• The 4th largest industrial REIT?
• A look at the proposed merger
• Rotate from CACHE to VIT

To Have and to Hold: Attractive for Both Sides of the Aisle?

We find the terms of the proposed merger between Viva Industrial Trust (VIT) and ESRREIT attractive for VIT unitholders. In effect, each VIT unit is to receive S$0.096 in cash and 1.6 new ESR-REIT units.

We estimate that the fair value of these new ESR-REIT units (i.e. units of the merged entity) should lie at ~S$0.53 each. Overall, our estimate translates into an aggregate value of at least S$0.942 – including the S$0.096 in cash – for each VIT unit, which is ~6% above VIT’s closing price of S$0.885 as at 23 May.

While we do not cover ESR-REIT, we believe their unitholders also stand to benefit from the merger. The estimate of a S$0.53 fair value post-merger is ~4% above that of ESR-REIT’s closing price of S$0.51 on 23 May.

While this S$0.53 estimate is below the current Bloomberg consensus fair value estimate of S$0.59 for the stand-alone ESR-REIT, we note that there are positive catalysts particular to the merger scenario:

1) a P/B revaluation post-merger and

2) operational and financial synergies, as discussed below.

A Big Baby Is Born: Further Revaluation Potential of Up to 10%

Should the merger be successful, the new entity will become the 4th largest industrial S-REIT by asset size. By virtue of its size alone, we see the potential for an upward revaluation of the REIT post-merger.

As at 23 May’s close, large-cap industrial REITs are trading at higher P/B valuations (1.10x to 1.33x) compared to small to mid-cap industrial REITs (0.72x to 1.17x). In particular, in terms of asset size and portfolio composition, we believe the closest comparable for the enlarged ESR-REIT would be Mapletree Industrial Trust (MINT).

Notwithstanding this, investors’ familiarity with Mapletree vs. Warburg Pincus-backed ESR may mean that the merged entity could trade at a discount relative to MINT’s P/B valuation of 1.33x.

Overall, we believe that the combined entity could eventually trade at around a ~1.25x P/B, around 10% higher than the ~1.14x P/B our S$0.53 estimate currently implies. Beyond this chance of a revaluation, we note opportunities for operational and financial synergies that can be gained from the merger. See report appendix for more details.

Preparing for the Future: Switch From CACHE Into VIT

Within the small-mid cap REITs space, we recommend switching holdings from Cache Logistics Trust (CACHE) [HOLD; FV: S$0.83] to Viva Industrial Trust [ACCEPT THE OFFER], given their 23 May closing prices. We are also positive on Soilbuild Business Space REIT [BUY; FV: S$0.71], but see fewer catalysts in the near horizon compared to VIT.

We do not cover ESR-REIT. Given that S-REITs valuations remain stretched, we encourage investors to remain selective in their holdings within the space.

Source: OCBC Research - 24 May 2018