ESR-REIT (SGX: J91U) and Sabana REIT (SGX: M1GU) Proposed Merger: What Does It Mean for Investors?
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ESR-REIT (SGX: J91U) and Sabana REIT (SGX: M1GU) Proposed Merger: What Does It Mean for Investors?

Sudhan P
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ESR-REIT (SGX: J91U) is not resting on its laurels.

After the successful merger with Viva Industrial Trust back in 2018, ESR-REIT is now looking to merge with Sabana Shariah Compliant REIT (SGX: M1GU) to become the fourth largest industrial Singapore real estate investment trust (REIT) by market share.

What does that entail?

What does each REIT unitholder get out of this?

Let’s dive deeper into the announcement that was made earlier this morning to find out.


TL;DR: Merger of Two Industrial REITS — ESR-REIT & Sabana REIT 

ESR-REIT-Sabana-REIT-merger Seedly

Key highlights from the proposed merger:

  • The enlarged REIT will become Singapore’s fourth largest industrial REIT by market share and the fifth largest by asset size.
  • Together, the enlarged REIT will have 75 properties with a total asset size of S$4.1 billion.
  • The merger will be carried out by ESR-REIT acquiring all Sabana REIT units by way of a trust scheme of arrangement.
  • For every 1 Sabana REIT unit held, the unitholder will receive 0.94 new unit in ESR-REIT.
  • Some benefits of the merger include larger diversification of portfolio, improvement to distribution per unit, and improved growth outlook.
  • After receiving all the necessary approvals, the proposed merger is expected to be completed by the fourth quarter of 2020.

What’s The Deal About?

ESR-REIT and Sabana REIT have proposed a merger to create a more diversified industrial trust.

The enlarged REIT will become Singapore’s fourth largest industrial REIT by market share and the fifth largest by asset size.

As of 30 June 2020, ESR-REIT had 57 properties with a total asset size of S$3.1 billion while Sabana REIT owned 18 properties, totalling S$0.9 billion in asset size.

Together, the enlarged REIT will have 75 properties with a total asset size of S$4.1 billion.

With that, Sabana REIT’s Shari’ah-compliant status is expected to be terminated.

Also, ESR-REIT’s sponsor, ESR, is expected to hold around 12.2% of the enlarged REIT.

The merger will be carried out by ESR-REIT acquiring all Sabana REIT units by way of a trust scheme of arrangement.

The deal comprises S$396.9 million, based on 989.9 million new ESR-REIT units to be issued at a price of S$0.401 per unit (which is the one-month volume-weighted average price of ESR-REIT units).

In all, the total acquisition cost is around S$777.4 million, comprising the scheme consideration of S$396.9 million, and other amounts pertaining to the refinancing of Sabana REIT’s loan, and fees such as acquisition and professional fees.

What Happens If I Own Sabana REIT Units Right Now?

If the trust scheme goes through and you are a Sabana REIT unitholder, you will receive units in ESR-REIT.

For every 1 Sabana REIT unit held, the unitholder will receive 0.94 new unit in ESR-REIT.

Based on the issue price of S$0.401 per new ESR-REIT unit and the gross exchange ratio of 0.94x, the implied scheme consideration will be S$0.377 per Sabana REIT unit.

You can understand this as ESR-REIT’s manager paying S$0.377 for each unit of Sabana REIT to buy it over.

So for example, if you own 1,000 units in Sabana REIT, you will get 940 ESR-REIT units and that’s supposed to translate to S$377 in value.

The amount of S$377 can be obtained by 1,000 Sabana REIT units multiplied by S$0.377 per Sabana REIT unit or 940 ESR-REIT units multiplied by S$0.401 per new ESR-REIT unit.

Sabana REIT scheme consideration
Source: ESR-REIT presentation

What Are the Benefits for Sabana REIT Unitholders?

There are some benefits from the merger for Sabana REIT unitholders, as highlighted below:

Sabana REIT merger benefits
Source: Sabana REIT presentation

For one, it is distribution per unit (DPU)-accretive by 12.9% for the unitholders of Sabana REIT, assuming the merger was completed on 30 June 2020.

The merger also reduces tenant concentration risk for Sabana REIT and diversifies its portfolio.

For example, Sabana REIT’s largest single tenant’s contribution by gross rental income decreases from 11.2% to 2.4% in the enlarged REIT.

Currently, Sabana REIT’s portfolio doesn’t contain any business park properties.

But with the merger, 22.3% of the enlarged REIT’s valuation will come from business parks, a sector with a positive outlook.

With a diversified and expanded portfolio, it could possibly arrest Sabana REIT’s falling gross revenue and net property income that have been happening in the past.

What Happens If I Own ESR-REIT Units Right Now?

If the trust scheme goes through and you are an ESR-REIT unitholder, nothing happens to the number of units held by you.

However, your holdings in ESR-REIT will now contain properties that were previously held by Sabana REIT, becoming an enlarged REIT.

What Are the Benefits for ESR-REIT Unitholders?

The benefits for ESR-REIT unitholders are similar to that of Sabana REIT unitholders.

ESR REIT merger benefits
Source: ESR-REIT presentation

However, one key difference is that the merger will also be NAV-accretive for ESR-REIT unitholders.

Assuming the merger was completed on 30 June 2020, ESR-REIT’s NAV per unit would have improved by 5.2%, from 41 Singapore cents to 43.2 Singapore cents.

Timeline of the Merger

The trust scheme will require approvals from both ESR-REIT and Sabana REIT unitholders and approval by the Singapore High Court.

After receiving all the necessary approvals, the proposed merger is expected to be completed by the fourth quarter of 2020.

The following is an indicative timeline of the whole process:

ESR REIT merger timeline
Source: ESR-REIT presentation

What Are Your Thoughts?

Is the proposed merger between ESR REIT and Sabana REIT a good deal for you?

Come and discuss this with fellow investors in our friendly Seedly Community!

ESR REIT and Sabana REIT merger Seedly Q&A

Disclaimer: The information provided by Seedly serves as an educational piece and is not intended to be personalised investment advice. ​Readers should always do their own due diligence and consider their financial goals before investing in any stock. 

About Sudhan P
It isn't fair competition when only one company in the world makes Monopoly. But I love investing in monopolies. Before joining the Seedly hood, I had the chance to co-author a Singapore-themed investment book – "Invest Lah! The Average Joe's Guide To Investing" – and work at The Motley Fool Singapore as an analyst.
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