Soilbuild Reit units surge 5% on 'fair' privatisation offer

Singapore

ANALYSTS largely showed support for the privatisation offer of Soilbuild Business Space Reit by Soilbuild Group's executive chairman Lim Chap Huat and Blackstone Real Estate via a trust scheme of arrangement, announced on Monday.

Units in the Reit rose as high as 5.5 per cent to hit an intra-day high of S$0.54 after its trading halt was lifted post-lunch. They ended the day 4.9 per cent higher at S$0.535, with 11.8 million units changing hands.

The scheme consideration is S$0.55 in cash per unit, although this will be reduced by the amount of any distribution declared by the Reit for Q4 2020 and Q1 2021. The offeror Clay Holdings III is indirectly owned by Mr Lim and Blackstone Real Estate. Mr Lim and his three sons owned a combined 30.3 per cent stake in the Reit as at Dec 14.

The proposed consideration represents a premium of 34.5 and 53.2 per cent over the volume-weighted average price for the one- and six-month period up to Aug 31, respectively. It also implies a price to adjusted net asset value (NAV) - following a portfolio revaluation - multiple of 0.98 to 1.0 times.

The main motivation for the privatisation was the Reit's limited ability to make acquisitions that are accretive to its distribution per unit (DPU), partly due to its high DPU yield. That also hindered the Reit from bidding competitively for third-party assets. A delisting will thus allow the manager to not be constrained by the 50 per cent leverage limit, and provide more flexible access to capital markets.

Jefferies analyst Krishna Guha called the offer price "fair" compared to the Reit's book value. He also noted that the current sponsor of the Reit, Soilbuild Group, is not selling its stake.

Soilbuild Reit's units were just about flat year-to-date before the privatisation announcement, compared to an approximately 8 per cent drop in the FTSE ST Reit Index this year, but since 2016, it has generally underperformed the Straits Times Index and FTSE ST Reit index.

This was despite efforts to expand into Australia and dispose of some Singapore assets. Its unit price remained low and now faces more uncertainty. In Monday's briefing, Roy Teo, chief of the Reit manager, said that the impact of Covid-19 on the Reit's performance this year up until Q3 has been muted due to the government and landlord's grants to the tenants.

"The uncertainty really starts from Q4 towards next year and can (come from) people working from home, in the office and business park environment."

He added that there have been times that the manager tried to acquire quality assets despite the lack of DPU accretion, and unitholders showed their disapproval by withdrawing support in the Reit's preferential offering announced in August 2019. The offer ended up being only 82 per cent filled.

"My take is investors still want yield accretion as a key priority. That is very difficult for us to grow... It is very difficult for us to move forward with any acquisition moving ahead."

To aggravate matters, the Reit has a relatively low debt headroom of about S$70 million, assuming a 40 per cent loan-to-value ratio, which is its target leverage level. This has hampered its ability to grow its portfolio.

Mr Lim, who is also co-founder of Soilbuild Group, said that the group has considered many options and discussed potential transactions, including a privatisation, with parties comprising private equity firms, real estate funds and developers across Hong Kong, China, Australia and the United States over the past few years. Merger proposals have been considered as well.

"We believe that this proposal by Blackstone presents the best option for minority unitholders based on the offers received, representing the highest price received," he said. It is also the "most credible" and offers the "greatest deal certainty in terms of timing and execution", backed by Blackstone's track record of privatisations. This will be Blackstone's second privatisation of a real estate trust in Singapore; its first was of Croesus Retail Trust in 2017 for about S$900 million.

In conjunction with the trust scheme, Soilbuild Reit has also signed a deal with entities of Blackstone to dispose of its Australian assets. With this, the Lim family will no longer hold any stake in the Australian assets upon disposal. The Australian assets disposal will also not reduce the scheme consideration.

The proposed trust scheme will be voted on by unitholders and is expected to be effective by March 2021.

The manager plans to engage with substantial unitholders to gain their support for the deal. Some of the substantial minorities include Schroders, Vanguard, BlackRock and Deutsche Asset Management.

Citigroup Global Markets Singapore, DBS Bank and United Overseas Bank are handling the deal, while KPMG Corporate Finance will advise Soilbuild Reit's independent directors on the trust scheme.