SINGAPORE - Reit (real estate investment trust) mergers are the flavour of the season and activist fund Quarz Capital Management is advocating a union of CapitaLand's two hospitality trusts.
In an open letter on Thursday, Quarz argued that Ascendas Hospitality Trust (A-HTrust) is undervalued due to its "suboptimal size", and should be merged with larger peer Ascott Reit, which CapitaLand also controls.
A-HTrust was owned by Temasek subsidiary Ascendas-Singbridge until CapitaLand agreed to acquire the latter in January.
The question of a direct conflict in the two hospitality trusts' overlapping mandates has been raised before. CapitaLand group chief executive Lee Chee Koon told shareholders earlier this month: "There are various possibilities to resolve the conflict. One is, we go to shareholders to ask for a narrower mandate for each Reit. The second possiblity is to sell one of them. The third is to merge the two. All this, we need to review."
Quarz wrote on Thursday (April 25) that a merger by way of a trust scheme is its preferred solution: "We propose that Ascott Reit offer A-HTrust's unitholders a 5 to 10 per cent premium to book value. A tentative deal where 0.75 unit of Ascott Reit and around $0.18 of cash will be exchanged for one unit of A-HTrust can be structured (total price of around $1.08)."
A-HTrust units were up 0.5 cent or 0.55 per cent at 91 cents as at 10.27am on Thursday. Ascott Reit units were down one cent, or 0.83 per cent, at $1.19.
The letter was addressed to the management and board of A-HTrust. Quarz said it has been a long-term shareholder of A-HTrust, but did not disclose its stake.
A-HTrust trades at a 9 per cent discount to its net asset value despite its prime asset base because of its small $1 billion market cap, Quarz argued: "Due to its size, any significant acquisition will also result in a substantial capital raising from A-HTrust's existing investors base. This has further weighed on investors' sentiments."
However, an enlarged Ascott-Ascendas Hospitality Trust (as Quarz calls it) could become Singapore's eighth largest Reit by assets under management, Quarz said, with an asset base exceeding $6.6 billion and a market cap of $3.6 billion.
A larger Reit would qualify for more index inclusion, Quarz said, noting that index component Reits trade at a tighter yield with higher trading volume since they are tracked by global institutional investors.
An integrated Reit manager could also make more accretive and strategic acquisitions, Quarz said: "The launch of Ascott's Citadines Connect Business Hotels in 2019 and the subsequent purchase of Felix Hotel by Ascott Reit (to be rebranded as Citadines City Connect) reflect the immense opportunity in business hotels. A-HTrust owns a number of prime hotels under management contract which can be rebranded as Citadines Connect to expedite the expansion of the brand."
An enlarged Ascott-Ascendas Hospitality Trust also has more financial muscle to pursue more sizeable acquisitions where there is less competition, Quarz added.
It opined that Ascott Reit's unitholders can benefit from a 5 per cent jump in distribution per unit from $0.068 to $0.072 if a merger takes place as it envisions.
Ascott Reit's spokesman said that CapitaLand's transaction with Ascendas-Singbridge is subject to conditions precedent being fulfilled and has yet to be effected. The Reit has noted the overlapping investment mandates of A-HTrust and Ascott Residence Trust, and shall be considering various options with the objective of maximising value for its unitholders, added the spokesman. Ascott Reit will make an announcement when there are material developments.
Quarz also urged A-HTrust to put on hold any acquisition plans until the corporate governance concerns arising from the overlapping investment mandates of the two CapitaLand-owned Reits is resolved: "This is to prevent any conflict of interest matters which can potentially harm the reputation and trust in both the trust and the sponsor which are embarking on a new phase of transformational changes."
Earlier this month, OUE Commercial Real Estate Investment Trust and OUE Hospitality Trust proposed to merge in a cash and stock deal to create one of Singapore's largest Reits with total assets of about $6.8 billion. Last October, ESR-Reit and Viva Industrial Trust completed their merger into a combined entity with assets of about $3 billion at the time.