How to read a Singapore REIT’s acquisition document – Tsing Yi Case study

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On the back of MLT’s acquisition of Tsing Yi warehouse in Hong Kong, I thought I’d do a comprehensive “How to” on understanding the announcement they put out and what it means for investors.

I will point out the implications of certain portions for investors and briefly explain how the Tsing Yi acquisition affects them. The document will be screen-shot to make it easy for us to get through it.

MLT’s acquisition announcement consisted of 23 pages. Let’s start with page 1.

In this acquisition, MLT the manager is making the announcement.

HDBS Institution Trust Services (Singapore), the “Trustee” is entering into the share purchase agreement with Mapletree Overseas Holdings (“MOHL”) for this Tsing Yi deal.




A short description of the property containing information on the address, number of storeys, years of lease left, floor area and other technical information is provided.

Tsing Yi introduction

The ownership structure is as follows

Mapletree Investments owns Mapletree Dextra which owns Mapletree Overses Holdings Ltd which owns Mapletree Titanium which owns Mapletree TY (HKSAR) which owns 30 Tsing Yi Road.

This is therefore an interested party transaction.

The total purchase consideration does not equal the property value as there are other assets and liabilities on the balance sheet of Mapletree Titanium and MTYL.

It is however genearlly quite close.

Following the transaction, the trustee will own 100% of the ordinary shares and 100% of the redeemable preference shares of Mapletree Titanium.

Tsing Yi acquisition structure

After the acquisition, Mapletree Logistics will be the new owner of Mapletree Titanium which will be the owner of Mapletree TY (HKSAR) Limited and of the property.

The property value agreed between MLT (buyer) and Mapletree Titanium (seller) is S$834.8 million.

This is a 2.4% to 3% discount to the valuer’s estimate of S$834.8 million.

The share purchase agreement outlines the conditions precedent of the transaction.

Conditions precedent is legal jargon for “what needs to be done before deal completion”.

Conditions precedent include

  • Unitholder’s approval at EGM
  • Approval by SGX for the listing and quotation of new units
  • Listing and commencement of trading of new units
  • Receipt by Trustee of the proceeds of the equity fund raising
  • Licenses, authorizations etc to be in place
  • No material damage to property
  • No compulsory acquisition of the property or any part of it
  • No statute, regulation or decision which would affect the acquisition
  • MYTL being able to show, prove and give good title to the property

Tsing Yi purchase price and conditions

The acquisition cost of S$847.6 million comprises of the total consideration (price paid to seller for the holding companies), acquisition fee and professional fees.

Collectively, they are called the “total acquisition cost”.

Tsing Yi acquisition cost

For REITs, they sometimes take acquisition fee payment in the form of units, rather than cash.

MLT has chosen to take 0.5% of the fee in units which translates to about 3.6 million units at $1.15 (the issue price per new unit).

MLT gets a cool S$4.2 million just for doing this deal! Year end bonus here I come!

In actuality, MLT should receive 1% as acquisition fee, or S$8.3 million. Half of it was received in units.

Passing mention is given to how the purchase will be financed – by equity fund raising and drawdown of loans.

SGX also requires the REIT to list out their rationale for doing the transaction.

Tsing Yi financing methods and rationale

The following lists out more reasons supporting the transaction.

How will the transaction impact MLT’s portfolio?

Note clearly that NPI yield is defined as Annualized net property income from 1 Jan 2018 to 31 Mar 2018 divided by agreed property value.

This is a forward looking metric. In place income is not being used to computer NPI yield.

MLT has taken the liberty to list out the accretion impact at a range of issue prices.

Note this are all forecasts because they are 2018 figures.

They list a range because equity market conditions can change in a few weeks or months down the road when they issue new units.

MLT makes it very clear the analysis is for ILLUSTRATIVE PURPOSES ONLY. This is because MLT is forecasting their portfolio’s DPU at the beginning of 2018, subject to a whole bunch of assumptions in note (2).

If one believes the assumptions by MLT are robust and fair, then the DPU at the beginning of 2018 is expected to be 1.887. It will be between 1.892 and 1.931 after the acquisition.

Imply: good for investors. Reality: there are so many moving parts one can only hope the transaction goes through well.

Tsing Yi portfolio impact

More reasons supporting the acquisition.

  • Increase exposure to the HK market
  • Increase occupancy rate (duh)
  • Enhance tenant diversification
  • Reduce tenant concentration risk
  • Increase free float and liquidity.

All these can also be found in the presentation slides.

Tsing Yi acquisition rationale

The equity fund raising will comprise a private placement and non-renounceable preferential offering of new units to existing unitholders.

Citigroup, DBS, HSBC are joint bookrunners. Payday for these banks!

These bookrunners will underwrite the equity fund raising.

According to SGX’s listing manual, the issue price for new units cannot be more than 10% discount to the volume-weighted average price for the full market day on which the underwriting agreement is signed.

Equity fund raising details will be announced on SGXNET.

Tsing Yi fund raising

MLT states how they will use the funds from equity fund raising.

Tsing Yi use of money from fund raisingTsing Yi pro forma financial effects

According to SGX, REITs must announce how the acquisition would have impacted their audited financial statements.

This is done via a pro-forma model.

Basically, what SGX wants is – how will your most recent audited annual financial numbers look if the acquisition (Tsing Yi in this case) were injected at the beginning of the financial year.

Let’s say a REIT’s financial year begins 1 Jan 2016 and ends 31 Dec 2016. We are now in Aug 2017. The most recent audited yearly financial numbers are for 1 Jan to 31 Dec 2016. So we have results as at 31 Dec 2016.

SGX wants to know how the 31 Dec 2016 numbers will be like if the acquisition had been completed on 1 Jan 2016.

I know MLT’s financial year does not begin on 1 Jan, but for illustration, I.e. If MLT had bought Tsing Yi at 1 Jan 2016 and held it all the way till 31 Dec 2016, how will 31 Dec 2016 distribution per unit look?

This is the gist of the section below.

On this basis, the Tsing Yi acquisition is accretive, as distribution per unit rises from 7.44 SG cents to 7.567 SG cents.

Tsing Yi pro forma distribution per unit

The Pro Forma NAV calculation is done on the same basis as above.

On this basis, NAV per unit rises from S$1.04 to 1.05. This implies there could be upward pressure on stock price as the P/NAV gap is closed over time.

Tsing Yi pro forma NAV

Legal requirements on a whitewash resolution. Not my area of expertise but I understand it as follows

MLT owns more than 50% of the target company (because MLT is owned by Mapletree Investments, and Mapletree Investments also own Mapletree Titanium (the holding company of Tsing Yi).

Since MLT will own additional shares of Mapletree Titanium, MLT is supposed to make a takeover bid.

The whitewash resolution takes MLT ‘off-the-hook’, so to speak, from being required to make a takeover bid.

Tsing Yi whitewash resolutionTsing Yi whitewash resolutionTsing Yi whitewash resolutionTsing Yi unitholders approvalTsing Yi interested person transaction

Importantly, the independent financial advisors, KPMG, gives an opinion of whether the acquisition is on normal commercial terms.

Tsing Yi comments by financial advisors

Similar to annual reports, the interests of substantial unitholders need to be declared.

In this case, none of the directors or substantial unitholders have an interest in the acquisition.

Tsing Yi declaration of interestTsing Yi declaration of interestTsing Yi further details

 


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