Real Estate Investment Trusts (REITs) investing is an important component in Singaporeans’ retirement portfolio. Many people buy REITs with the intention to keep for their retirement years. But just as “company privatisation“, REITs merger becomes a new norm in today’s market.
Recently, Viva Industrial Trust (VIT) and ESR-Reit announced a proposed merger to create Singapore’s fourth largest industrial Reit with a combined S$3 billion in assets. If you are a VIT or ESR REIT shareholder, this article may help answer some of your burning questions.
Being a VIT shareholder myself, I attended the recent “VIT Dialogue Session” organized by SIAS. The dialogue is a very useful session and we got to speak with CEO and Executive director Wilson Ang (VIT) and Adrian Chui (ESR). I compiled some of the common questions in this post.
Note I am speaking from a VIT shareholder’s point of view. You may view it differently if you are an ESR-Reit unitholder. After all, if the deal is too good for VIT shareholders, it is not as good as it is for ESR-REIT holders. You should also take note that the EGM is taking place on 31 August 2018.
The information in this article is for education purpose. It does NOT constitute financial advice or recommendation. The contents are of my personal views and you are responsible for your own investment decision.
Some Background: Who are VIT and ESR REIT
Viva Industrial Trust (VIT) comprises two trusts:
- Viva Industrial Real Estate Investment Trust (“VI-REIT”)
- Viva Industrial Business Trust (“VI-BT”)
VIT focuses on a diversified portfolio of an income-producing real estate that is predominantly for business parks and other industrial purposes in Singapore and elsewhere in the Asia Pacific region. VIT’s current property portfolio covers an aggregate gross floor area of 3.9 million sq ft and is strategically located in key business parks and established industrial clusters with an aggregate valuation of close to S$1.3 billion.
ESR-REIT invests in quality income-producing industrial properties. As at 31 December 2017, it has a diversified portfolio of 48 properties located across Singapore, with a total gross floor area of approximately 9.9 million sq ft and a property value of S$1.68 billion.
What is the Offer?
The information below is from the Scheme Presentation which you can download from VIT’s website.
ESR-REIT is offering VIT shareholders $0.96 Scheme Consideration per share
- It is payable 10% in cash, 90% in new ESR-REIT Units
- New ESR-REIT Units to be issued at S$0.54 per ESR-REIT Unit
Here is what it means to VIT shareholders. If you have 1,000 VIT shares and the scheme goes through, you will receive $96 in cash and 1,600 ESR-REIT Unit (the Consideration Units).
Why do They Want to Merge?
According to the merger documents, the VIT manager gives 5 key reasons.
- Attractive Premium to NAV and Historical Trading Prices
- Distribution per Stapled Security and NAV per Stapled Security Accretive to Stapled Securityholders
- Creation of a Sizeable and Liquid Industrial Singapore-listed REIT (“S-REIT”)
- Enlarged and Diversified Portfolio
- Enlarged Trust will be Well-Supported by a Strong and Committed Developer-Sponsor
1. Attractive Premium to NAV and Historical Trading Prices
The VIT manager believes that the merger offers a premium based on the past VIT share prices.
This may seem true as most transactions were below since the REIT’s IPO was below $0.96.
But the VIT shareholders must take note that they are having the new ESR-REIT share at a slight premium based on the last closing price $0.515 (as 21 August 2018).
So the VIT shareholders do get a premium (otherwise nobody will approve the merger), but it may be a small premium.
Additional Reading: Did ESR Overpay To Acquire Viva?
2. Proposed Merger will be DPU and NAV Accretive to Stapled Securityholders
The VIT manager calculated as below:
- 3.6% Distribution per Stapled Security accretive
- 14.5% NAV per Stapled Security accretive
But since this is a backwards-looking pro forma calculation, I won’t bother too much about this.
3. Creation of a Sizeable and Liquid Industrial Singapore-listed REIT
This is the real deal. Post the Merger, the Enlarged Trust is expected to become the 4th largest industrial S-REIT, with a combined asset size of S$3 billion.
Size does matter for Real Estate Investment Trust. As a Capitamall Trust unitholder, I used to worry when they rebuild Funan Digital Mall. But the share prices since then spoke by itself.
A large REIT benefits from many aspects especially in terms of lowing the cost of financing. In a volatile and rising interest rate environment like now, being big is good.
In addition, a large portfolio benefits economy of scale and operational costs can be spread out.
4. Enlarged and Diversified Portfolio
The manager emphasized a few times that the merger not only creates a larger portfolio, but a more diversified business.
5. Well-Supported by a Strong and Committed Developer Sponsor
ESR is a leading Pan-Asian logistics real estate developer, operator and fund manager focusing on developing and managing institutional, quality logistic facilities.
The merger helps leverage off ESR’s strong network of strategic relationships with leading global e-commerce companies, retailers, logistics service providers and manufacturers.
The ESR has the presence in China, South Korea, Japan, India, Singapore and Australia. This brings up the next question.
One unitholder is considering if the enlarged REIT will be ending up investing more overseas properties and create more uncertainties. She says she is very happy with a Singapore concentrated REIT which is “sheltered” from trade wars and currency fluctuation overseas.
This is an interesting thought as some people may feel a global diversified REIT is more stable. But shouldn’t a Singapore REIT just be a Singapore REIT?
Nevertheless, ESR-REIT’s reply is that if they were to venture to overseas, they still have to come back to the security holders for approval.
Why Not 100% Cash?
One person asks if the unitholders can receive 100% cash instead of new ESR-REIT units. The answer is NO. Technically, this is possible but the reality is that to finance 100% for the merger, it is more difficult to get ESR-REIT holders approving the deal.
0.25% VIT Facilitation Fee, Will you Vote?
Besides the resolution to approve the merger scheme, there is a Resolution 2, which is to approve the VIT Facilitation Fee Amendments.
The VIT Manager appeals to the security holders to compensate the manager a fee of 0.25% of the aggregate Scheme Consideration. This is because in the current VIT Trust Deeds, there is no provision for such compensation (unfortunately to the manager) and the manager gets nothing by making the merger succeed.
The manager feels this fee is reasonable because if they spinoff the REIT instead of the proposed merger, they could be compensated 0.5% of the consideration. But they feel the proposed merger is more beneficial to the security holders.
The next question is, who pays for this fee? Given the Scheme Consideration is more than $1 billion, the fee comes out to be more than $2.5 million.
The answer is that from the accounting point of view, the fee will be “capital in nature” and will not directly affect VIT security holders. It will be absorbed by the new enlarged REIT.
As a VIT security holder, you can vote FOR or AGAINST this resolution. But as long as the first VIT Trust Scheme Amendments resolution is passed, the merger is approved.
What is the next step
The expected timeline is as below. This date may change but it is likely to happen in this way:
- On August 31, both ESR-REIT and VIT will hold EGM to get their respective shareholders for approval
- If both managers get the shareholders’ consent, they will proceed with the merge and the indicative date of completion is Oct 3, 2018
- VIT will be delisted and VIT shareholders will see their shares become ESR-REIT units the next day
I hope this article gives more clarity to VIT shareholders. If you like this article, share it by clicking the button below so more people can benefit.
If you are shareholders of VIT or ESR-REIT, don’t forget to cast your vote on August 31. Feel free to leave your comment below if you have any general questions.
Update on 15 Oct 2018: The VIT Managers has announced that:
- Scheme effective date: 15 October 2018
- Expected date for the payment of the Scheme Consideration: 17 October 2018 (or no later than 24 October 2018)
- Expected date for the delisting of Stapled Securities: 22 October 2018