Challenges abound. First of all, the risk to CLI’s REITs is obvious. The operational underperformance of Mapletree Pan Asia Commercial Trust (MPACT), Mapletree Logistics Trust (MLT) and Mapletree Industrial Trust (MINT) compared to their peers this year are potential challenges. Clearly, the CLI REITs would be reluctant to merge with these REITs on an “as-is” basis. Some market observers suggest the Mapletree REITs “break up” with their assets divested into separate vehicles.
Already, plans are afoot to divest MLT’s Chinese warehouses into a private fund. Similarly, MPACT’s North Asian assets could be carved out into either a private fund or a separate REIT.
Song and Khi say: “Key concerns include questions about the strategic fit of the merger, possible distraction from CLI’s efforts to grow its private funds business, risks to CLI’s existing S-REIT platform, and skepticism over CLI’s ability to deliver cost synergies, given limited evidence following the Ascendas integration.”
To be fair, parts of the Ascendas integration were smooth - mainly India where CLI had a limited footprint and Australia via CapitaLand Ascendas REIT (CLAR). However, the Ascendas portfolio in China was somewhat challenging, not because of the portfolio per se but China’s slowdown following Covid, and the subsequent (and current) US-China spat.
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Different geographical focus
Among investor concerns that The Edge Singapore(TES) has flagged, and echoed by the JP Morgan analysts include the implications, mainly negative for CapitaLand Integrated Commercial Trust (CICT) and CLAR which are trading at premiums to their net asset values. For instance, market observers reckon that a scenario as painted by the analysts at DBS Group Research that CICT merge with MPACT and CLAR with MINT and MLT could be far-fetched. CLAR’s focus is on developed markets, and CICT’s focus is mainly Singapore.
Tan Choo Siang, CEO of CICT’s manager has gone on record to say that CICT will focus on Singapore because “if there are enough things to do here, there’s no reason for us to think about going overseas, and we have proven over the last few years that there are enough things for us to do locally.”
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CICT has been viewed as one of the best proxies for Singapore commercial real estate by investors since its acquisitions of ION in October last year and CapitaSpring this year, a view articulated by Tan himself in an interview with TES in August.
William Tay, CEO of CLAR’s manager, says in a recent interview with TES, “We have always focused on creating a REIT that is resilient, that is diversified, across mature, developed economies.”
“Investors were worried about the potential for a de-rating of CLI’s S-REITs, which could negatively impact returns and hinder S-REIT FUM (funds under management) growth. There are also concerns about reduced market diversity if CICT absorbs MPACT and CLAR merges with MINT and MLT, potentially affecting the vibrancy of the S-REIT sector,” Song and Khi state in their report.
Additional risks include possible diseconomies of scale, drag from overseas assets, slower growth, and a holding company discount for larger REITs, they add.
Based on available data, CLI’s listed REIT FUM has grown since its FY2021, when the original CapitaLand split its business into CLI and the unlisted CapitaLand Development, from $58 billion to $70 billion as of June 30 which includes CLI’s indirect stake in Japan Hotel REIT.
Mapletree’s listed REIT FUM appears to have fallen - based on available data. Part of the reason is that valuations of properties in China have eased because of the slowdown and divestments.
Synergies absent
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In an earlier JP Morgan report dated Nov 3, Song and Khi have a series of charts and tables to indicate the lack of synergy between CLI and Mapletree. CLI’s current focus is to scale up its private funds business for fee income. One of the charts shown in the Nov 3 report indicates its listed REITs MPACT, MLT and MINT are the main contributors to Mapletree’s fee income.
“Investors are concerned that acquiring Mapletree with its substantial $21 billion S-REIT FUM, could distract from CLI’s focus on expanding its private funds business, especially given fee pressure, underperformance and outflows from some of Mapletree’s private funds,” Song and Khi state. “Clients also expressed concerns about CLI’s ability to raise capital from limited partners who may have experienced losses in Mapletree’s funds,” the duo adds.
One of the M&A combinations flagged by the JP Morgan report is a reduction of CLI’s China exposure, by selling its low-ROE on-balance-sheet China assets to Temasek or Mapletree in exchange for the latter’s fund management business. This was viewed positively by investors, the report says. On the other hand, most investors thought acquiring all of Mapletree is seen to too large, and dilutive to CLI’s own ROE given that Mapletree’s ROE is lower than CLI’s.
Is JP Morgan suggesting that the dilution coupled with the challenges around M&A with the listed REITs which have their own board and independent unitholders, make this particular merger a difficult ask? That’s what it sounds like, market obervers note.
