The proposed merger of Frasers Logistics and Industrial Trust and Frasers Commercial Trust is the latest in a flurry of mergers among Singapore REITs this year. But not all mergers are good for shareholders (technically, REIT investors are called unitholders but let’s not split hairs here).
To determine if the proposition is fair to Frasers Logistics and Industrial Trust shareholders, I did a quick analysis of the deal.
[Note: An article discussing what the merger means for Frasers Commercial Trust shareholders was published on 10 December 2019. You can find it here.]
Details of the deal
In essence, Frasers Logistics and Industrial Trust will be absorbing Frasers Commercial Trust. It will pay S$0.151 in cash plus 1.233 new units of Frasers Logistics and Industrial Trust for every Frasers Commercial Trust unit.
In addition, Frasers Logistics and Industrial Trust is proposing to purchase the remaining 50% freehold interest in Farnborough Business Park that is not already owned by Frasers Commercial Trust.
Is Frasers Logistics and Industrial Trust Overpaying?
A share-plus-cash deal can be complicated to process. That’s why I prefer to break it into two parts. First is the issuance of new shares, and second is the purchase of the REIT using existing cash and the capital raised from the fundraising exercise. I will address each of these separately.
- Frasers Logistics and Industrial Trust is issuing new shares at a premium to its book value. The new shares (if you consider that they are issued at market prices of $1.23), is 29% higher than Frasers Logistics and Industrial Trust’s current book value per share of S$0.95. Additionally, the new shares are being issued at a trailing annualised dividend yield of 5.8%, which is quite low for a REIT. Because of the relatively high price of the new shares issued, I think the issuance of new shares is positive for existing shareholders of Frasers Logistics and Industrial Trust.
- That brings us to the second part of the assessment- the price paid for Frasers Commercial Trust. Based on the current market price of $1.23 for each Frasers Logistics and Industrial Trust share, it is paying $1.66 (1.23 x 1.23+0.151) for each Frasers Commercial Trust share. The implied price is just a 3.1% premium to Frasers Commercial Trust’s book value per share of $1.61. It is also lower than Frasers Commercial Trust’s current market price of $1.68 per share. I think this is a fair purchase price, considering the potential long-term benefits of the deal (more on this below).
Based on the above considerations, I believe the deal will benefit existing unitholders of Frasers Logistics and Industrial Trust.
Immediate impact on distribution per unit and NAV per unit
The new units are being issued at relatively high prices, and the purchase price is just a slight premium to book value. So it is not surprising that the deal is expected to have an immediate positive impact for Frasers Logistics and Industrial Trust. Management expects the acquisition to be accretive to both distribution and book value per unit.
The two charts below illustrate the pro forma accretion to book value and distribution per unit (DPU).
Other benefits of the deal
Besides the immediate positive impact on DPU and book value per unit, there are also other potential benefits to the merger:
- The enlarged REIT will likely be able to negotiate lower interest rates on its debt in the future
- There are potential economies of scale due to the enlarged size of the combined REIT
- The bigger portfolio will increase diversification and decrease concentration risk
- The new properties absorbed by Frasers Logistics and Industrial Trust have favourable characteristics that could drive growth. For instance, 51.8% of Frasers Commercial Trust’s properties have step-up annual rent escalations of between 3.0% and 4.0%. Also, Alexandra Technopark, one of Frasers Commercial Trust’s six properties, also recently completed an asset enhancement work.
The Good investors’ conclusion
There are many reasons for existing shareholders of Frasers Logistics and Industrial Trust to like the deal. First, the deal will be immediately accretive to both book value and DPU per unit. Second, the enlarged REIT will benefit over the longer-term through economies of scale and diversification. In turn, this should provide the REIT with a longer runway for DPU-growth in the future.
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