here uses ibkr to purchase sg REITs?
Is it better than moo, tiger syfe etc?