2019 is gearing up to be the year of REIT consolidations based on the prevailing belief that “bigger is better”.
The latest proposed merger is between Frasers Logistics & Industrial Trust (SGX: BUOU), or FLT, and Frasers Commercial Trust (SGX: ND8U), or FCOT, which will happen via a trust scheme.
This news comes hot on the heels of three other mega REIT mergers that have occurred this year alone.
What’s at stake
FCOT’s portfolio of six properties is shown below.
Source: FLT-FCOT Merger Presentation Slides
In a nutshell, FLT will acquire all units of FCOT for a total consideration of S$1.68 per FCOT unit, based on S$0.151 in cash per FCOT unit and 1.233 new units of FLT.
The arrangement implies a gross exchange ratio of 1.355x based on an issue price of S$1.24 per unit of FLT ($0.151 divided by $1.24 equals to 0.122. Add this to 1.233 to get 1.355). The consideration of S$1.68 for FCOT is a slight premium of 3.5% to its one-month volume-weighted average price.
This premium can be viewed as icing on the cake, considering that FCOT had already clocked a strong performance of over 20% year-to-date.
Of course, each REIT merger needs to be separately assessed on its own merits. As investors, we cannot assume that a bigger REIT is always better.
The sponsor for both REITs is Frasers Property Limited (SGX: TQ5), or FPL. FPL has proposed this merger as a way to create an enlarged REIT with more muscle and recognition in the financial markets. In addition to this merger, the enlarged REIT also proposes to acquire the remaining 50% interest in Farnborough Business Park for a sum of 90.1 million pounds (£).
As a unitholder of FLT, I would like to share five reasons why I think the FLT-FCOT merger is a great deal for investors.
1. DPU and NAV accretion
One of the key reasons why investors choose REITs is for their income consistency and stability.
The good news is that the merger cum acquisition is expected to lift distribution per unit (DPU) for FY2019 by 2.2% from S$0.0722 to S$0.0738. In addition, the merger will add on six quality assets in Singapore (two properties), Australia (three properties) and the UK (one property) to FLT’s enlarged portfolio, boosting the net asset value (NAV) of the REIT by 9.5% from S$0.95 to S$1.04.
2. Enhanced capability to serve customers
By acquiring a portfolio of commercial properties, FLT can now offer end-to-end business solutions to customers.
This ability makes the REIT more attractive to existing and potential clients as it now houses a variety of property types, thus fulfilling the needs of a wider base of clients. With properties across the entire value chain, FLT’s enlarged portfolio is also in a better position to retain clients and win new ones.
3. Bigger is indeed better
The merger will result in a significantly larger REIT of around S$4.2 billion in market capitalisation.
The enlarged REIT will be able to source for better deals at a lower cost of capital as it now has the size to negotiate for better loan and acquisition opportunities. FLT’s enlarged market capitalisation could enable the REIT to occupy a higher weighting in the FTSE EPRA/NAREIT index, which could trigger a positive re-rating for its share price.
Meanwhile, the enlarged REIT’s free float will also jump from S$1.9 billion to S$3 billion, greatly enhancing liquidity for institutional investors and larger funds to easily buy and sell its units.
FLT started out with a 100% concentration in Australia back when it listed in 2016.
In April 2018, the REIT added 21 German and Dutch properties via a 596.8 million Euros (€) acquisition. With this merger, FLT will be gaining exposure to Singapore and the UK as well.
Upon completion, no single country will account for more than 50% of the portfolio, versus Australia at 58.3% previously. The high Australian exposure was a bugbear for me as the Australian dollar has depreciated around 3% against the Singapore dollar since the start of the year.
Meanwhile, FLT’s sector distribution will become more diversified. Previously, FLT had 100% exposure to logistics and industrial, but this sector will be pared down to 58.4% of the REIT’s portfolio value with offices and business parks expected to take up 20% and CBD Commercial the remaining 21.7%.
5. Better growth prospects
Finally, the FLT-FCOT merger will also provide an enlarged debt headroom for acquisitions, asset enhancement initiatives (AEI) and development.
While the REIT’s gearing level will increase from 33.4% to 37% post-merger and acquisition of Farnborough, the absolute debt that FLT can borrow increases from S$726 million to S$868 million.
Most importantly, the enlarged REIT will gain a pipeline of assets in excess of S$5 billion from its sponsor FPL with the right-of-first-refusal.
This pipeline means that FLT can continue to grow over the years as more properties are eventually injected into the REIT by the sponsor.
Get more stock updates at our Facebook page. Click here to like and follow us on Facebook.
None of the information in this article can be constituted as financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. Disclosure: Royston Yang owns shares of FLT.