Yesterday evening (10 May 2022), Securities Investors Association (Singapore), or SIAS for short, facilitated a virtual dialogue session between Mapletree Commercial Trust (SGX:N2IU) (or MCT for short) and its unitholders on the REIT’s proposed merger with Mapletree North Asia Commercial Trust (SGX:RW0U) (or MNACT for short).

For context, it was announced on 31 December 2021 that the 2 Mapletree REITs have proposed a merger, with the combined entity (to be known as Mapletree Pan Asia Commercial Trust, or MPACT for short) becoming one of Asia’s Top 10 REITs – with its portfolio comprising of 18 retail and office properties in Singapore, Hong Kong, China, Japan, and South Korea, and a total asset under management of approximately S$17.1bn (you can read the news article published on The Straits Times in full here.)

I have attended the session as a unitholder of MCT to learn more about the proposed merger and for the benefit of those who are not able to attend, in this post, you’ll find my summary of the CEO’s presentation, along with the Mapletree’s (CEO of MCT, Ms Sharon Lim, as well as Deputy CEO of Mapletree Investments Pte Ltd, Mr Chua Tiow Chye) responses to questions posed by fellow attendees.

Let’s begin:

Presentation by CEO of MCT

Rationale for the Merger:

• Due to limited growth opportunities available in Singapore, and in order for the REIT to sustain its growth on a long-term basis, it will have to expand overseas.
• MNACT, which is anchored by a diversified portfolio (with investments in key gateway markets including China, Hong Kong, Japan, and South Korea) offers the best opportunity as the REIT has a ready launchpad with a similar Standard Operating Procedure and systems (as both are under the Mapletree umbrella), which allows for a seamless integration.
• Also, compared to the REIT embarking on inorganic acquisitions themselves (which will take a much longer time), the merger will allow them to very quickly gain access to key markets.
• Merged entity will leapfrog to become the 7th biggest REIT in Asia (compared to being in 13th position for MCT, and in 29th position for MNACT currently.)
• Pro forma DPU (up 6.8% from 9.53 cents to 10.18 cents), as well as NAV (up 7.1% from $1.69 to $1.81) accretive.

Overview of Merged Entity:

• 18 assets across 5 markets with the number of properties and percentage concentration (by assets under management) in brackets: Singapore (5 properties, 52%), Hong Kong (1 property, 26%), China (2 properties, 11%), Japan (9 properties, 10%), South Korea (1 property, 2%)
• Best-in-class assets (in Festival Walk, VivoCity, and Mapletree Business City) constitutes 67% of the REIT’s portfolio.
• Portfolio occupancy will be at 97.2%, with a WALE (Weighted Average Lease Expiry) at 2.5 years.

Scheme Consideration Options:

• MNACT unitholders will have to choose from the following (where all 3 options amount to S$1.1949, in-line with the REIT’s Net Asset Value as at 30 September 2021, and a 1.0x Price/Net Asset Value):
  • Scrip-Only: 0.5963 new MCT units for every MNACT unit;
  • Cash-and-Scrip: 0.5009 new MCT units, plus S$0.1912 in cash for every MNACT unit;
  • Cash-Only: S$1.1949 in cash for every MNACT unit, which is also the default option.
• Mapletree Investment Pte Ltd, a Sponsor for both Mapletree REITs, has elected to receive the “Scrip-Only” consideration.

Preferential Offering by MCT to Fund for the Additional Cash Consideration:

• Ms Lim explained that this came about following the inclusion of the “Cash-Only” consideration, where the Sponsor have also undertaken to subscribe for the Maximum Preferential Offering Units of up to S$2.2bn (based on the issue price of S$2.0039), along with agreeing to a voluntary 6-month lock-up period of the unitholdings (to add, Mr Chua gave his reassurance that the Sponsor does not have any intention to divest the units even after the lock-up period.)
• On top of that, Ms Lim shared that the Sponsor have agreed to waive off acquisition fees related to the transaction.

New Management Fee Post-Merger:

• Ms Lim noted that many unitholders have expressed their concerns about the 10.0% base fee of distributable income for the merged entity (compared to MCT’s base fee of 0.25% per annum of total assets and performance fee of 4.0% per annum of Net Property Income), to which she has clarified that based on Mapletree Commercial Trust’s current fee structure, its base + performance fees amounts to 0.42% of the total assets under management. However for the merged entity, it will be at a lower 0.35% (assuming all MNACT Unitholders, excluding the MIPL Entities, elect to receive the “Cash-and-Scrip” or “Cash-Only” consideration) to 0.36% (assuming all MNACT Unitholders elect to receive the Scrip-Only Consideration) – this is in spite of the merger being a DPU-accretive one (between 4.3% and 6.8%.)

Post-Merger Strategy:

• Exploring opportunities to further acquire office and office-like business park properties (something like Mapletree Business City), which Ms Lim cited has a rental advantage, and at the same time, having a reasonable valuation.
• Unlocking value through selective strategic divestments at an opportune time, along with expanding their business presence in other geographical location (in that light, Ms Lim shared that MPACT is looking to deepen its presence in South Korea, where the REIT currently only have 1 property.)

Indicative Timeline (Selected Items):

• MCT’s EGM – 10.00am on Monday, 23 May 2022
• MNACT’s EGM – 2.30pm on Monday, 23 May 2022
• Expected Application Period (in respect of the Preferential Offering) for MCT unitholders – Thursday, 28 July 2022 to Friday, 05 August 2022
• Expected Effective Date of Trust Scheme – Monday, 08 August 2022
• Expected Date of Settlement of Scheme Consideration – Wednesday, 17 August 2022
• Expected Date of Delisting of MNACT – Friday, 19 August 2022

Responses to Questions Raised by Session Attendees

• One unitholder wanted to know why the REIT cannot remain status quo (and continue to acquire properties in Singapore) since the merged entity will also remain Singapore-centric. Ms Lim explained that there have been limited acquisition opportunities available in Singapore over the past few years (on top of that, Mr Chua said that the Sponsor have no intention to sell any properties to which MCT has ROFR to in the near-term as they are due for re-development, in-line with the Singapore Government’s Greater Southern Waterfront project.) At the same time, she shared that many unitholders have expressed their concerns about the REIT’s growth potential ahead. Taking all these into consideration, the REIT will need to expand overseas to ensure its long-term growth, and the proposed merger with MNACT will propel it into a new era of growth.
• Responding to unitholders’ concerns about the REIT’s risk profile following the merger, Ms Lim understood that unitholders may feel jittery about it (as the risk profile will definitely be higher compared to investing in properties in a safe haven like Singapore), but she explained that in order for the REIT to be able to maintain its growth in the years ahead, they will need to expand overseas, and as such, the increase in risk profile is inevitable. That said, she added that the reward will be an improvement in the REIT’s DPU and NAV (on a pro-forma basis.)
• Another unitholder wanted to know whether it is the right time to embark on such a transaction at this point in time, considering the current headwinds posed by rising interest rates, lockdown in China (due to its “Zero Covid” strategy), as well as geopolitical tensions between Russia and Ukraine. In response, Ms Lim said that while she understood the unitholder’s concerns, but she explained that there is no “perfect” time, as there will always be challenges. She added that all the considerations have been extensively studied, and it was concluded that for the long-term, there are more positives than negatives (hence the proposed transaction at this point in time.) Furthermore, the proposed transaction has been supported by third-party validators.
• Pertaining to concerns that the REIT’s aggregate leverage will go up to 38.8% (assuming all MNACT Unitholders elected to receive either the “Cash-and-Scrip” or “Cash-Only” consideration; should they elect to receive the “Scrip-Only” consideration, it will be at 37.5%) post-merger, Ms Lim said that it is still well below the guidelines set by the MAS (Monetary Authority of Singapore), and that there still remains S$3.9bn of debt headroom before the regulatory limit of 50.0% is reached – which is not straining in her opinion.
• On another question pertaining to plans to reduce the merged entity’s aggregate leverage after the merger, Ms Lim said there is no need to actively bring it down as there still remains a huge debt headroom before the regulatory limit (set by the MAS) is reached. She also shared that if the merged entity manage to record a positive performance, the properties’ valuations will go up, and this will also help to bring down the REIT’s aggregate leverage.
• In response to a unitholder’s question as to whether or not the properties of MNACT are acquired at a “bargain price”, Ms Lim highlighted the need to be “fair” to unitholders of both Mapletree REITs and as such, the acquisition price has been extensively negotiated and deemed to be at a “fair value”, and also well-supported by 805 audit opinion.
• On concerns as to whether or not the lease in Festival Walk (in Hong Kong) will be renewed upon its expiry in the year 2047, Ms Lim shared that historically, the Hong Kong Government have always granted fresh lease renewals and as such, and she does not foresee any problems as far as lease renewal for the particular property is concerned.
• Another question relating to Festival Walk is about headwinds surrounding it – in response, Ms Lim expressed her confidence in the property, where she explained that it is very similar to VivoCity in terms of its tenant-mix, size, as well as connectivity. She added that even though the mall is still recording negative rental reversions (for new and/or renewed leases), but it has narrowed in the recent quarters. Also, safe management measures in Hong Kong have recently been relaxed, and Ms Lim is positive that visitor traffic and tenant sales will improve, similar to that experienced in VivoCity, where the mall experienced a hike in sales volume (she also added that VivoCity’s tenant sales for Q4 FY2021/22 ended 31 March 2022 have surpassed pre-Covid levels.) Mr Chua further reassured unitholders by sharing that apart from the social unrest (which he do not foresee a repeat) and Covid, Festival Walk has contributed positively towards MNACT’s financial performance in the other years. That said, he is confident of the mall’s contribution towards the merged entity’s overall performance in the years ahead.
• Since the preferential offering price of S$2.0047 is much higher than the REIT’s open market price (currently), there’s a strong possibility that unitholders will not be subscribing to it. As such, a unitholder wanted to know whether there will be a dilution effect (to those who choose not to subscribe.) To this, Ms Lim explained that there is no dilution, as the total number of units remain the same – if unitholders were to opt for the “Cash-Only” option, then units will fall into the hands of the Sponsor. Likewise, if unitholders choose not to subscribe to the preferential offering, the Sponsor will also be taking up all the units. Additionally, she highlighted the fact that the Sponsor is prepared to subscribe to the units at S$2.0047, goes to show their conviction in the long-term growth potential of the REIT.
• Responding to a question on what will happen if the proposed transaction does not go through, Ms Lim said everything will remain status quo. However, she cautioned about the limited growth potential of the REIT (due to the limited M&A opportunities available in Singapore) should that happen.
• Addressing another question on whether there is a reduction in demand for office space brought upon by the hybrid work model post-pandemic, Ms Lim said that a majority of them have maintained their current office sizes, as companies are aware that employees prefer to maintain a “safe distance” between work desks and have re-configured their office spaces to cater to such a requirement – in other words, while the number of employees at the office have reduced, but it is offset by having a bigger space for each employee present at their workplace.
• A unitholder wanted to know about the merged entity’s reconstitution plans, to which Ms Lim shared that it will involve portfolio recycling (where they will look to divest certain properties and redeploy the capital into higher yielding ones.) Ms Lim also shared the possibility of rebalancing its Japan assets (where it has 9 assets constituting 10% of the merged entity’s AUM) either through selective divestment of some of the assets in the country, or by adding more assets in other countries.
• Another unitholder wanted to know whether there will be a shake-up of the Board after the merger, which Ms Lim said more details will be announced after the EGM. At this point in time, the Board has yet to be formed.

Related Documents

• EGM Announcement
• Circular to Mapletree Commercial Trust Unitholders
• Summary Booklet to Mapletree Commercial Trust Unitholders
• Notice of EGM
• SIAS-MCT Presentation Slides

Disclaimer: At the time of writing, I am a unitholder of Mapletree Commercial Trust.