Sias delves into the MCT-MNACT merger deal

THE managers of Mapletree Commercial Trust (MCT) and Mapletree North Asia Commercial Trust (MNACT) took only 2 days to respond to questions about their proposed merger from the Securities Investors Association (Singapore), or Sias.

This quick turnaround might have been because many of the responses provided were related to the merits of the merger, which the the managers of MCT and MNACT have already been at pains to explain to the market.

Yet, their answers (and non-answers) to some of the questions from Sias, when carefully dissected, underscore why mergers of real estate investment trusts (Reits) that have common sponsors are not entirely about what's best for unitholders.

In a letter to MCT's manager dated Feb 21, Sias said the proposed merger came as a surprise to some unitholders, as they had invested in MCT for exposure to the "stable and resilient" Singapore market

In order to help investors better understand the merger, Sias posed a number of questions to MCT's manager.

The first of these was: Is MCT acting outside its mandate to acquire MNACT, which has assets in North Asia?

On Feb 23, MCT's manager responded by stating that the enlarged Reit - which will be renamed Mapletree Pan Asia Commercial Trust (MPACT) - will indeed have an expanded investment mandate, allowing it to invest in key gateway markets in Asia.

MCT's manager noted that the Reit's trust deed allows it to change its investment policies from time to time, so long as it gives notice of the change to MCT's trustee and unitholders not less than 30 days beforehand. MCT's manager added that notice of its intention to expand the investment mandate was given when the merger was announced on Dec 31.

Then, MCT's manager said this: "In any event, the expansion of the investment mandate will only take place if the proposed merger is approved" by the respective unitholders of MCT and MNACT.

Why is this seemingly mundane statement important? In its responses to other questions from Sias, MCT's manager said the Reit actually faces limited growth prospects in Singapore.

"With the city having relatively limited transaction volumes for office and retail assets as compared to other key gateway markets in Asia, opportunities for growth remain sparse for us," it said.

So, why is MCT's manager only prepared to widen its investment mandate to facilitate the proposed merger with MNACT? Why does it not hunt for North Asian assets on its own?

MCT's manager said merging with MNACT would be much easier than buying individual assets in North Asia and trying to build an operational team from scratch.

MCT's manager did not point out that venturing into North Asia on its own might eventually put it in competition with MNACT for assets. And, with the superior market valuation of its units, MCT might be more competitive than MNACT in raising funds and making acquisitions.

Sceptical investors

This issue of overlapping mandates is precisely what ESR-Reit and Ara Logos Logistics Trust (ALog Trust) are struggling to resolve through their own proposed merger.

But investors are now questioning whether Reit mergers are really in their best interest, and demanding alternatives.

In January, the managers of ESR-Reit and ALog Trust were forced to revise the original terms of their merger after 2 proxy advisory firms recommended that unitholders of ALog Trust vote against the deal.

The proxy advisory firms - Institutional Shareholder Services (ISS) and Glass Lewis - said in separate reports that the merger was not compelling from the perspective of ALog Trust's unitholders.

They also questioned the "process" aspect of the deal. ISS said ALog Trust could have "shopped around" for alternative transactions.

"A robust sale process would offer comfort to unitholders that alternatives were evaluated and deemed inferior," ISS added.

In a similar vein, Sias asked MNACT's manager in a letter dated Feb 21 if it is actively seeking competing bids for MNACT or signalling to the market that it is prepared to consider superior offers.

On Feb 23, MNACT's manager said the proposed merger with MCT is not a sale of assets.

"This is a strategic merger, with significant long-term benefits including size, scale and resilience, and enables MNACT unitholders to stay invested in a larger, more diversified Reit with growth potential."

MNACT's manager also said it has agreed to not seek or solicit competing bids for the duration of the implementation agreement, though it will consider any third party offer that happens to come its way.

It seems unlikely, however, that a third party would incur the effort and expense of making an offer for MNACT without a clearly expressed invitation.

More activism?

This column has previously asserted that Reit managers and sponsors are not likely to easily give in to demands that they solicit alternative deals, as it could result in them losing a chunk of their assets under management.

Yet, as the Reit market develops and investors become increasingly savvy, pressure is unlikely to ease.

Given the responses provided by MCT's manager to Sias last week, some MCT unitholders may well be wondering why they may have to live with sub-optimal growth prospects simply because they happen to not like the terms of the merger.

If MNACT is unable to garner a sufficiently strong market valuation, shouldn't its manager consider selling its portfolio in order to realise value for MNACT unitholders?

The scrutiny that Reit mergers are drawing could eventually spread to other aspects of their affairs.

Activist investor Quarz Capital Management, which is demanding better merger terms for unitholders of MNACT, is also rallying unitholders of Sabana Industrial Reit to vote against a number of resolutions that are likely to be put forward at its upcoming annual general meeting.

Quarz waged a successful campaign in 2020 to scupper Sabana Reit's merger with ESR-Reit. Since then, it has pressed Sabana Reit's manager on a number of matters.

At Sabana Reit's upcoming EGM, Quarz wants to block the endorsement of a recently appointed independent director, the mandate to issue new units, and the dividend reinvestment plan.

It would not be a bad thing if more investors were inspired to adopt a similarly activist approach in engaging locally listed companies and Reits.