ESR-REIT (SGX: J91U) and Sabana REIT (SGX: M1GU) Propose Merger To Strengthen Portfolio



Last week, the managers of both ESR-REIT (SGX: J91U) and Sabana Shariah Compliant Industrial REIT (SGX: M1GU) has announced a merge proposal for the two REITs. Based on the proposal, a Sabana REIT unitholder will receive 0.94 units in ESR-REIT for every one unit in Sabana REIT. Taking the last traded price of ESR-REIT of $0.40 for example, with a gross exchange ratio of 0.94, you will be entitled of $0.376 worth of ESR-REIT share, for every unit of Sabana REIT share you have. The proposal will required approval from at least 75% of the shareholders in an extraordinary general meeting (EGM), which is expected to be around October.

What You Need to Know

Sabana REIT Holders


Based on 1st Half 2020 financial results, the proposal of merger is distribution per unit (DPU) accretive for Sabana REIT holders. The REIT manager claimed that the merger is 12.9% accretes to its DPU (increased from 2.342 cents to 2.643 cents).

ESR-REIT Holders


The merger is both DPU accretive and NAV accretive for ESR-REIT. Based on the 1st half results, it will be 3.5% accretes to its DPU. While it is significantly less as compared to Sabana REIT’s accretion, ESR- REIT will also enjoy 5.2% accretion to its net asset value (NAV). Hence, ESR-REIT’s NAV will rise from 41 cents as at June 30, to 43.2 cents post-merger.

Post-merger


  1. The enlarged REIT will have a portfolio size of $4.1 billion, with 100% focused in Singapore assets, placing it the fifth largest REIT behind Ascendas REIT, Mapletree Logistics Trust, Frasers Logistics and Commercial Trust, and Mapletree Industrial Trust.

  2. Both the managers are optimistic on the merger that it would lead to the inclusion in global indices, for example the FTSE EPRA NAREIT Developed Index. This would lead to higher liquidity and trigger ETFs rebalancing in favour of both the REITs.

  3. With an enlarged portfolio and more diversified assets, the REIT will potentially enjoy lower cost of capital.

Summary


If everything goes according to the plan, the EGM will be held in October and the combined REIT will start trading in November if it is approved by the shareholder. We are positive on the proposal, with a combined portfolio, it would strengthen its balance sheet and potentially reduce the overall expenses for both REITs.

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