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Even before proposed merger, CCT and CMT have already been diversifying: managers

CAPITALAND Commercial Trust (CCT) and CapitaLand Mall Trust (CMT) in a recent dialogue with unitholders, said that with or without a merger, both Reits (real estate investment trusts) have already been adopting a diversification strategy even within their own portfolios.

The dialogue, held virtually on Sept 17 and 18, were organised by the Securities Investors Association (Singapore). More than 200 retail unitholders took part. 

The Reit managers were responding to questions about whether the management of both Reits will consider specific business plans to improve their respective Reits rather than to proceed with the merger.

This was so that Singapore investors can decide on their own diversification strategy instead of being "forced" to accept exposure to a sector that they do not understand nor want to invest in.

CCT said it has been trending towards more white sites and integrated developments, as a response to the evolving real estate landscape, catering to greater demand for integrated living and bringing together work-live-play elements in land-scarce Singapore. CCT's two latest additions - CapitaSpring and CapitaGreen - are both integrated developments.

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At the same time, CMT also redeveloped Funan from a pure retail mall into an integrated development comprising an ecosystem of retail, office and co-living components.

"The case for a larger and more diversified Reit has become even more compelling in the post-Covid-19 environment. While Singapore retail and office remain relevant, the onset of Covid-19 is likely to accelerate the trend towards more mixed-use precincts and integrated developments across Singapore."

The merged entity would also be better positioned, given the combined domain expertise as well as potential cost savings from bulk procurements, further optimisation of the supply chain and the elimination of frictional costs, they said.

Both Reits also said that the pro forma accretion to distribution per unit (DPU) is not merely the sum of the combined distributable income from the two entities.

The accretion figures of +4.1 per cent and +7.6 per cent for CMT and CCT unitholders respectively have come about as a result of the consolidation of CMT's retail and CCT's office portfolios and the ability of both platforms to unlock synergies and create value for the merged entity over time.

"Such synergies will include cross-selling opportunities, enhanced digital platform and data analytics and cost optimisation. Moreover, with an enlarged asset base, the merged entity will enjoy a significantly higher development headroom and an enhanced ability and flexibility to undertake larger redevelopments to capitalise on evolving real estate trends and reposition its portfolio," they said.

But the accretion figures are backward looking, calculated on a historical pro forma basis assuming the merger was completed on Jan 1, 2019 and July 1, 2019. In view of expected retail rent correction going forward as well as a gradually returning workforce to office properties, unitholders had also wanted to know if such DPU accretion was achievable, and whether the Reits could provide "more realistic" estimates than the pro forma numbers.

The Reit managers simply replied that the pro forma financial effects do not take into consideration the synergies and opportunities that may be derived from the leadership, resilience and growth potential of the merged platform. "It is important that we look at the transaction in its entirety," they said, adding that the combined platform is expected to unlock further synergies.

In response to questions about whether CMT's management will consider improving its proposed terms as its unit price has declined drastically since late January when the deal was first announced, and whether CCT's management still considers the merger proposal to be in the interest of its unitholders given the "significant erosion of value" to its unitholders, both Reits replied that the scheme consideration was arrived at with a "balanced view" for all stakeholders.

It was based on an understanding that it would be a "merger of equals", and would achieve a "balanced and attractive" outcome for both sets of unitholders. It also fundamentally reflects a "market-to-market" valuation of both Reits.

They added that CMT and CCT unit prices have largely traded in tandem at the net exchange ratio range of 0.72 to 0.74 times. Furthermore, CCT's independent financial adviser, Deloitte & Touche Corporate Finance, believes that the financial terms of the scheme are fair and reasonable.

"The merger rationale remains valid and has in fact been reinforced by the impact of Covid-19," they said. "The trend towards mixed-use precincts and integrated developments is expected to accelerate post-Covid-19."

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