Why I dislike the Mapletree Commercial Trust Merger (as a Unitholder)

 

So… Mapletree Commercial Trust and Mapletree North Asia Commercial Trust called for a trading halt on 28 Dec.

And trading remained halted for the next 3 days.

Speculation in the market went wild about a merger between the 2 REITs.

And it turns out the rumours were exactly true – because it was announced that MCT will be buying MNACT.

 

Mapletree Commercial Trust Merger Explained

To sum it up – Mapletree Commercial Trust (MCT) is buying over Mapletree North Asia Commercial Trust (MNACT).

MNACT unitholders will get an option of either:

1. 100% MCT units – 0.5963 new MCT units at an issue price of S$2.0039 apiece
2. 84% MCT Units, 16% cash – 0.5009 MCT units and S$0.1912 in cash

This works out to a total consideration of $1.1949.

S$1.1949 is MNACT’s net asset value (NAV), so MNACT is basically bought out at book value.

This is a 7.6% premium to MNACT’s trading price on Dec 27 and a 17.3% premium to its 12-month volume-weighted average price

On a pro forma basis, the merger is 8.9% DPU Accretive and 6.5% NAV Accretive for MCT unitholders.

Investment Mandate of Mapletree Pan Asia Commercial Trust (MPACT)

The newly merged REIT will be known as Mapletree Pan Asia Commercial Trust (MPACT).

It’s investment mandate will be office or retail properties in key gateway markets in Asia, including Singapore, China, Hong Kong SAR, Japan, and South Korea.

You can look at the asset allocation of the new MPACT below.

Breakdown will be:

• Singapore – 51%
• Hong Kong – 26%
• China – 11%
• Japan – 10%
• South Korea – 2%

And asset class will be:

• Retail – 46%
• Office – 34%
• Business Parks 21%

Indicative Timeline for Merger

Indicative Timeline is below, transaction is expected to close by mid-June 2022.

Is this Merger a better deal for MCT or MNACT?

Full Disclosure – I am a unitholder of both MCT and MNACT, so you can’t accuse me of being biased.

And I’m just going to put it out there.

As a MNACT unitholder, I love this merger.

As a MCT unitholder, I am much less pleased.

Mapletree North Asia Commercial Trust (MNACT)

As a MNACT unitholder, I am ecstatic.

I’ve been meaning to exit this position for quite a while now.

The reason why was because I wanted to close off my Hong Kong exposure. Longer term, I’m just not super bullish on Hong Kong real estate.

And frankly, the rest of the MNACT portfolio excluding Festival Walk isn’t exactly best in class, so I wasn’t super keen to hold on long term.

I was actually prepared to sell at anything 1.1+, so when it started trading at $1.11 recently that really caught my eye.

But now it’s getting privatised at $1.19, payable with MCT units at $2.00.

That’s just a fantastic deal for me and I for one, love this merger as an MNACT unitholder.

   

Mapletree Commercial Trust (MCT)

Regular readers of Financial Horse will know that I adore Mapletree Commercial Trust.

It’s the first REIT I wrote about on Financial Horse, and one of my largest REIT positions.

But as a MCT unitholder… man, where do I even begin.

I wouldn’t necessarily say it’s a terrible deal for MCT, but the analysis is a lot more nuanced as compared to MNACT.

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Why does MCT need to do this merger?

Okay a bit of background.

The problem for MCT before this, is that there is no room to grow in Singapore anymore.

All the best-in-class assets in Singapore are held by other REITs, who would never sell to MCT.

And those that aren’t REIT-ed? You need to pay a crazy price to get them, which wouldn’t be DPU or NAV accretive.

So you have to go outside Singapore to grow.

You can look at all the big REITs like CICT or Ascendas, and they’re all buying non-Singapore properties these days.

That brings with it its own set of problems, because you need to source for deals, evaluate it, negotiate price etc. It takes a lot of time and effort to execute, and there’s no guarantee you can buy at a fair price in this market, given how insane valuations are.

And at the same time, MCT was starting to get outclassed (size wise) by their competitors CICT and Ascendas REIT.

Big is sexy these days, because of index inclusion, liquidity and financing reasons.

Long story short – MCT needed to grow, in a NAV/DPU accretive way, fast.

I can see why MNACT had to do it

And the deal makes sense for MNACT too.

MNACT has been trading at a discount to NAV for the longest time ever, ever since Hong Kong protests back in 2019.

This makes it very hard to do yield accretive transactions, and it’s very hard to raise equity because you would be issuing new units at a discount to NAV.

And over the past few years, they’ve been trying to do everything to bring the unit price up – even the rebrand from Mapletree Greater China Commercial Trust to Mapletree North Asia Commercial Trust.

But nothing really worked so far.

A lot of the recent properties they acquired have also not been performing that well.

You can only blame Hong Kong protests that long before it starts to look like just poor management.

So MNACT needed to find a way to bring the unit price up to book value.

Kill 2 birds with one stone

The quickest way to solve both problems for MCT and MNACT?

Merge the 2 of course.

MCT is trading at a premium to book value, so you use MCT to issue new units (at a premium to book), and buy out MNACT at book value.

MCT unitholders get a NAV and yield accretive transaction.

MNACT unitholders get to “exit” their position at a premium.

Magic right?

So to give credit where credit is due, I can absolutely see why this deal had to be done, and why it makes sense for Mapletree.

Best-In-Class Greater Southern Waterfront Play… no more?

I used to love Mapletree Commercial Trust as a best-in-class Greater Southern Waterfront Play.

Vivocity and Mapletree City were just absolute crown jewels.

In the past, Vivocity and Mapletree Business City made up 79% of Mapletree Commercial Trust, making it a very efficient bet on Singapore and the Greater Southern Waterfront.

Going forward, both will make up only 40% of the expanded REIT.

So previously if you were bullish on Singapore and bearish Hong Kong, you could buy more MCT and buy less MNACT.

Going forward, that option goes away.

If you buy MCT, you have to accept that 49% of your portfolio is going into Hong Kong, China and Japan.

I raised the same concern with the CMT CCT merger, but at least in that case they were mixing Singapore offices with Singapore malls.

Here – it’s mixing Singapore commercial assets with North Asian commercial assets. Both are very different markets, with very different valuations.

I mean it’s a decent enough acquisition, and if it were 5-10% of MCT’s portfolio I would have no comments.

But this is a $8.3 billion portfolio that will effectively make up 49% of MCT going forward.

So yeah… really not a big fan of this merger.

What is a Fair Price for MNACT?

As a MCT unitholder, I’m effectively buying MNACT out at book value.

For a Hong Kong retail mall, and a bunch of China/Japan/Korean offices or malls. That has been trading at a 15-20% discount to book for much of the past 1 – 2 years.

Buying it at NAV – is it a good price?

I mean you can argue that if MCT went out into the market right now and bought an equivalent portfolio from a third party, they probably have to pay much more.

I don’t disagree with that.

The market is so overvalued right now that if you are going to do a mega deal, this is probably the fair price to pay.

But that said, if given the option between (1) buying MNACT and (2) not buying MNACT, I actually would have much rather preferred the latter.

DPU and NAV Accretive for MCT

The merger is DPU and NAV accretive for MCT though, but that is to be expected when you (a) use a REIT trading at a premium to (b) buy out a REIT trading at a discount.

If you use the pro forma DPU and annualise it, the yield for MCT should be about 4.7% at the last done unit price of $2.00.

If it drops to $1.9 on Monday, that’s about a 5.0% yield.

What is the fair value of Mapletree Commercial Trust after the merger?

MCT traded at a 15%-20% premium to book before this.

Post-merger, I wouldn’t expect it to trade at a premium to book anymore, because of the North Asia assets.

MNACT trades at about a 15-20% discount to book, so both should equalize each other out, and the new MPACT should trade at around book value going forward.

Or at least that would be my idea of fair value.

NAV for MCT post acquisition is about 1.8, so my rough fair value would be $1.8 – $1.9 ish.

MCT last traded at $2.00, so this could imply a pretty large drop on Monday when trading resumes. Let’s see.

Will I buy more MCT if it drops on Monday?

That said, as an investor, I look at the world as it is, not as how I wish it to be.

I don’t like the merger, but I can understand why it needs to be done, and chances are it will likely get done.

This could put a lot of pressure on MCT’s share price short term.

If so, would I be scooping up MCT units?

And the answer is a resounding – Yes.

If I can fill MCT at close to my fair value, I’m probably going to be loading up on MCT units.

I think that even after this merger, there are not going to be many REITs out there that can outperform MCT at $1.8 – $1.9, at this level of risk.

But let’s see.

For those who are keen, you can check out my full REIT portfolio (and stock portfolio) on Patreon.

Closing Thoughts – Leakage of Merger Information?

It’s interesting because MNACT went up 3% on 27 Dec right before MNACT called for the trading halt.

Whereas MCT has been trending down for a while.

It’s quite stark when you plot them against each other – Red being MNACT and Green being MCT.

I wonder if MAS/SGX will look into this – because it seems the unusual trading activity was serious enough that MNACT/MCT had to call for a trading halt 3 days earlier than they would have liked.

Whatever the case – I would love to hear from you.

Are you a MCT or MNACT unitholder? Do you like this merger?

As always, this article is written on 31 Dec 2021 and will not be updated going forward. Latest thoughts (and my stock watch and personal portfolio) are available on Patron.

 

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