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REITS CONSOLIDATION

CCT, CMT unveil plan for Reit juggernaut in S$8.27b merger

Proposal is fifth merger in sector since 2018; emergent entity will be Singapore's biggest Reit and Asia-Pacific's third largest

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CapitaLand Mall Trust Management CEO Tony Tan (left) and CapitaLand Commercial Trust Management CEO Kevin Chee (right) at the briefing on Wednesday on the proposed merger of their companies.

Singapore

TWO CapitaLand S-Reits (Singapore real estate investment trust) are joining the sector's consolidation trend with a deal that if successful will propel the emergent entity to be Singapore's biggest Reit and Asia-Pacific third largest.

The managers of CapitaLand Commercial Trust (CCT) and CapitaLand Mall Trust (CMT) on Wednesday announced that the two Reits are looking to merge via a S$8.27 billion cash and stock deal.

This is the fifth Reit merger to be announced since 2018. The others were ESR-Reit and Viva Industrial Trust, OUE Commercial Reit and OUE Hospitality Trust; Ascott Residence Trust and Ascendas Hospitality Trust; as well as Frasers Logistics & Industrial Trust and Frasers Commercial Trust.

Under the proposed trust scheme of arrangement, CMT will acquire each CCT unit for S$0.259 in cash and 0.72 new CMT unit at an issue price of S$2.59 apiece. This works out to a total of S$2.1238 per unit, which implies a gross exchange ratio of 0.82 times. The total consideration comprises 88 per cent in new CMT units and 12 per cent in cash.

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The deal is expected to be accretive to the distribution per unit (DPU) for both trusts. For illustration purposes, the pro-forma DPU accretion will be about 1.6 per cent for CMT and 6.5 per cent for CCT.

The merged entity, to be named CapitaLand Integrated Commercial Trust (CICT), will have a market cap of S$16.8 billion and a combined property value of S$22.9 billion, making it the third largest Reit in the Asia-Pacific region, on the heels of Hong Kong's Link Reit (S$30.2 billion as at Jan 21, 2020) and Australia's Scentre Group (S$19.1 billion). Both are retail Reits.

As the largest S-Reit, it will also be CapitaLand's primary investment vehicle for commercial real estate in Singapore and other developed markets.

The deal will merge CMT's portfolio of 15 downtown and suburban malls in Singapore, with CCT's portfolio of 10 office assets comprising eight in Singapore and two in Frankfurt, Germany.

Upon completion of the merger, CICT will be able to undertake up to S$4.6 billion worth of overseas acquisitions in developed countries, while remaining predominantly Singapore focused.

The total cost of the proposed merger is estimated at S$8.27 billion. This comprises S$999.1 million in cash consideration and about 2.78 billion new CMT units issued at S$2.59 apiece, to be paid to CCT unitholders. There is also a S$55.6 million acquisition fee, payable wholly in new CMT units to CMT's manager, and S$22 million in professional and other fees.

Wednesday's announcement of the proposed deal caught many by surprise. Although market observers had expected Reit consolidation to remain a theme for this year, they were expecting activity to come from the smaller Reits seeking index inclusion instead.

When asked if the management has considered an internal management model for the Reit, Kevin Chee, chief executive of CCT Management, replied that the current structure works for both Reits, as well as the S-Reit space, so "there is no real reason to change that at this point in time".

Speaking at a media and analyst briefing on Wednesday, he said: "We don't face the constraints that people believe an externally managed Reit has. This has not been an issue for us, so we don't believe this is something we will consider in the near term."

Management was also coy about "who will be boss after the merger?", a question posed by one analyst. They said the issue will be addressed "in due course" once the transaction is approved.

In a research note on Wednesday, Jefferies Singapore equity analyst Krishna Guha noted that the proposed merger continues the trend of consolidation wave in Singapore's Reit space.

He expects the two S-Reits to benefit from scale and diversification, and possibly cushion each other from adverse sub-sector trends such the anaemic retail spend, e-commerce disruption, and a slowdown in co-working leasing demand.

"That said, we are mindful that the current overlap between the portfolios is only limited to Raffles City Singapore, which is about 15 per cent of combined portfolio value," Mr Guha added. "Unless there are more such integrated development plans, the two Reits have limited overlap, with CCT owning central business district office assets and CMT operating mostly suburban malls. As such, operational synergies may be limited to begin with."

Jefferies Singapore has issued a "buy" rating for CCT, with a price target of S$2.30. Similarly, Morgan Stanley has an "equal-weight/attractive" recommendation on CCT, with a target price of S$2.10.

Meanwhile, RHB analyst Vijay Natarajan has a "neutral" call on CMT, with a target of S$2.38, pending the approval of the proposed merger. "With size, scalability and diversification being critical factors driving Reit performance, we recommend both unitholders to accept the offer."

Additionally, the merged entity will also have greater funding capacity with a debt headroom of S$2.9 billion, and the flexibility to undertake larger redevelopments.

"The enlarged development headroom of S$2.4 billion to 10 per cent development limit and S$6 billion to 25 per cent for its own assets seems to signal an intention to take on more development projects," said Macquarie Capital Securities (Singapore) analysts, Derrick Heng and Ong Hwee Yee. They added: "With the evolving real estate landscape, CICT could redevelop its existing retail or office assets into new integrated developments. The redevelopment of Funan from an underperforming retail mall into an integrated development is a prime example."

Both CMT and CCT are expected to hold their respective extraordinary general meetings and the scheme meeting in May 2020. If all goes well, the trust scheme will come into effect in June 2020; CCT unitholders will be paid in the same month, and CCT will also be delisted then. The deal is expected to be completed before the end of the second quarter this year.

Both Reits requested trading halts on Wednesday morning before the market opened. CCT units closed two Singapore cents or 0.9 per cent lower at S$2.13 on Tuesday, and CMT units was down two Singapore cents or 0.8 per cent to S$2.59. CapitaLand shares closed at S$3.89, up five Singapore cents, or 1.3 per cent on Wednesday. CapitaLand will retain its sponsor stake of about 29.1 per cent in the merged entity if the deal goes through.

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