Mapletree's support for MCT-MNACT merger may raise expectations of other Reit sponsors

BEN PAUL

WHEN Mapletree Commercial Trust (MCT) and Ma-pletree North Asia Commercial Trust (MNACT) unveiled plans to merge 3 months ago, this column asserted the deal only made sense from the perspective of their sponsor Mapletree Investments.

This past week, Mapletree Investments - which is a privately held unit of Temasek Holdings - doubled down on its support for the deal by agreeing to stump up as much as S$2.2 billion in cash in order to mollify disgruntled unit-holders of MNACT and MCT.

This move has probably increased the likelihood of the merger succeeding, but it might result in investors expecting more of the sponsors of other real estate investment trusts (Reits) pursuing similar deals.

It could also lead to calls for active intervention by sponsors in repositioning Reits that fail to garner decent market valuations or deliver high enough returns.

Under the terms of the merger, first announced on Dec 31, unitholders of MNACT are to receive a consideration of S$1.1949 per unit - which is equivalent to the Reit's adjusted net asset value (NAV) as at Sep 30, 2021.

Unitholders of MNACT can elect to receive this consideration in the form of 0.5963 of a new MCT unit priced at S$2.0039; or 0.5009 of a new MCT unit priced at S$2.0039 plus S$0.1912 in cash.

The merger was presented as an initiative of the managers of the 2 Reits, though the deal plainly had the support of their sponsor - in particular, Mapletree Investments provided an undertaking to accept the scrip-only consideration for its stake in MNACT.

On Mar 21 - in the wake of mounting investor resistance to the merger - the managers of MCT and MNACT announced that unitholders of MNACT will be given the further option of receiving the consideration of S$1.1949 per unit entirely in cash.

MCT will raise the additional S$2.2 billion of cash required for this third consideration option through a preferential offering of up to 1,094 million new units priced at S$2.0039 each.

To make it all work, Mapletree Investments has provided an undertaking to subscribe for MCT's entire S$2.2 billion preferential offering. Following the merger and preferential offering, Mapletree Investments' stake in MCT will rise from 32.61 per cent to as much as 57.09 per cent.

Notable precedent

For investors, the S$2.2 billion commitment from Mapletree Investments has put a new complexion on the merger.

For starters, the all-cash consideration option has set a floor market price for MNACT units.

Meanwhile, Mapletree Investments' commitment to fully back MCT's preferential offering means the enlarged MCT will be spared any incremental debt financing as a result of the all-cash consideration.

Just before the all-cash consideration option was announced, MCT had closed at S$1.89 - which was 5.7 per cent below the S$2.0039 at which its units are being valued under the merger.

Reflecting MCT's sagging market price, MNACT closed at S$1.12 - which was 6.3 per cent below the S$1.1949 at which its units are being valued under the merger.

Since the all-cash consideration option was unveiled, the market price of MNACT units has jumped 9.8 per cent while the market value of MCT units has held steady.

It seems very likely that Mapletree Investments' support for the merger of MCT and MNACT will be cited as a notable precedent when similar deals are proposed in the future.

Unitholders of target Reits are bound to demand an all-cash consideration option in order to protect themselves from being paid in overvalued units of the acquiring Reit.

Indeed, the support Mapletree Investments has demonstrated may also inform investor expectations on the role sponsors can play in repositioning their struggling Reits.

The all-cash consideration for MNACT units, combined with Mapletree Investments' backing of MCT's S$2.2 billion preferential offering, is akin to the sponsor making a cash offer for MNACT and then injecting it into MCT in exchange for new units priced at a premium.

Is it too much to ask that the sponsors of other Reits struggling to trade above their NAVs - including CapitaLand China Trust, Keppel Pacific Oak US Reit and Sabana Industrial Trust - consider taking them private in order to reposition and enhance their portfolios before bringing them back to market?

What's next?

While the all-cash consideration might have appeased disgruntled unitholders of MNACT, it could be as long as 2 months before unitholders of MCT and MNACT actually vote on the proposed merger.

This is arguably a very long time in the market, given the post-pandemic reopening, shifting inflation trends and geopolitical uncertainty.

In order to ensure the merger ultimately succeeds, the manager of MCT needs to build stronger investor support for the Reit by explaining exactly how its growth will be enhanced after subsuming MNACT.

The manager of MCT has already said that it is stabilising and improving the performance of Festival Walk in Hong Kong; considering selective divestments in Japan; and looking for opportunities to expand in South Korea.

In China, the manager of MCT is trying to keep occupancy levels up while hunting for opportunities to acquire more offices and business parks.

Back in Singapore, the manager of MCT is looking into acquiring additional assets from its sponsor to entrench its position in the Greater Southern Waterfront area.

More than anything else, setting the market price of its units on a gradually rising trajectory - such that it begins pulling MNACT higher too - is probably the most effective way for the manager of MCT to ensure that its unitholders, as well as unitholders of MNACT, vote for the merger when the time comes.

The writer owns units in Mapletree North Asia Commercial Trust and CapitaLand China Trust.