CMT, CCT in proposed merger to form third largest Reit in Asia-Pacific

THE Singapore real estate investment trusts (S-Reits) sector is witnessing yet another proposed consolidation, with CapitaLand Commercial Trust (CCT) and CapitaLand Mall Trust (CMT) on Wednesday announcing a proposed merger via a S$8.27 billion cash and stock deal.

The proposed transaction, by way of a trust scheme of arrangement, will see CMT acquiring all units in CCT, in the form of cash and new CMT units.

For each CCT unit they hold, CCT unitholders will receive S$0.259 in cash and 0.72 new CMT units at an issue price of S$2.59 apiece. This means that CCT unitholders will be paid a scheme consideration of S$2.1238 per CMT unit, which implies a gross exchange ratio of 0.82 times.

The deal is expected to be accretive to the distribution per unit (DPU) for both CMT and CCT. For illustrative purposes, the pro-forma DPU accretion will be about 1.6 per cent for CMT and 6.5 per cent for CCT as at Dec 31, 2019, if the merger had been completed on Jan 1, 2019 and if CMT had held and operated the properties of CCT through to Dec 31.

The merged entity, CapitaLand Integrated Commercial Trust (CICT), is poised to become the third largest real estate investment trust (Reit) in the Asia-Pacific region, and the largest proxy for the Singapore commercial real estate market. It is expected to have a market cap of about S$16.8 billion and a combined property value of about S$22.9 billion.

"As the largest S-Reit, CICT will be CapitaLand's primary investment vehicle for commercial real estate in Singapore and other developed markets," CapitaLand said.

The deal will merge CMT's portfolio of 15 downtown and suburban malls in Singapore, with CCT's portfolio of 10 office assets comprising eight in Singapore and two in Frankfurt, Germany.

Upon completion of the merger, CICT will be able to undertake up to S$4.6 billion worth of overseas acquisitions in developed countries, while remaining predominantly Singapore focused.

The total cost of the proposed merger is estimated at S$8.27 billion. This comprises S$999.1 million in cash consideration and about 2.78 billion new CMT units issued at S$2.59 apiece, to be paid to CCT unitholders. There is also a S$55.6 million acquisition fee, payable wholly in new CMT units to CMT's manager, and S$22 million in professional and other fees.

In a research note on Wednesday morning, Jefferies Singapore equity analyst Krishna Guha noted that the proposed merger continues the "trend of consolidation wave".

He expects the two S-Reits to benefit from scale and diversification, and possibly cushion each other from adverse sub-sector trends such the anemic retail spend, e-commerce disruption, and a slowdown in co-working leasing demand.

"That said, we are mindful that the current overlap between the portfolios is only limited to Raffles City Singapore, which is about 15 per cent of combined portfolio value," Mr Guha added. "Unless there are more such integrated development plans, the two Reits have limited overlap, with CCT owning CBD (central business district) office assets and CMT operating mostly suburban malls. As such, operational synergies may be limited to begin with."

Jefferies Singapore has issued a "buy" rating for CCT, with a price target of S$2.30.

The proposed merger is subject to approval by unitholders of CMT and CCT at upcoming extraordinary general meetings (EGMs), the approval of CCT unitholders at a scheme meeting, as well as regulatory and third-party approvals.

The EGMs and scheme meetings are expected to take place by May, while the payment of cash and consideration units will be made to CCT unitholders by June.

The deal is expected to be completed before the end of the second quarter this year. Thereafter, CCT will become a wholly owned sub-trust of CMT and be delisted from the Singapore Exchange (SGX).

Both Reits requested trading halts on Wednesday morning before the market opened. CCT units closed two Singapore cents or 0.9 per cent lower at S$2.13 on Tuesday, while CMT units was down two Singapore cents or 0.8 per cent to S$2.59.

Following the proposed merger, the CapitaLand group will have five Reits listed on SGX: CICT, Ascendas Real Estate Investment Trust, Ascott Residence Trust, Ascendas India Trust and CapitaLand Retail China Trust. CapitaLand will also retain its sponsor stake of about 29.1 per cent in the merged entity.