REITS and Business Trust

KGI securities

Impact/likelihood of industrial REITs consolidation Rumours of consolidation. Philip Levinson, CEO of Cambridge Industrial Trust, was quoted by Bloomberg yesterday that ‘the wave of consolidation for Singapore REITs is about to begin’. Consolidation would save regulatory and compliance costs, and smaller REITs which are not part of the broader index are significantly disadvantaged.

Smaller REITs are disadvantaged with higher yield and discount to book…
Smaller industrial REITs (<S$1b) are trading at over 8% dividend yield, in comparison to the larger peers such as Mapletree Logistics Trust (7.4%), Mapletree Industrial Trust (6.9%) and Ascendas REIT (6.4%). The smaller industrial REITs typically trade at a discount to book, while the larger peers trade near or above book. This implies that smaller REITs face a higher cost of equity, increasing the challenge for equity fundraising and raises the hurdle rate for yield-accretive acquisition.
… and hence consolidation is a key positive to smaller REITs, if it happens.
While we think that Ascendas and Mapletree are strong sponsors, which partly explains the valuation gap between the smaller and bigger industrial REITs, smaller REITs are handicapped as they appeal to a smaller range of investors. A number of institutional funds told us that they could not invest in smaller REITs as they do not meet their market cap and liquidity requirement, and also because smaller REITs may not be included in major indexes. Hence, if the smaller REITs were to consolidate and form a larger REIT, they could gain access to a wider reach of investors and improve access to equity fundraising. The larger REIT would also have a more diversified property and tenant profile, potentially improving the credit rating and hence lower the cost of borrowings.

Smaller REITs unlikely to merge in the near-term…

However, consolidation is unlikely to happen for the industrial REITs in the near-term. Cambridge
Industrial Trust clarified that there is no firm plan to consolidate, though the manager sees the possibility of consolidation in the future. The manager also mentioned that the main driver for consolidation would be higher stock liquidity and improved access to a wider range of investors. We understand that most smaller REITs do not have plans for consolidation, after speaking to Soilbuild Business Space REIT, Sabana Shari’ah Compliant Industrial REIT, Cache Logistics Trust and Viva Industrial Trust (“Viva”). Viva also mentioned that the acquisition has to be friendly since each REIT has a different sponsor. We have yet to reach AIMS AMP Capital Industrial REIT as of the time of publication, as the managers are away.
… and larger REITs may not have plans to buy smaller REITs out.

Another angle is for the larger REITs to buy out the smaller REITs, as the transaction would be yield-accretive. However, we understand from Mapletree Logistics Trust that it has no plans to do this, while Mapletree Industrial Trust did not comment on consolidation plans. We also spoke to Ascendas REIT last November on the potential of such acquisitions, and noted its considerations such as the quality and fit of the assets, as discount to book is not the only factor.

Hong Wei WONG [email protected] +65 6236 2850


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