ESR-Reit and Sabana Reit propose merger

A UNION may be on the cards for ESR-Reit and Sabana Shari'ah Compliant Industrial Real Estate Investment Trust (Sabana Reit), the latest in a string of consolidations in the Singapore real estate investment trust (S-Reit) universe.

The two trusts on Thursday announced a proposed merger, by way of a trust scheme of arrangement, under which ESR-Reit will acquire all units of Sabana Reit in exchange for new units in ESR-Reit.

This comes eight months after activist fund Quarz Capital Management argued that ESR Cayman's cross-ownership of the managers of both Reits puts Sabana at a disadvantage when the two trusts' investment mandates overlap. Quarz called for a merger then, to resolve this issue.

The enlarged entity will become the fourth-largest industrial S-Reit by market share based on gross floor area (GFA), the managers said on Thursday.

By way of illustration, if the scheme becomes effective, each Sabana unitholder will receive 94 new ESR-Reit consideration units for every 100 Sabana units held.

The illustrative issue price is S$0.401 per new ESR-Reit consideration unit, and the gross exchange ratio is 0.94 times.

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This will translate to Sabana unitholders receiving an implied scheme consideration of S$0.377 per Sabana unit. The implied aggregate scheme consideration is about S$396.9 million.

Following the merger, the sponsor, ESR Cayman, is expected to hold about 12.2 per cent of the total issued units in the enlarged Reit.

Adrian Chui, chief executive officer (CEO) and executive director of ESR-Reit's manager, said the merger is in line with its strategy to establish ESR-Reit as a leading pan-Asian industrial Reit.

The enlarged Reit will have a market capitalisation of about S$1.8 billion and a free float of some S$1.3 billion.

This larger market capitalisation and free float, as well as higher trading liquidity, will help to facilitate its potential inclusion in key indices, which will in turn provide the enlarged Reit with access to a wider and more diversified investor base and increased analyst coverage, Mr Chui added.

"Moreover, the greater scale of the enlarged Reit diversifies our portfolio, reduces risks and enhances our resilience, especially in view of the Covid-19 pandemic."

The potential merger also offers the possibility for the trusts to reap "significant" operational synergies and realise upside through portfolio lease-up, asset enhancement initiatives and redevelopment opportunities, Mr Chui said.

The enlarged Reit will have an expanded network of 75 assets with a total GFA of about 19.2 million square feet across Singapore.

Donald Han, CEO of Sabana Reit's manager, said that with ESR Cayman as a developer-sponsor, the enlarged Reit will have access to a pipeline of assets worth over US$22 billion "in a market where quality logistics properties are increasingly scarce".

The merger will be "transformational" for Sabana Reit, he said, adding that it will make the trust more competitive in the industrial S-Reit space.

"The larger asset and tenant base will put us in a stronger position to undertake initiatives to improve and rejuvenate the portfolio at lower costs with minimised execution risks," he noted.

Back in 2017, both Reits had entered into talks with regards to a potential merger, but discussions fell through. ESR Reit went on to merge with Viva Industrial Trust (VIT). Commenting on the timing of the present deal with Sabana Reit, Mr Chui said in a teleconference on Thursday: "At that point in time, (VIT) was a better strategic fit for us. We did not have business park exposure." With ESR Reit's larger size currently, as well as headwinds linked to Covid, it is a good time for both Reits to come together, which would be beneficial for both unitholders, he added.

Mr Han pointed out that the two Reits also now share a common sponsor, which was not the case in 2017. He went on to say: "Our vision is aligned. And in the recession we're experiencing right now, it makes sense to join forces to become bigger."

The proposed merger will be accretive to the distribution per unit on a pro forma basis for ESR-Reit unitholders by 3.5 per cent and for Sabana unitholders by 12.9 per cent.

Mr Chui also said that an enlarged entity would give the two Reits more balanced exposure to segments such as logistics, business parks and high-specs assets. "In the new normal of Covid-19 and increasing US-China tensions, industrialists are relooking at their global supply chain plans," he said, adding that logistics and high-specs will likely be in greater demand over the next few years. "We can now do cross-marketing of our properties and space together."

ESR-Reit's trustee has entered into a S$460 million unsecured loan-facility agreement in connection with the merger and scheme, its manager announced in a separate filing on Thursday.

For the loan, the mandated lead arrangers and bookrunners are Maybank's Singapore branch, RHB Bank Berhad, Sumitomo Mitsui Banking Corp's (SMBC) Singapore branch and United Overseas Bank (UOB). The original lenders are Maybank's Singapore branch, RHB Bank Berhad, SMBC's Singapore branch and UOB; the facility agent is UOB.

The scheme will require, among others, the approval of Sabana unitholders for the amendments to the Sabana Reit trust deed and the scheme, at an extraordinary general meeting and a scheme meeting to be convened.

In addition, a Singapore court order is required to convene the scheme meeting and to sanction the scheme, if it is approved at the scheme meeting.

ESR-Reit will need to seek its unitholders' approval at an EGM to be convened for the merger and issue of the consideration units.

In respect of the merger and the scheme, Citigroup Global Markets Singapore, Maybank Kim Eng Securities, RHB Securities Singapore and United Overseas Bank are the financial advisers to the ESR-Reit manager, while Credit Suisse (Singapore) and HSBC Singapore Branch are the financial advisers to Sabana Reit's manager.

In November last year, following Quarz's call for the merger, ESR Cayman said it was aware of the possible conflicts of interest that may arise between the two Reits, and had put in place "strict internal controls".

Units of Sabana Reit closed flat at S$0.36 on Wednesday. ESR-Reit units finished unchanged at S$0.39. Both called for trading halts on Thursday before the market opened, pending the release of the merger announcement and their financial results.