OUE Commercial REIT (C-REIT) and OUE Hospitality Trust (H-Trust) announced a mega merger that involves C-REIT absorbing H-Trust. Given OUE’s dodgy history as a REIT sponsor, I was interested to see if this merger would be beneficial to C-REIT and H-Trust Unitholders. Here are my findings.
The merger will be effected via scheme of arrangement, with C-REIT issuing 1.3583 units and $0.04075 in cash per H-Trust stapled security.
Using C-REIT’s latest price of 52 cents, this translates to a consideration of approximately 75 cents per H-Trust unit. This represents a slight premium of 1.5 cents or 2% over H-Trust’s latest unit price of 73.5 cents.
Also, do note that the illustrative consideration mentioned within the SGX announcement uses a higher C-REIT per unit price of 57 cents.
The cash consideration will be funded by C-REIT’s debt facility.
Impact to existing C-REIT investors
Let’s see the pro-forma financial impact to C-REIT unitholders from the various financial metrics.
|Metric||Prior to Merger||Post Merger||Change|
|DPU (Cents)||3.41||3.48||2% Increase|
|NAV per unit (cents)||71||62||13% Decrease|
Figures were calculated based on FY2018 figures.
As you can see, the merger is slightly DPU accretive to shareholders but highly dilutive NAV per unit wise. This is because C-REIT units are being issued at a massive discount to NAV to buy properties at fair value.
This is similar to what happened during the C-REIT rights issue last year that was so value destructive.
Impact to existing H-Trust investors
WIth C-REIT unit holders getting shafted, let’s see if H-Trust investors benefit from this merger. The figures below are adjusted by 1.3583 units and do not take into account the cash consideration to be received.
|Metric||Prior to Merger||Post Merger||Change|
|DPU (Cents)||4.99||4.73||5.2% Decrease|
|Adjusted DPU (Cents)||4.93||4.73||4.1% Decrease|
|NAV per unit (Cents)||75||84||12% Increase|
I wasn’t very sure how post merger DPU was computed by H-Trust management so I did my own computation instead. Adjusted DPU refers to DPU adjusted to reflect C-REIT’s management fee structure. As you can see above, the merger is DPU dilutive but massively NAV accretive, the exact opposite of the effects of the C-REIT unit holders. If you further add the 4 cents of cash per unit you are getting as a H-Trust investor, I would say this is a not bad deal for you.
I feel sad for C-REIT investors for getting shafted again so soon after the disastrous rights issue last year. As for H-Trust investors, this seems like you will do alright.
Pushing to become a Mega Cap REIT
I feel this merger is largely motivated by management’s desire to be considered a Mega Cap REIT.
If a REIT obtains substantial market cap and assets under management, they are able to have more tools at their disposal. Examples include ability to development new properties, ability to issue bonds at cheaper interest rates, gain access to more institutional funds for private placements, etc.
Whether the properties have any synergy with each other is difficult to say. It certainly makes it more difficult to value the combined REIT due to its mix of office and hospitality properties.
I was going through the C-REIT slides and I realised that management omitted all the negative effects of the merger (Increase in gearing to 40.3%, drop in NAV) from the slides and simply promoted the positives. I had to dive into the long announcement document to find those details, a document that investors are not as likely to read.
This leaves a very bad impression to me.
High gearing – another rights issue post merger?
This merger pushes gearing above the critical threshold of 40% post merger. While it is still within MAS regulation of 45% gearing, most investors usually expect another equity raising if a REIT crosses the 40% gearing level. In response, the REIT may continue to trade at a significant discount to NAV.
Time will tell if this comes to pass.
Potential Arbitraging opportunity
The merger may create arbitraging opportunities depending on the share price movements. In a perfect world, C-REIT and H-Trust shares should trade in lock step according to this formula:
H-Trust Price = 1.3583 x C-REIT Price + 4.075 cents
As such, if there is any significant mispricing close to the date of closure of the merger, it might be worth looking at for a trade.
It’ll be interesting to see how the market prices this merger. What are your thoughts on the OUE REIT Merger? Do share with me your thoughts.
Other OUE C-REIT related articles
OUE Commerical REIT Rights Issue
If you missed my previous article
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