On the 18th of May 2018, the managers of ESR-REIT as well as Viva Industrial Trust (VIT) made a joint announcement that there will be merger by way of a trust scheme of arrangement.
In short, ESR-REIT will be acquiring VIT for $0.96 per unit. VIT unitholders will be receiving $0.96 and 1.6 newly created ESR-REIT units for every VIT unit that they own.
After merger, the REIT will be the 4th largest industrial REIT in Singapore. ESR-REIT will be paying 10% of the total cost in cash and 90% of the total cost in new ESR-REIT units. After merger, the new REIT will still be under the management of ESR-REIT’s manager.
Net Property Income will increase by 104.3%. Portfolio size will increase by 79.8% to $3 billion. WALE however, will drop from 4.5 years to 3.8 years.
As an ESR-REIT unitholder, I was invited to the SIAS-ESR-REIT dialogue held in Suntec City on 21st August 2018. Here are my observations from the session. If you want to know more about VIT, I wrote an article about Viva Industrial Trust and why I think it’s not a good REIT to invest at the moment. To know a lot more about the merger, clicking here will bring you to the unitholders’ circular.
The dialogue session was organised by Securities Investors Association Singapore (SIAS) and moderated by Mr David Gerald, President and CEO of SIAS. The dialogue session was a very informative session as it allows unitholders to put their questions across to the managers who otherwise, is usually inaccessible by the average retail investor.
The session allows unitholders to post questions to the CEO of ESR-REIT, Mr Adrian Chui and the CEO of Viva Industrial Trust (VIT), Mr Wilson Ang. Before the start of the Q&A session, Mr Adrian Chui presented his case as per the unitholder’s circular about the prospects of the merger. It was informative to be in the session although at times, strong words and tempers flared in the room.
CEO Mr Adrian Chui was supportive of the merger as size is important for a REIT. The positives of the merger includes cost saving, increased liquidity and float, increased DPU as well as a possible index inclusion.
With the merger, ESR-REIT is able to tap on the business parks VIT which he believe are scarce in Singapore and is the future of where ESR-REIT should be heading. He believes that the property market in this aspect is just starting to bloom, therefore, the merger will be beneficial to ESR-REIT in attacking this market.
Mr Adrian Chui revealed that he was the driving force between the merger as he has known Mr Wilson Ang for years and recognised Mr Wilson Ang as a capable industrial veteran. After merger, Mr Wilson Ang will be joining him as part of the management team with Mr Adrian Chui retaining the position of CEO.
In searching for merger opportunities, Mr Adrian Chui believes that VIT is the only one that checks all the boxes in their search criteria as VIT’s assets will be able to complement ESR-REIT’s portfolio whereas ESR-REIT will be able to complement VIT through their superior credit rating.
One of the biggest questions that unitholders has is the price in which acquisition is done. ESR-REIT will be paying $0.96 for each VIT unit, which is 6 cents more than current market price as well as a significant premium over the current Net Asset Value per unit of $0.7651.
Mr Adrian Chui believes that it shows that the market recognises the potential of VIT with their assets showing where the future industrial real estate market will head to.
Personally, it is also beyond me as to why there is a need to buy a REIT at a 26.4% premium.
Another huge concern that unitholders had during the session was the double whammy of reduced NAV per unit of the enlarged REIT.
As 90% of the cost of merger will be raised through units placement, the enlarged REIT will have a NAV per unit of $0.492, down from the current $0.584.
As part of the acquisition, the ESR-REIT will be taking on VIT’s debt and re-financing them. The positive thing about ESR-REIT is that their loans are not secured to any of their properties and they are currently operating at a healthy gearing ratio of 31.3%.
VIT on the other hand, has a less superior credit rating are operating at a rather precarious gearing ratio of 39.8%.
After merger, the enlarged REIT will be operating on a gearing ratio of 38.9%, which gives the enlarged REIT very little buffer for any additional funding.
Manager has indicated that, should the need for capital arises, the management will be looking towards the unitholders for additional capital. Thereby, further diluting the ownership for unitholders.
Short land lease
Unitholders was also concerned about the short land lease of two properties, namely Viva Business Park and Jackson Square, who has 13 years and 11 years of land lease left respectively. This is of concern as Viva Business Park accounts for “about 25%” of VIT’s Net Property Income, which will subsequently accounts for about 12.5% of the enlarged REIT’s Net Property Income.
The last question of the evening was reserved for the future should the merger not go through. Probably sensing that the mood of the unitholders to be rather cold towards the merger, a unitholder asked if the Mr Adrian Chui what will be the plans for ESR-REIT should the merger not go through.
The answer by Mr Adrian Chui is that pretty much, life goes on as per normal, although AEI and portfolio expansion will be much slower without VIT coming on board. Personally, it seems to me that there hasn’t been much thought on this topic even though this is on the minds of some unitholders as well.
Throughout the session, there were many voices of dissent that at times resulted in flared tempers and strong words. As an ESR-REIT unitholder, I believe it is an excellent idea to have the dialogue session and I feel appreciative of the attendance of SIAS, ESR-REIT and VIT’s manager in providing a platform for unitholders to channel their questions across.
I have my reservation on the merger as well as it seems like VIT unitholders are getting the better deal at the expense of ESR-REIT. The idea of merger by Mr Adrian Chui is an excellent one, as doing so can have the potential of bringing ESR-REIT forward on many different aspects.
It seems to me that so much effort is being put through on the merger such that it is a lose-lose situation for unitholders in a sense that the REIT incurs all the cost of the proposing the merger if the merger does not goes through. In the situation that the merger goes through, ESR-REIT unitholders face the prospect of massive dilution of their ownership, increased debt, aging properties and reduced NAV.
The whole merger reminds me of the Chinese saying, “一动不如一静”, which means, not moving is better than having unnecessary movements.
Should ESR-REIT or VIT unitholders vote for the merger?
What I know is that the best thing from the dialogue session is the free Chicken Chop that was served.
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