S-Reits in merger race for bigger scale

The proposed merger between OUE Commercial Reit and OUE Hospitality Trust signals a growing trend where Reit mangers combine assets for stronger liquidity and financing capacity.

Singapore-listed real estate investment trusts are tipped to see more consolidation after OUE Commercial Reit and OUE Hospitality Trust proposed to merge their operations into a new entity in order boost liquidity and create a larger capital base to more effectively access funding.  

In a joint statement on Monday, the two companies said the merger will create an entity with total assets of S$6.8 billion ($5 billion) and a market capitalization of S$2.9 billion, making it the eighth largest S-Reit by total assets and 10th largest by market capitalization.

The proposed transaction is the second merger between Singapore-listed Reits after the consolidation of ESR-Reit and Viva Industrial Trust last year, highlighting an ongoing trend by Reit managers to combine assets to combat against weak trading volume on the Singapore stock exchange.

Typically, larger Reits are traded more often because they have a higher free float, attract more analyst coverage and are more likely to be included in major indices.

OUE Commercial Trust, the de facto surviving entity in the merger, said its free float is expected to increase 2.9 times from S$400 million to S$1.1 billion, or by 12 percentage points from 25% to 37%.

At the same time, the combined entity will be able to secure more funding with its enlarged asset base. The Reit managers estimate that the new entity will have a total funding capacity of over S$1 billion, putting it in a better position to make large acquisitions.

Still, there is a risk of losing some specialised real estate investors as the two Reits put their office, hospitality and retail properties together to create a more diversified portfolio of assets.

However, senior management of both OUE Commercial Reit and OUE Hospitality Trust believe that the impact will be minimal because the Singapore government is looking to encourage people to live closer to their workplaces. That will create a strong demand for mixed-use properties in central business areas.

The combined entity will own two hotels, namely the Mandarin Orchard Singapore and the Crown Plaza Changi Airport, as well as four office properties including One Raffles Place in Singapore and Lippo Plaza in Shanghai. It will also own the Mandarin Gallery shopping complex in Singapore.

Analysts believe the merger will drive other similar mergers between commercial and hospitality Reits in the near future.

Potential mergers include Frasers Centerpoint Trust and Frasers Hospitality Trust, Mapletree Commercial Trust and Mapletree Hospitality Trust, as well as Capitaland Mall Trust and Capital Commercial Trust.

Under the proposed merger, unitholders of OUE Hospitality Trust will receive 1.3583 new units in the combined entity and 4.075 Singapore cents in cash for every investment unit tendered.

The combined value of S$0.747066 represents a premium of 1.64% to OUE Hospitality Trust’s S$07.35 closing price on Friday. Both OUE Commercial Reit and OUE Hospitality Trust were suspended for trading on Monday.

The merger is conducted via a scheme of arrangement, which means OUE Hospitality Trust will need to get at least 50% acceptance from minority shareholders holding at least 75% in value of the units at the extraordinary general meeting. The deal also requires approval from the High Court of Singapore.

Citigroup, Credit Suisse and OCBC advise OUE Commercial Reit on the merger. Bank of America Merrill Lynch advises OUE Hospitality Trust.

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