CapitaLand eyes positive re-rating for enlarged Ascott Reit-BT

Singapore

SOONER than expected, the union of CapitaLand's two hospitality trusts has been set in motion.

Marriage has been in the air ever since CapitaLand agreed to acquire Ascendas-Singbridge in January, and Ascott Residence Trust (Ascott Reit) is making its offer for Ascendas Hospitality Trust (A-HTRUST) against the backdrop of a Singapore Reit rally that has pressed on all year long.

Ascott Reit is offering to acquire all of A-HTRUST's units via a trust scheme for S$1.24 billion in cash and stock. It will pay S$61.8 million in cash and the rest in 902.8 million units of the new stapled Ascott Reit and Ascott Business Trust (Ascott Reit-BT).

In other words, each A-HTRUST unit will be swapped for 5.43 Singapore cents in cash and 0.7942 new Ascott Reit-BT units issued at S$1.30.

The total consideration is based on a gross exchange ratio of 0.836 times, derived by dividing the S$1.02 net asset value (NAV) per unit of A-HTRUST by Ascott Reit's NAV per unit of S$1.22.

Beh Siew Kim, chief executive of the manager of Ascott Reit, emphasised on Wednesday that the deal is "NAV-neutral" for both parties.

On a pro forma basis, A-HTRUST unitholders would see a 1.8 per cent accretion to distribution per unit (DPU), while Ascott Reit unitholders would see an accretion of 2.5 per cent, she added.

A-HTRUST units closed 6.5 cents or 6.67 per cent higher at S$1.04 on Wednesday, as punters pushed the units closer to their S$1.0868 consideration value under the trust scheme.

But Ascott Reit units pulled back from a six-year high, closing three cents or 2.29 per cent lower at S$1.28.

A-HTRUST was trading at a slight discount to book prior to the announcement, whereas Ascott Reit traded at a slight premium. While Ascott Reit has a historical payout ratio of 100 per cent, A-HTRUST retained 7 per cent of its distributable income in its last two financial years.

OCBC Research analyst Deborah Ong told The Business Times: "Investors on either side of the aisle should concentrate on what the fair value of the entire merged entity could be, and then assess - given the cash consideration and security conversion ratio - whether the deal benefits them."

It would be misleading to make a decision based on the S$1.30 "issue price" alone, she noted, because in theory, if the issue price were raised and the gross exchange ratio lowered in proportion, the effective terms of the agreement could remain the same.

As far as CapitaLand and its trust managers are concerned, bigger is better.

Tan Juay Hiang, chief executive of the A-HTRUST managers, told analysts on Wednesday: "Two A's coming together can only give you triple-A."

Ascott Reit's merger with A-HTRUST will help it defend the title of largest hospitality trust in the Asia-Pacific, with total assets of S$7.6 billion and a market cap of S$4 billion.

The combined entity would also qualify for inclusion in the FTSE EPRA Nareit Developed Index, which the managers hope will lead to a positive re-rating.

Most market players felt the deal was fair. Quarz Capital Management chief investment officer Jan Moermann said: "We commend CapitaLand and Ascott on the swift and decisive action taken to rationalise the mandate overlap between the two hospitality trusts."

Mr Moermann, who owns A-HTRUST, said he would have preferred a higher cash payout: "Nevertheless, with the lower aggregate leverage of 36.9 per cent, the enlarged entity has a substantial runway to make further yield-accretive acquisitions to the benefit of all unitholders."

Ascott Reit last traded at a 5.7 per cent forward yield and A-HTRUST, at 5.8 per cent.

The merger is subject to votes by unitholders at meetings scheduled for October. The deal is expected to be completed in December.

To show its support for the deal, Ascott Reit's manager is waiving half its acquisition fee entitlement. Under the trust deed, it is entitled to 1 per cent of the enterprise value of any real estate acquired.

The Ascott will be the sponsor for the merged Ascott Reit-BT, which will retain its global mandate. A-HTRUST's management team will either join the sponsor's team or Ascott Reit's.

Meanwhile, other CapitaLand counters were in play on Wednesday. CapitaMall Trust units were up 3.03 per cent, Ascendas India Trust units rose 2.96 per cent, and CapitaCom Trust units climbed 2.77 per cent. Some punters are hoping that CapitaLand could be dropping more assets into these counters, like it did recently with CapitaLand Retail China Trust.

READ MORE: Merger of Ascott Reit, Ascendas Hospitality Trust makes sense