On April 8, OUE Commercial Reit (OUE C-Reit) and OUE Hospitality Trust (OUE H-Trust) jointly announced their proposed merger, potentially creating one of the largest diversified Singapore Reits, with total assets of about S$6.8 billion (US$5 billion).
The proposed merger will be put into effect by way of a trust scheme of arrangement, with OUE C-Reit acquiring all the issued and paid-up securities in OUE H-Trust in exchange for a combination of cash and new units in OUE C-Reit.
Under the scheme, stapled security holders of OUE H-Trust will receive S$0.04075 in cash and 1.3583 new OUE C-Reit units per stapled security. Following the proposed merger, OUE group (the sponsoring group joining the two entities) will continue to retain a significant stake of 48.3% of the total issued units in the enlarged Reit.
Tan Shu Lin, CEO of OUE Commercial Reit Management, manager of OUE C-Reit, describes the merger as transformative and enhances the resilience of the enlarged Reit’s income and strengthens its ability to capitalize on further growth opportunities.
On the other hand, Chen Yi-Chung Isaac, acting CEO of OUE Hospitality Reit Management, manager of OUE H-Trust, says the merger creates a platform of scale equipped with an enlarged capital base and enhanced financial flexibility to drive long-term growth.
The transaction indicates a continuing consolidation in the sector, following the merger between Viva Industrial Trust and ESR Reit last year, which created an enlarged industrial and logistics trust with a total asset base of S$3 billion.
The OUE C-Reit and OUE H-Trust merger is expected to reap a number of benefits, including the creation of one of the largest diversified Reits in Singapore based on the total asset size as at the end of 2018. It will also benefit from a significant increase in market capitalization to about S$2.9 billion, as well as a larger free float of about S$1.1 billion.
The merger is expected to lead to higher trading liquidity, potential index inclusion and a wider investor base. The enlarged Reit can potentially enjoy a positive re-rating that will benefit all unit holders in the long term.
The transaction will also result in both a larger capital base and broadened investment mandate, which will provide flexibility and capability to drive long-term growth. With a bigger capital base, the enlarged Reit will have an increased funding capacity of about S$1.024 billion. This will improve the enlarged Reit’s ability to deliver long-term growth through value accretive acquisitions and asset enhancement initiatives.
In addition, it will also broaden the investment mandate of the enlarged Reit to include commercial, hospitality and integrated developments. This will provide the Reit with greater flexibility to grow its portfolio.
With a well-diversified portfolio across office, hospitality and retail sectors, the enlarged Reit will reduce the concentration risk associated with exposure to any single real estate asset class. The commercial portfolio will include about 1.9 million sq ft of prime office space in the core central business district and about 306,000 sq ft of prime retail space.
The hospitality portfolio, meanwhile, will include upscale hotels with an aggregate of 1,640 rooms located in the strategic locations of Orchard Road and Changi Airport.
The proposed merger will be distribution per unit accretive on a historical pro forma basis for both OUE C-Reit unit holders and OUE H-Trust stapled security holders by 2.1% and 1.4%, respectively, for the 12-month period ended December 31 2018.
Citi, Credit Suisse and Oversea-Chinese Banking Corporation are the financial advisers to OUE C-Reit manager, while Bank of America Merrill Lynch is the sole financial adviser to OUE H-Trust manager.