More M&A could be in the offing for S-Reits

OUE Commercial Reit (OUE C-Reit) and OUE Hospitality Trust (OUE H-Trust) are coming together in what could be the second merger among S-Reits in the past six months.

At about S$2.9 billion, the enlarged Reit would be Singapore's 10th largest Reit by market capitalisation and at S$6.8 billion, the eighth largest by assets - with exposure to the office, hospitality and retail sectors. Its assets would include four from OUE C-Reit - OUE Bayfront, One Raffles Place, OUE Downtown Office and Lippo Plaza - and three from OUE H-Trust - Mandarin Orchard Singapore, Mandarin Gallery and Crowne Plaza Changi Airport.

Under the proposed scheme of arrangement, OUE C-Reit will pay each holder of OUE H-Trust stapled security S$0.04075 in cash plus 1.3583 new OUE C-Reit units. However, they will first have to get the greenlight from their respective unitholders and stapled securityholders to go ahead with the merger, while the trust scheme will also need to be sanctioned by the Singapore Court. If successful, OUE H-Trust is expected to be delisted. OUE Group will remain the sponsor and major shareholder with a 48.3 per cent stake in the combined Reit.

The merger will create one of the largest diversified S-Reits, delivering greater scale, higher trading liquidity, access to a broader pool of investors and potential index inclusion. It is also likely to reap cost savings from synergies, while increased funding capacity may allow it to be more aggressive about accretive acquisitions and asset enhancement initiatives.

On the flipside, some questions remain.

"The yet-to-be exercised convertible perpetual preferred units held by the sponsor and potential injection of OUE Bayfront Oakwood serviced residences - which at this point is unlikely to be accretive - remains an overhang which the merger has not fully resolved," DBS Group Research analysts Mervin Song, Carmen Tay and Derek Tan wrote.

They also highlighted that the gearing for the enlarged entity is expected to hover around the 40 per cent threshold following the merger, which means that equity raisings could be necessary to fund the trust's growth plans.

Unique proposition

The combined entity will create a unique proposition in terms of offering investors exposure to office and hotel assets, instead of a single property sub-asset class, and it remains to be seen how the market would react to such an asset mix. In this case though, investors will also be able to benefit from the growth in the commercial sector and expectations of a rebound in the hospitality industry on the back of a tightening supply pipeline.

The proposed merger is the second instance of M&A among S-Reits in recent months following ESR-Reit and Viva Industrial Trust's merger, and the third since 2015 when US private equity firm Lone Star Funds scooped up Saizen Reit's assets for 44.66 billion yen. (However, it also marks the first intra-sponsor REIT merger, Morgan Stanley analysts pointed out).

Analysts say that more M&A could be expected given the limited acquisition opportunities in Singapore, favourable Reit market conditions and the fact that scale gives Reits a leg up in competing with heftier rivals.

Morgan Stanley analysts Wilson Ng and Samuel Ong pointed out that Reit mergers can benefit both Reits and their sponsors, since Reits are typically "rewarded" in the market for size and liquidity. They also noted that sponsors that manage and/or own substantial Reit stakes can also benefit from higher fee income, lower operational costs and greater flexibility to divest property to their Reits.

Meanwhile, RHB Group analyst Vijay Natarajan reckons there are merger opportunities to be had among industrial and hospitality Reits, given that those segments have a bigger proportion of smaller Reits, namely those with a market cap of under US$1 billion.

Taken together, this suggests that the OUE C-Reit/OUE H-Trust union - if successful - could pave the way for more such mergers.