Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

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<p>Back on November last year, Quarz Capital Management, one of <a href="https://www.smartkarma.com/entities/sabana-shariah-compliant-reit" target="_blank" data-smartkarma-citation="entities:911:1" rel="noopener">Sabana Shari’ah Compliant REIT (SSREIT SP)</a>'s top 5 unitholders (at the time),  <a href="https://www.smallcapasia.com/wp-content/uploads/2019/12/Quarz-Capital-Management-Open-Letter-Sabana-REIT-and-ESR-Cayman-Nov-2019-FINAL.pdf" target="_blank" rel="noopener">proposed</a> a merger by way of a Trust Scheme between <a href="https://www.smartkarma.com/entities/esr-reit" target="_blank" data-smartkarma-citation="entities:10934:1" rel="noopener">ESR-REIT (EREIT SP)</a> and Sabana.</p>
<p>This made perfect sense given the potential conflict of interest within the organisational structure as seen below:</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/174/565/original/image_53041997321606445245932.png?1606445249" class="editor-image img-responsive" data-smartkarma-image-id="174565"></figure>
<p>Nearly nine months after Quarz's proposal, ESR and Sabana jointly <a href="https://links.sgx.com/FileOpen/PressRelease_ESR_REIT_and_SabanaREIT_Announce_ProposedMerger.ashx?App=Announcement&amp;FileID=623899" target="_blank" rel="noopener">announced</a> a merger, whereby each Sabana Unitholder will receive 94 consideration units (new units in ESR) for every 100 Sabana units held. </p>
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<p>In response to ESR <a href="https://links.sgx.com/FileOpen/Proposed%20Merger%20-%20No%20Increase%20of%20Offer%20Price.ashx?App=Announcement&amp;FileID=626445" target="_blank" rel="noopener">announcing</a> on the 6 August it does not intend to increase the Scheme Consideration, Quarz (along with Crane capital, together holding 10% of units out, or 5% each, at the time, now up collectively 11%) <a href="https://e67b5536-3500-4e76-a4b1-1e47f7092aa8.filesusr.com/ugd/517105_b64078d28c29451690e946b507e385fc.pdf" target="_blank" rel="noopener">issued</a> an open letter to Sabana that they intend to reject the proposal at the current terms.</p>
<p>The key issue is the discount to book value under the share swap ratio. </p>
<p>The rhetoric from both sides has not let up, and has only ratcheted up ahead of Sabana's EGM next Friday, the 4 December. </p>
<p>I side with Quarz/Crane on this - this is being done too cheaply. And there are alternative ways to go forward than what is currently on the table. </p>
<p>More below the fold. </p>
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<p></p>
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Back on November last year, Quarz Capital Management, one of Sabana Shari’ah Compliant REIT (SSREIT SP)'s top 5 unitholders (at the time),  proposed a merger by way of a Trust Scheme between ESR-REIT (EREIT SP) and Sabana.
This made perfect sense given the potential conflict of interest within the organisational structure as seen below:

Nearly nine months after Quarz's proposal, ESR and Sabana jointly announced a merger, whereby each Sabana Unitholder will receive 94 consideration units (new units in ESR) for every 100 Sabana units held. 


In response to ESR announcing on the 6 August it does not intend to increase the Scheme Consideration, Quarz (along with Crane capital, together holding 10% of units out, or 5% each, at the time, now up collectively 11%) issued an open letter to Sabana that they intend to reject the proposal at the current terms.
The key issue is the discount to book value under the share swap ratio. 
The rhetoric from both sides has not let up, and has only ratcheted up ahead of Sabana's EGM next Friday, the 4 December. 
I side with Quarz/Crane on this - this is being done too cheaply. And there are alternative ways to go forward than what is currently on the table. 
More below the fold. 





ESR-REIT/Sabana: Furphys And Fear-Mongering

Silver Point

Thomas J. Monaco

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

Equity Bottom-Up

<p>*<em><strong>Another Weak Set Of Metrics: </strong></em>Link REIT (823.HK) [Link REIT] reported negative FY 1H21 bottom-line results of HKD 4.1 bn. While still a loss, this figure represents about 17.2% of losses (HKD 23.9 bn) posted in FY 2H20. Losses in both periods were attributed to negative fair value marks of HKD 7.3 bn and HKD 27.6 bn, respectively. While results on an operating basis were positive, the trend unfortunately remains negative for Link REIT – declining HKD 564 mn (15.1%). The poor operating results were driven by weaker Hong Kong rental income which declined HKD 186 mn (5.4%) HOH; and a HKD 55 mn (9.8%) decline in mainland Chinese property-related revenues;</p><p><strong><em>*Worries Abound: </em></strong>Weaker than expected Hong Kong retail operations leading to lower level of rental reversions; and continued negative revaluation of property due to lower rents and/or higher cap rates remain long-term risks; and</p><p><strong><em>*Poor Capital Management: </em></strong>On July 26, 2020, Link announced its proposed acquisition of a Grade A office building, The Cabot at 25 Cabot Square at Canary Wharf in London. This transaction makes little sense for Link REIT on a number of levels. Management also reiterated its 2025 target, suggesting that intends to add to the existing "core" portfolio while adding "core-plus" and "value-add" assets, which would include mainland Chinese Tier-1 cities, the United Kingdom, Australia, Singapore and Japan. Link REIT has also completed the 60 mn share buyback. Instead of weighing a buybacks return versus new investment ROI, management views share buybacks as a mechanism to defend its shares against short-selling.</p>

*Another Weak Set Of Metrics: Link REIT (823.HK) [Link REIT] reported negative FY 1H21 bottom-line results of HKD 4.1 bn. While still a loss, this figure represents about 17.2% of losses (HKD 23.9 bn) posted in FY 2H20. Losses in both periods were attributed to negative fair value marks of HKD 7.3 bn and HKD 27.6 bn, respectively. While results on an operating basis were positive, the trend unfortunately remains negative for Link REIT – declining HKD 564 mn (15.1%). The poor operating results were driven by weaker Hong Kong rental income which declined HKD 186 mn (5.4%) HOH; and a HKD 55 mn (9.8%) decline in mainland Chinese property-related revenues;*Worries Abound: Weaker than expected Hong Kong retail operations leading to lower level of rental reversions; and continued negative revaluation of property due to lower rents and/or higher cap rates remain long-term risks; and*Poor Capital Management: On July 26, 2020, Link announced its proposed acquisition of a Grade A office building, The Cabot at 25 Cabot Square at Canary Wharf in London. This transaction makes little sense for Link REIT on a number of levels. Management also reiterated its 2025 target, suggesting that intends to add to the existing "core" portfolio while adding "core-plus" and "value-add" assets, which would include mainland Chinese Tier-1 cities, the United Kingdom, Australia, Singapore and Japan. Link REIT has also completed the 60 mn share buyback. Instead of weighing a buybacks return versus new investment ROI, management views share buybacks as a mechanism to defend its shares against short-selling.

Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

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<p>With the long drawn out merger of CCT+CMT finally approved with minimal resistance, with the little there was coming mostly from CCT holders, the combined entity will add to the bunch of listed REITs which offer a mix of office and retail exposure. </p>
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<p>For investors interested in obtaining Singapore (SG) office or suburban retail exposure, the pure play options are now fairly limited.</p>
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<p><strong>Links to my previous REITs insights:</strong></p>
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<ul style="list-style-type: disc;">
<li>
<a href="https://www.smartkarma.com/insights/singapore-reits-what-s-been-cooking-this-year" target="_blank" rel="noopener">Singapore REITs - What’s Been Cooking This Year,</a> I spoke about how the REITs have performed this year and touched upon some of the factors that have been driving them. </li>
<li>
<a href="https://www.smartkarma.com/insights/trade-ideas-for-sgreits-retail-reits-share-price-has-been-more-resilient-than-it-should-be" target="_blank" rel="noopener">Trade Ideas for SGREITs - Retail REITs Share Price Has Been More Resilient than It Should Be,</a> covers the factors that have been impacting retail REITs. </li>
<li>
<a href="https://www.smartkarma.com/insights/trade-ideas-sg-office-reits-this-time-it-s-different" target="_blank" rel="noopener">Trade Ideas SG Office REITs - This Time It’s Different</a> covers how the office REITs might fare better.</li>
<li>
<a href="https://www.smartkarma.com/insights/trade-ideas-sg-industrial-reits-bigger-names-have-been-holding-up-a-little-too-well" target="_blank" rel="noopener">Trade Ideas SG Industrial REITs - Bigger Names Have Been Holding up a Little Too Well </a> looks at the industrial REITs</li>
<li>
<a href="https://www.smartkarma.com/insights/singapore-reits-get-out-of-jail-free-card-for-the-tenants" target="_blank" rel="noopener">Singapore REITs - Get Out of Jail Free Card, for the Tenants</a> I spoke about how the recent changes announced by the government would benefit the smaller tenants more than the landlords.</li>
<li>
<a href="https://www.smartkarma.com/insights/trade-ideas-sg-eu-us-focus-reits-the-orphaned-lot-is-starting-to-look-interesting" target="_blank" rel="noopener">Trade Ideas SG EU/​US Focus REITs - The Orphaned Lot Is Starting to Look Interesting</a> looks at the EU/US focussed REITs trading wider than their SG and US listed peers</li>
<li>
<a href="https://www.smartkarma.com/insights/trade-ideas-for-sgreits-update-on-office-vs-retail-trade-up-8-so-far" target="_blank" rel="noopener">Trade Ideas for SGREITs - Update on Office Vs Retail Trade, up 8% so Far</a> I spoke about the recent updates impacting the REITs and implications of Suntec Results</li>
<li>
<a href="https://www.smartkarma.com/insights/trade-ideas-for-sgreits-more-updates-on-office-vs-retail-trade-from-kreit-and-mct-results" target="_blank" rel="noopener">Trade Ideas for SGREITs - More Updates on Office Vs Retail Trade from KREIT and MCT Results</a> I spoke about KREIT and MCT results</li>
<li>
<a href="https://www.smartkarma.com/insights/trade-ideas-sgreits-office-vs-retail-vs-industrial-up-16-so-far" target="_blank" rel="noopener">Trade Ideas SGREITs - Office Vs Retail Vs Industrial, up 16% so Far</a> I spoke about sticking to the trade till CMT results and post that switching to office versus industrial</li>
<li>
<a href="https://www.smartkarma.com/insights/singapore-reits-update-even-as-circuit-breaker-ends-2q-dpu-for-retail-reits-will-be-close-to-0" target="_blank" rel="noopener">Singapore REITs Update - Even as Circuit Breaker Ends, 2Q DPU for Retail REITs Will Be Close to 0</a> I covered the impact of the governments plans for circuit breaker exit</li>
<li>
<a href="https://www.smartkarma.com/insights/trade-ideas-for-singapore-reits-coming-back-to-life" target="_blank" rel="noopener">Trade Ideas for Singapore REITs - Coming Back to Life</a> I covered the updates over the Jan-Mar 2020 earnings season</li>
<li>
<a href="https://www.smartkarma.com/insights/singapore-reits-reits-will-have-to-fund-some-sme-rents-by-law" target="_blank" rel="noopener">Singapore REITs - REITs Will Have to Fund Some SME Rents, by Law</a>, I spoke out the updates from the Fortitude budget</li>
<li>
<a href="https://www.smartkarma.com/insights/singapore-reits-new-rental-relief-framework-for-smes" target="_blank" rel="noopener">Singapore REITs - New Rental Relief Framework for SMEs</a>, I spoke about the impact of the rental relief for SMEs</li>
</ul>
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With the long drawn out merger of CCT+CMT finally approved with minimal resistance, with the little there was coming mostly from CCT holders, the combined entity will add to the bunch of listed REITs which offer a mix of office and retail exposure. 

For investors interested in obtaining Singapore (SG) office or suburban retail exposure, the pure play options are now fairly limited.


Links to my previous REITs insights:




Singapore REITs - What’s Been Cooking This Year, I spoke about how the REITs have performed this year and touched upon some of the factors that have been driving them. 

Trade Ideas for SGREITs - Retail REITs Share Price Has Been More Resilient than It Should Be, covers the factors that have been impacting retail REITs. 

Trade Ideas SG Office REITs - This Time It’s Different covers how the office REITs might fare better.

Trade Ideas SG Industrial REITs - Bigger Names Have Been Holding up a Little Too Well  looks at the industrial REITs

Singapore REITs - Get Out of Jail Free Card, for the Tenants I spoke about how the recent changes announced by the government would benefit the smaller tenants more than the landlords.

Trade Ideas SG EU/​US Focus REITs - The Orphaned Lot Is Starting to Look Interesting looks at the EU/US focussed REITs trading wider than their SG and US listed peers

Trade Ideas for SGREITs - Update on Office Vs Retail Trade, up 8% so Far I spoke about the recent updates impacting the REITs and implications of Suntec Results

Trade Ideas for SGREITs - More Updates on Office Vs Retail Trade from KREIT and MCT Results I spoke about KREIT and MCT results

Trade Ideas SGREITs - Office Vs Retail Vs Industrial, up 16% so Far I spoke about sticking to the trade till CMT results and post that switching to office versus industrial

Singapore REITs Update - Even as Circuit Breaker Ends, 2Q DPU for Retail REITs Will Be Close to 0 I covered the impact of the governments plans for circuit breaker exit

Trade Ideas for Singapore REITs - Coming Back to Life I covered the updates over the Jan-Mar 2020 earnings season

Singapore REITs - REITs Will Have to Fund Some SME Rents, by Law, I spoke out the updates from the Fortitude budget

Singapore REITs - New Rental Relief Framework for SMEs, I spoke about the impact of the rental relief for SMEs



Trade Ideas for Singapore REITs - Implications from CCT+CMT Merger

Lakshmi Iyer, CFA

Credit

<p>We think the <a href="https://www.smartkarma.com/entities/esr-reit" target="_blank" data-smartkarma-citation="entities:10934:1" rel="noopener">ESR-REIT (EREIT SP)</a>  perpetual (4.6% perpetual callable on 3-11-22) is expensive with respect to its senior bonds as well as perps issued by comparable credits. The merger, which would have been a credit positive event, does not appear likely at present. Also, the bond has run up around 3 points over the past month. In light of all the above reasons, we find it expensive. We prefer the senior debt.</p><div class="content-highlight"><p><em>Fundamental credit research focused on Asian high yield, including coverage of areas which are generally overlooked such as Indian finance companies and non-USD denominated credit (SGD).  Sector agnostic. Research process consists of rigorous bottom-up company analysis combined with spotting market dislocations to provide trade ideas.</em></p></div>

We think the ESR-REIT (EREIT SP)  perpetual (4.6% perpetual callable on 3-11-22) is expensive with respect to its senior bonds as well as perps issued by comparable credits. The merger, which would have been a credit positive event, does not appear likely at present. Also, the bond has run up around 3 points over the past month. In light of all the above reasons, we find it expensive. We prefer the senior debt.Fundamental credit research focused on Asian high yield, including coverage of areas which are generally overlooked such as Indian finance companies and non-USD denominated credit (SGD).  Sector agnostic. Research process consists of rigorous bottom-up company analysis combined with spotting market dislocations to provide trade ideas.

ESR REIT 4.6% Perpetual - Appears Expensive

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<p>Back on the 16 July, <a href="https://www.smartkarma.com/entities/esr-reit" target="_blank" data-smartkarma-citation="entities:10934:1" rel="noopener">ESR-REIT (EREIT SP)</a> (ESR-REIT) and <a href="https://www.smartkarma.com/entities/sabana-shariah-compliant-reit" target="_blank" data-smartkarma-citation="entities:911:1" rel="noopener">Sabana Shari’ah Compliant REIT (SSREIT SP)</a> (Sabana REIT) jointly <a href="https://links.sgx.com/FileOpen/PressRelease_ESR_REIT_and_SabanaREIT_Announce_ProposedMerger.ashx?App=Announcement&amp;FileID=623899" target="_blank" rel="noopener">announced</a> the proposed merger of the two companies. Should the Scheme become effective, each Sabana Unitholder will receive 94 Consideration Units (new units in ESR-REIT) for every 100 Sabana Units held. </p>
<p>Quarz Capital Management, one of Sabana-REITs' top 5 unitholders (at the time), presciently <a href="https://www.smallcapasia.com/wp-content/uploads/2019/12/Quarz-Capital-Management-Open-Letter-Sabana-REIT-and-ESR-Cayman-Nov-2019-FINAL.pdf" target="_blank" rel="noopener">proposed</a> a merger by way of a Trust Scheme between ESR and Sabana REITs back in November 2019.</p>
<p>All good so far? Not quite.</p>
<p>On the same day ESR-REIT <a href="https://links.sgx.com/FileOpen/Proposed%20Merger%20-%20No%20Increase%20of%20Offer%20Price.ashx?App=Announcement&amp;FileID=626445" target="_blank" rel="noopener">announced</a> that it does not intend to increase the Scheme Consideration and accordingly, the exchange ratio of 0.940x is final - except in a competitive situation - Quarz (along with Crane capital, together holding 10% of units out, or 5% each) <a href="https://e67b5536-3500-4e76-a4b1-1e47f7092aa8.filesusr.com/ugd/517105_b64078d28c29451690e946b507e385fc.pdf" target="_blank" rel="noopener">issued</a> an open letter to Sabana that they intend to reject the proposal at the current terms.</p>
<p>The key issue - as singled out by <a href="https://www.smartkarma.com/profiles/sumeet-singh" target="_blank" data-smartkarma-citation="accounts:4" rel="noopener">Sumeet Singh</a> in <em><a href="https://skr.ma/5iBkP" target="_blank" rel="noopener">ESR-REIT/Sabana Merger - Buying Well Below Book</a></em> - is the discount to book value under the share swap ratio. There are additional grievances.</p>
<p>10% is not an insignificant <em>Against</em> vote.</p>
<p>That and other grievances raised by Crane/Quarz are addressed in this insight.</p>
<hr>
<p><em>This insight addresses the latest developments with respect to the merger. For a detailed overview or the proposed terms, properties held by each REIT etc, please refer to <a href="https://skr.ma/Z2kDg" target="_blank" rel="noopener">ESR-REIT/Sabana-REIT Merger</a>.</em></p>
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<p></p>
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Back on the 16 July, ESR-REIT (EREIT SP) (ESR-REIT) and Sabana Shari’ah Compliant REIT (SSREIT SP) (Sabana REIT) jointly announced the proposed merger of the two companies. Should the Scheme become effective, each Sabana Unitholder will receive 94 Consideration Units (new units in ESR-REIT) for every 100 Sabana Units held. 
Quarz Capital Management, one of Sabana-REITs' top 5 unitholders (at the time), presciently proposed a merger by way of a Trust Scheme between ESR and Sabana REITs back in November 2019.
All good so far? Not quite.
On the same day ESR-REIT announced that it does not intend to increase the Scheme Consideration and accordingly, the exchange ratio of 0.940x is final - except in a competitive situation - Quarz (along with Crane capital, together holding 10% of units out, or 5% each) issued an open letter to Sabana that they intend to reject the proposal at the current terms.
The key issue - as singled out by Sumeet Singh in ESR-REIT/Sabana Merger - Buying Well Below Book - is the discount to book value under the share swap ratio. There are additional grievances.
10% is not an insignificant Against vote.
That and other grievances raised by Crane/Quarz are addressed in this insight.

This insight addresses the latest developments with respect to the merger. For a detailed overview or the proposed terms, properties held by each REIT etc, please refer to ESR-REIT/Sabana-REIT Merger.





Singapore

Sabana Industrial Real Estate Investment Trust is a real estate investment trust. The Trust focuses on investments in income-producing real estate used for industrial purposes in Asia, as well as real estate-related assets, in line with Sabana investment principles.

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Sabana Industrial REIT (SSREIT SP)

ESR-REIT/Sabana: Furphys And Fear-Mongering

If the deal goes through I expect both stocks to rise vs other S-REITs.If the deal does not go through, the spotlight will be on Sabana's cheapness...

David Blennerhassett

Link REIT – Bread and Butter Melting

LINK REIT: Almost Nothing Is Going Right For Link REIT. Rental Reversion Rates Weakening In Hong Kong; FV Marks Remain Negative; and Capital...

Thomas J. Monaco

Trade Ideas for Singapore REITs - Implications from CCT+CMT Merger

In my earlier insight on Singapore's Fortitude budget, Singapore REITs - REITs Will Have to Fund Some SME Rents, by Law, I had mentioned the...

Sumeet Singh

ESR REIT 4.6% Perpetual - Appears Expensive

We think the ESR-REIT (EREIT SP) perpetual (4.6% perpetual callable on 3-11-22) is expensive with respect to its senior bonds as well as perps...

Lakshmi Iyer, CFA

ESR/Sabana: Better Off Selling Assets

Back on the 16 July, ESR-REIT (EREIT SP) (ESR-REIT) and Sabana Shari’ah Compliant REIT (SSREIT SP) (Sabana REIT) jointly announced the proposed...

David Blennerhassett

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