Industrial property landlords ESR-Reit and Sabana Reit propose merger

ESR-Reit will acquire all units of Sabana Reit in exchange for new units in ESR-Reit. PHOTO: SABANA REIT

SINGAPORE (THE BUSINESS TIMES) - A union may be on the cards for ESR-Reit and Sabana Shari'ah Compliant Industrial Real Estate Investment Trust (Sabana Reit), the latest in a string of consolidations in the Singapore real estate investment trust (S-Reit) universe.

The two trusts on Thursday (July 16) announced a proposed merger, by way of a trust scheme of arrangement, which will see ESR-Reit acquiring all units of Sabana Reit in exchange for new units in ESR-Reit.

This comes eight months after activist fund Quarz Capital Management argued that ESR Cayman's cross ownership of the managers of both Reits puts Sabana at a disadvantage when the two trusts' investment mandates overlap. Quartz called for a merger then, to resolve this issue.

The enlarged entity will become the fourth-largest industrial S-Reit by market share based on gross floor area (GFA), the managers said on Thursday.

By way of illustration, if the scheme becomes effective, each Sabana unitholder will receive 94 new ESR-Reit consideration units for every 100 Sabana units held.

The illustrative issue price is $0.401 per new ESR-Reit consideration unit, and the gross exchange ratio is 0.94 times.

This will translate to Sabana unitholders receiving an implied scheme consideration of $0.377 per Sabana unit, and the implied aggregate scheme consideration is about $396.9 million.

Following the merger, the sponsor, ESR Cayman, is expected to hold about 12.2 per cent of the total issued units in the enlarged Reit.

Adrian Chui, chief executive officer (CEO) and executive director of ESR-Reit's manager, said the merger is in line with its strategy to establish ESR-Reit as a leading pan-Asian industrial Reit.

The enlarged Reit will have a market capitalisation of about $1.8 billion and a free float of some $1.3 billion.

This larger larger market capitalisation and free float, as well as higher trading liquidity, will help to facilitate its potential inclusion in key indices, which will in turn provide the enlarged Reit with access to a wider and more diversified investor base and increased analyst coverage, Mr Chui added.

"Moreover, the greater scale of the enlarged Reit diversifies our portfolio, reduces risks and enhances our resilience, especially in view of the Covid-19 pandemic."

The potential merger also offers the possibility for the trusts to reap "significant" operational synergies and realise upside through portfolio lease-up, asset enhancement initiatives and redevelopment opportunities, Mr Chui said.

The enlarged Reit will have an expanded network of 75 assets with a total GFA of about 19.2 million square feet across Singapore.

Donald Han, CEO of Sabana Reit's manager, said that with ESR Cayman as a developer-sponsor, the enlarged Reit will have access to a pipeline of assets worth over U$22 billion "in a market where quality logistics properties are increasingly scarce".

The merger will be "transformational" for Sabana Reit, Mr Han said, adding that it will enable the trust to be more competitive in the industrial S-Reit space.

"The larger asset and tenant base will put us in a stronger position to undertake initiatives to improve and rejuvenate the portfolio at lower costs with minimised execution risks," he noted.

The proposed merger will be accretive to the distribution per unit on a pro forma basis for ESR-Reit unitholders by 3.5 per cent and for Sabana unitholders by 12.9 per cent.

ESR-Reit's trustee has entered into a $460 million unsecured loan facility agreement in connection with the merger and scheme, its manager announced in a separate filing on Thursday.

For the loan, the mandated lead arrangers and bookrunners are Maybank's Singapore branch, RHB Bank Berhad, Sumitomo Mitsui Banking Corp's (SMBC) Singapore branch and United Overseas Bank (UOB). The original lenders are Maybank's Singapore branch, RHB Bank Berhad, SMBC's Singapore branch and UOB, while the facility agent is UOB.

The scheme will require, among others, the approval of Sabana unitholders for the amendments to the Sabana Reit trust deed and the scheme, at an extraordinary general meeting and a scheme meeting to be convened.

In addition, a Singapore court order is required to convene the scheme meeting and to sanction the scheme, if it is approved at the scheme meeting.

ESR-Reit will need to seek its unitholders' approval at an EGM to be convened for the merger and issue of the consideration units.

In respect of the merger and the scheme, Citigroup Global Markets Singapore, Maybank Kim Eng Securities, RHB Securities Singapore and United Overseas Bank are the financial advisers to the ESR-Reit manager, while Credit Suisse (Singapore) and HSBC Singapore Branch are the financial advisers to Sabana Reit's manager.

In November last year, following Quarz's call for the merger, ESR Cayman said it was aware of the possible conflicts of interest that may arise between the two Reits, and had put in place "strict internal controls".

Separately on Thursday morning, ESR-Reit said its distribution per unit (DPU) fell by 42.2 per cent to 1.162 cents for the half year ended June 30, from 2.011 cents a year ago. This was mainly due to the impact of the coronavirus pandemic and the subsequent "circuit-breaker" measures in Singapore, as well as the retention of about $7 million of distributable income in the first quarter for "prudent cash flow management".

Sabana Reit meanwhile said its first-half DPU fell 65.7 per cent to 0.47 cent from 1.37 cents a year ago. Due to Covid-19, the manager has decided to temporarily retain 55 per cent of its first-half distributable income to conserve capital, which will be paid out at a later date, it said. Had this amount been included, DPU would have been 1.05 cents.

Units of Sabana Reit closed flat at $0.36 on Wednesday, while ESR-Reit units finished unchanged at $0.39.

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