■ On balance, we like the merger as it is DPU-accretive for EREIT’s unitholders. With a larger AUM, EREIT could also potentially re-rate and enjoy lower borrowing costs.
■ We maintain our Add call with an unchanged DDM-based TP.
History in the making
● The proposed merger with VIT marks a milestone as it would be the first M&A in SREIT history. The scheme consideration payable to VIT stapled securityholders is S$0.96 per stapled security on an ex-distribution basis (implying an equity value of c.S$937m for VIT). The consideration will be satisfied via 10% cash and 90% through the issuance of new EREIT’s units, implying an exchange ratio of 1.778x.
● Post-merger, EREIT would potentially be the fourth largest industrial S-REIT with S$3bn AUM and potential market cap of c.S$1.7bn. EREIT manager will be the manager of the combined entity. Accordingly, sponsor ESR would acquire VIT manager and property manager for a total of S$62m cash. In addition, key management of VIT manager will be joining EREIT manager.
● Acknowledging that the consolidation of managers is also a critical bottleneck for REIT mergers, we view the above manager arrangements favourably (especially from an acquiree perspective). Such arrangements could help to pave the way for future REIT M&As. Post-consolidation, ESR will hold 67.3% in the manager; Mr Tong Jinquan (holds c.50% in VIT) will hold 25% and Mitsui will hold 7.7%.
● VIT is a Singapore-focused business park and industrial REIT. It has nine properties with an AUM (assets under management) of c.S$1.3bn. We consider UE BizHub EAST and Viva Business Park to be the jewels in the group’s crown (c.67% of AUM).
Benefits of the merger
● From EREIT’s perspective, a larger AUM could re-rate the REIT. We observe that bigger-cap REITs tend to trade at a premium against their smaller-cap peers. Secondly, the merger will result in the conversion of all of VIT’s secured debt into unsecured debt. There could be further borrowing costs savings with a larger AUM.
● Thirdly, EREIT would gain immediate access to high-tech, R&D and high value-added tenant sectors through higher business park exposure. Post-merger, business parks would account for 30% of EREIT’s AUM. Fourthly, the manager estimates a 5.6% accretion to FY17 pro forma DPU.
Potential pitfalls of the target REIT
● We note that VIT’s earnings could peak in FY18F as income support for UE BizHub East expires in Nov 2018. This is partially mitigated by higher contributions from Viva Business Park (VBP) due to the maximisation of “white” space. While EREIT is acquiring VIT at an implied 1.26x P/BV, the counter-argument is that value could be unlocked if underlying land lease at VBP is extended.
● We view potential multi-tenanted building (MTB) conversion risks as c.40% of VIT’s AUM is on single-tenanted/master leases.
● The M&A is expected to be completed by 3Q18.
During this process, an EGM is scheduled to be held in Sep. Unitholders’ approvals are required for the
ii) issuance of new units (for the merger) and a
iii) whitewash waiver.
This is because post-merger, Mr Tong Jinquan’s interest in EREIT will increase to more than 30%. Mr Tong and ESR are required to abstain from voting in these approvals.
● Pending the completion of the merger, we keep our estimates and DDM-based TP. We like the merger given the i) DPU-accretion, ii) potential re-rating effect from a larger AUM, and iii) potential lower borrowing costs. In essence, EREIT would be the largest non-GLC (government-linked company) industrial S-REIT.
Downside risks include higher rate hikes, unfavorable acquisitions and challenging industrials market.
Source : CGSCIMB Research
Read Also :
ESR-REIT - Supersize me: ESR-REIT and VIT merging to form fourth largest industrial REIT in Singapore (DBS Group Research)
Viva Industrial Trust - VIS-À-VIS LA VIVA (OCBC Investment Research)