On 2nd Dec, both the managers of Frasers Logistics Trust (FLT) and Frasers Commercial Trust (FCOT) has proposed a merger of the two REITs, with a combined market capitalisation of $4.2b. Under the proposal, FLT will be acquiring all units of FCOT for about S$1.54b. The proceeds will be paid in the form of a combination of cash and new FLT units. For each FCOT unit, you will receive $0.151 in cash and 1.233 FLT shares at $1.24. This would represent a total value of $1.68 per unit, which is 2 cents below FCOT's open price today.
Why does the merger make sense
1. Inclusion in major indices
Post-merger, with a market capitalisation of $4.2b, FLT will become the top 10 largest Singapore REITs. The bigger portfolio and enhanced float should give the REIT a higher weighting in the FTSE EPRA/NAREIT Index, and potentially to be included in other indices. This will drive up the demand of the REIT and may trigger a re-rating by the analysts.
2. Diversified portfolio
The combined portfolio of 98 properties comprising industrial, business parks, offices across five countries would further reduce concentration risks for both the REITs. The occupancy rate remains almost full at 99.5% with a pool of diversified tenants.
3. Almost $1b of debt headroom
From the capital perspective, the combined portfolio will have an estimated leverage of 37%. This would give the REIT a debt headroom of $868m for future acquisitions and asset enhancement initiatives. Besides, the REITs' sponsor has a pipeline of properties that worth more than $5b, which the two REITs have the first-right-of-refusal.
What you need to know
Based on the given timeline, the two REITs will hold an EGM in Q1 next year to get approval from the unit holders. If the support is granted, the REITs will proceed to obtain the High Court's approval. The whole process is expected to complete in April 2020.
When it comes to REITs investing, there are always two key aspects that investors should look at: consistent income with low portfolio risk. The merger is, in general, fulfill the two objectives. Port-merger, the portfolio should be yield-accretive to both REITs (>2%), and at the same time, reduce the portfolio risk with more diversified assets.