What If The Two Frasers REITs Merge?

The Business Times reported on 29 Nov 2019 that two of Fraser’s REITs, Frasers Commercial Trust (FCOT) and Frasers Logistics & Industrial Trust (FLIT), are making plans to merge, according to sources familiar with the matter¹. With both counters halted for trading since the morning of 28 Nov 2019, and not much news forthcoming, the merger issue at this point would be at best, a conjecture.

However, with the slew of trust mergers such as the Viva and ESR one last year and the combination of the OUE hospitality and commercial trusts just a few months ago, the possibility of a merger involving these two seems plausible. FCOT and FLIT are two out of the four trusts in the Frasers family listed in the local Singapore Exchange (SGX).

If (and a very big IF) it is a merger, let us take a look at the numbers before and an implied after:

Trust	FCOT	FLIT	Combined
Total Asset Value	SGD 2,226.9 mil2	AUD 3,554.1 mil3	SGD 5,514.4 mil (AUDSGD 0.925 as at 30 Nov 2019)
Net Asset Value Per Unit	SGD 1.612	SGD 0.953	SGD 2.56
Price-To-Book (as at 29 Nov 2019)	1.044	1.314	1.18 (averaged)
Gearing/Leverage	28.6%2	33.4%3	31% (averaged)
Dividend Yield (trailing, as at 30 Nov 2019)	5.75%5	5.65%5	5.7% (averaged)
No. of Properties	62	913	97
Occupancy	95% (committed)2	99.6%3	97.3% (averaged)
Weighted Average Lease Expiry (by gross rental income)	4.9 years (committed)2	6.31 years3	5.61 years (averaged)

Note: The above figures may be asynchronous due to the different “as at” information being presented from the reference sources. It also provides a very simplistic and assumptive point of view should the merger event occur, which may or may not materialize in the future.

At a combined asset value of SGD 5.5 billion, it sits between the current ESR REIT (SGD 3.3 billion as at 30 September 2019⁶) and OUE Commercial REIT (SGD 6.8 billion as at 30 September 2019⁷). Therefore, the asset value is comparable to the two mentioned post-merger REITs.

According to SGX rules, a trading halt cannot exceed three market days⁸, hence we may know the actual news earliest this coming Monday.

Disclosure: 

The Bedokian’s portfolio contains FCOT.

Disclaimer

1 – Frasers Logistics, Frasers Commercial Trust make plans to merge: sources. The Business Times. 29 Nov 2019. https://www.businesstimes.com.sg/companies-markets/frasers-logistics-frasers-commercial-trust-make-plans-to-merge-sources (accessed 30 Nov 2019)

2 – Frasers Commercial Trust. 4QFY19 and FY19 Financial Results. 22 October 2019. https://fcot.frasersproperty.com/newsroom/20191105_201648_ND8U_LOTB79B842SXVZX5.2.pdf (accessed 30 Nov 2019)

3 – Frasers Logistics & Industrial Trust. 4QFY19 Results Presentation. 6 November 2019. https://flt.frasersproperty.com/newsroom/20191106_063827_NULL_OFF7JENV0BVJIHYI.3.pdf (accessed 30 Nov 2019)

4 – Based on last closing price on 29 Nov 2019.

5 – Based on data from Reit Oracle. https://www.reitoracle.com (accessed 30 Nov 2019)

6 – ESR REIT Financial Results Presentation. 3Q19. 25 Oct 2019. https://esr-reit.listedcompany.com/newsroom/20191025_062614_J91U_AUTIU22SVU0IE6H4.2.pdf (accessed 30 Nov 2019)

7 – OUE Commercial REIT. Financial Results for 3^rd Quarter 2019. 13 November 2019. https://investor.ouect.com/newsroom/20191113_194311_TS0U_V36L8QUSDHME2BXH.1.pdf (accessed 30 Nov 2019)

8 – SGX Rulebook. Mainboard Rules > Chapter 13 Trading Halt, Suspension and Delisting > Part II Trading Halt and Voluntary Suspension > 1302. http://rulebook.sgx.com/en/display/display_main.html?rbid=3271&element_id=5338(accessed 30 Nov 2019)

The Bedokian Review Of Mapletree North Asia Commercial Trust And Some Takeaways

Back in June this year, I had written a post on Mapletree North Asia Commercial Trust (MNACT) in my “Inside The Bedokian’s Portfolio” series (see here). In it, I had mentioned about the crown jewel Festival Walk, a large retail and office property situated in Hong Kong, and itself was a prime concern due to the huge concentration in MNACT’s book value and revenue, which both stood at about 60-plus percent.

Last week, Festival Walk had sustained internal damages that warranted a full closure, after it was being targeted by protestor groups in the current unrest. With reopening, we are not very sure whether it may be subjected to further damages. This definitely has a huge impact in retail revenue from shoppers, which in turn rental revenue from Festival Walk tenants and eventually dividends to MNACT unitholders.

I had made an extensive analysis and prognosis of the Hong Kong situation, given the social, geo-political and economy factors, the whole thing may not end quick, and even so, there may still be underlying tensions simmering for another one. Hence, in view of my conclusion above (I could be wrong, though, so please do your own due diligence), I had fully divested MNACT.

It is not really a loss as I had entered at SGD 0.91 back in August 2014 and there were still some capital gains despite my second tranche (which was two-thirds number of units of the first one) of SGD 1.41 added in July 2019. Adding in dividends, it was about 9.8% annualized.

Every moment is a learning opportunity, so using this real-life situation, let me provide some pointers to you as takeaways.

Takeaway #1: Rebalancing The Portfolio, The “Wishlist” And Averaging Strategies

As of 15 November 2019, MNACT stood at about 4.8% of our Bedokian Portfolio in value. The divestment meant an addition of 4.8% to the cash portion and a drop of the same percentage points from our REITs asset class, which is a substantial deviation from the strategic allocation. Therefore, rebalancing has to be done on our Bedokian Portfolio and I would redeploy this capital as soon as possible. This is where the “wishlist” comes in useful.

As mentioned in my ebook, the “wishlist” is a shortlist of financial instruments and investment vehicles (of the various asset classes) that you came up with on a cursory basis¹. It also serves as a “what’s next to enter?” guide. Besides the “wishlist”, you could also employ averaging strategies (up or down) on your existing holdings (see here on my post on averaging). 

Takeaway #2 – What Price To Reenter?

MNACT, in my opinion, still has potential, but not at this moment. Besides Festival Walk, it has eight other properties; two in mainland China and six in Japan. The next question would be: What price to reenter?

The most simplistic (and worst-case scenario) to determine the price would be to discount the entire net asset value (NAV) of Festival Walk, which is 66% based on the latest property valuation as at 31 March 2019². With MNACT’s NAV of SGD 1.43 as at 30 Sep 2019³, it means the price would be around SGD 0.48. The chance of the price going down that low is remote, though it is not impossible.

There are other valuation methods for REITs, such as funds from operations, dividend yield, etc. As I had stated here, pricing and valuation is very subjective depending on the methodologies used, so stick to a method that works best for you.

Takeaway #3 – Looking Beyond

True that at this price, MNACT’s yield stood at about 6.7%, but all dimensions must be factored in before a sound transaction decision is made. The Bedokian Portfolio’s three-tier fundamental analysis model⁴ (financial statements, environmental factors and economic conditions) covered most aspects and angles required while looking at a REIT (or company) as it looks beyond just the usual ratios and numbers.

On top of economics, we need to consider also the social, political and even natural variables, for these do really play a part on how and where your investments are heading. Therefore, it is important to look beyond.

Disclaimer

1 – The Bedokian Portfolio, p94-95

2, 3 – Mapletree North Asia Commercial Trust, Financial Results for the Period from 1 April 2019 to 30 September 2019. https://www.mapletreenorthasiacommercialtrust.com/~/media/MNACT/Newsroom/Announcements/2019/Oct/MNACT_PresentationSlides__2QFY1920.pdf (accessed 20 Nov 2019)

4 – The Bedokian Portfolio, p84-85