Making An MPACT : Key Issues Of The Mapletree Merger

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Most people could already deduce why both REITs proposed a simultaneous trading halt.

The proposed merger of MCT & MNACT is the most recent event of a long list of REIT mergers and acquisitions.

MPACT (Mapletree Pan-Asia Commercial Trust) is expected to produce a Mega-REIT with an AUM of S$17.1b. It will also have an expanded investment mandate covering the whole of Asia in general.

It will be managed by the team behind MCT, while also switching to the fee structure of MNACT. Great for those vested as it prioritizes Distributable income, and DPU growth.

Other cited benefits include an increase in NAV and DPU, and more headroom and financial muscle to pursue growth. A compelling option for MCT shareholders.

Needless to say, the merger does have a number of deeper issues which require attention. We’ll examine them closer for more details.

MCT’s Growth Pipeline

MCT’s management would likely have had a hard time finding acquisition opportunities in Singapore as the sponsor’s local pipeline is limited.

Within Singapore, the only remaining non-REIT assets are 20 Harbour Drive, Harbourfront Center, and Harbourfront Tower 1&2. This represents a total Net Lettable Area of 128,000 sqm of office and retail space, rivalling Vivocity.

Going this route however, would cause it’s assets to be wholly concentrated in Singapore. The sponsor’s overseas assets would also remain out of reach for the REIT.

The sponsor has a number of assets located throughout Asia

By combining both REITs, the sponsor would be able to achieve growth by acquiring MNACT’s assets at book value, while also expanding it’s investment mandate to encompass their available overseas assets.

But the attractiveness of MNACT’s assets is a different story altogether.

Quality Of MNACT’s Assets

Probably the most contentious issue of the merger is the appeal of MNACT’s properties, and how they would likely fare in the future.

Although acquiring them will instantly boost MCT’s key metrics, some of the assets have not been performing well in the past couple years.

Take a closer look at the two largest assets, Festival Walk and Gateway Plaza. This pair make up about 70% of the REIT’s AUM, and 68% of total NPI.

Yet in terms of performance, they are clearly in a predicament. Drops in valuations, negative rental reversions, and relatively short land leases are all pertinent issues.

Management has also stated that it will take awhile before overall occupancy and rental rates recover. Meaning that investors shouldn’t expect a quick turnaround.

Of course, one can also argue that it is precisely times like these that scooping up these properties make sense. As demand & supply balances out, these assets should be able to recover and contribute meaningfully to the REIT.

Things started going downhill from 2019

At least the other newly acquired assets are pulling their weight well. These properties make up 30% of the REIT’s total assets, representing a sizable portion of the REIT.

The Transaction

Great news for MNACT shareholders. The scheme sets the base consideration for acquiring MNACT shares at S$1.19 per share, close to book value. Shareholders can also choose between shares-only, or cash-and-share options.

Considering that the REIT’s share price has been trading grossly under book value for the past 2 years, this would mean a instant capital gain for shareholders.

It also includes pound-for-pound entry into a larger, higher quality pan-Asian REIT as well. All positives in my opinion.

Sadly the opposite is true for MCT shareholders. The REIT will lose it’s Singapore-focused premium, and take on a higher degree of debt in the name of growth.

For the time being however, we should expect some volatility in the share prices of both REITs. With the value of MNACT’s shares tagged to the current share price of MCT, any movement in MCT’s share price will trigger a balancing of MNACT’s share price as well.

Everything hinges on MCT’s share price

MNACT shareholders who do not wish to wait can also sell off their MNACT shares for an instant capital gain as well. Because for all we know, the merger might not even materialize if the majority vote doesn’t get through.

A Game Of Consolidation

Those who scrutinize the merger closely enough might even accuse the sponsor of trying to salvage MNACT, who had managed to get into a quagmire of under-performing assets and high leverage (41.4% as of 30th September).

Nonetheless, we’ll still like to believe that MCT is truly trying to grow it’s portfolio by acquiring undervalued assets, and positioning itself for future acquisitions throughout Asia as well.

Because to us, it doesn’t really click for the sponsor to deliberately sabotage it’s flagship REIT by forcing it to take up sub-par assets at book value.

Of course, everyone is entitled to his or her opinion of the merger. And decision to vote.

What I’ll Choose To Do

As a shareholder of both REITs, i’ll likely be holding out for the Script+Cash option. This will hopefully enable me to transition my holdings in MNACT into the new mega-REIT.

Because i’m expecting the share prices to fluctuate considerably for the next couple months, the cash portion of the offer should provide some constancy as to what i can expect in return.

Do drop us a comment if you are for or against the merger, and which option you would choose.

Casey H

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