As more REITs are being listed in Singapore, the space is getting crowded.
Hence, it is not surprising to hear of REITs undergoing mergers over the years.
The latest merger announcement involves Mapletree Commercial Trust (SGX: N2IU) and Mapletree North Asia Commercial Trust (SGX: RW0U).
The benefits touted include increased diversification and a jump in distribution per unit (DPU).
Before this merger, there was another mega-merger in September 2020 between two REITs under CapitaLand Investment Limited (SGX: 9CI), namely that of CapitaLand Mall Trust and CapitaLand Commercial Trust, to form CapitaLand Integrated Commercial Trust (SGX: C38U), or CICT.
A year before that, Frasers Logistics & Industrial Trust merged with Frasers Commercial Trust in a deal that created Frasers Logistics & Commercial Trust (SGX: BUOU), or FLCT.
And let’s not forget that in late-2018, ESR-REIT (SGX: J91U) effected a successful merger with Viva Industrial Trust.
ESR-REIT is now in the process of consummating another merger with ARA Logos Logistics Trust (SGX: K2LU) in a S$1.4 billion merger to become Singapore’s fifth-largest industrial REIT.
There’s a clear trend, but have these mergers been good for unitholders? Let’s find out.
Hits and misses
A good measure of whether these mergers have been successful is to take a look at the direction the REIT’s unit price has headed post-merger.
As mergers will create larger entities with higher levels of gross revenue, net property income and DPU, a steady rise in DPU post-merger should translate into a higher unit price over time.
CICT was trading around S$1.99 in late September 2020 and has since risen to S$2.05 for a gain of around 3%.
This is an admirable feat considering the REIT was negatively impacted by the pandemic for both its retail and commercial property portfolios.
FLCT has seen its unit price climb by 25.4% from S$1.22 on the day after we wrote on the merger, to S$1.53.
ESR-REIT, however, has seen its unit price decline from S$0.51 at the time it merged with Viva Industrial Trust to S$0.48 today.
OUE Commercial REIT (SGX: TS0U), or OUECR, which merged with OUE Hospitality Trust two months before the FLCT merger, saw its unit price fall from S$0.53 back then to the current S$0.44, down 17%.
From the above, we can conclude that mergers have not always created better value for unitholders.
FLCT has thus far fared the best among the four mergers mentioned, while OUE Commercial REIT has fared the worst.
The importance of a strong sponsor
Investors may notice something interesting about the mergers that performed well.
They are both helmed by REITs that have strong sponsors.
CICT has a strong sponsor in CapitaLand Investment, while FLCT’s sponsor is Frasers Property Limited (SGX: TQ5), a diversified real estate developer and owner with total assets of around S$40.3 billion as of 30 September 2021.
Of course, the other factor at play is also the asset sub-class involved in the mergers.
For OUECR, the inclusion of hospitality assets made the merged REIT more vulnerable to the effects of the pandemic, thus causing a drag on its performance.
DPU rises drive returns
Whether a REIT merger does well or not also hinges on the ability of the REIT to increase its DPU post-merger.
For instance, ESR-REIT concluded its merger with Viva Industrial Trust in October 2018.
A quick look at the ESR-REIT’s fiscal 2018 first half (1H2018), the final reporting period before the merger, versus 1H2021 shows that DPU had declined from S$0.01848 to S$0.01554.
In contrast, for FLCT, its DPU for 1H2020 was S$0.0347, but by 1H2021, this had risen to S$0.038.
The rise in the REIT’s DPU was certainly a key factor that fuelled the rise in its unit price.
Get Smart: A combination of positives
The evidence seems clear.
To determine if a REIT merger will do well, investors need to watch out for two main factors.
The first is the presence of a strong sponsor that has a pipeline of assets that can be injected into the REIT post-merger.
The second attribute is the ability of the REIT to continue posting DPU growth.
For the Mapletree Commercial Trust merger, it has a strong sponsor in Mapletree Investments Pte Ltd.
Unitholders will have to assess if the REIT can continue to post DPU increases in the quarters to come.
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Disclaimer: Royston Yang owns shares of Frasers Logistics & Commercial Trust.
