By Bradley Smahon (Singapore Management University)
Overview of the deal
Acquirer: CapitaLand Mall Trust Target: CapitaLand Commercial Trust Estimated value: USD6,120.1 million
Announcement date: 22 January 2020 Advisors to Buyer: J.P. Morgan Advisors to Target: Credit Suisse
CapitaLand Mall Trust Management Limited (“CMT”), and CapitaLand Commercial Trust Management Limited (”CCT”), have announced a proposed merger, through which the merged entity will be renamed ”CapitaLand Integrated Commercial Trust” (CICT). As per the deal, CMT will acquire all issued and paid-up units of CCT through a trust scheme of arrangement. This is in line with the Singapore Code on Takeovers and Mergers. Prior to COVID-19, the deal was expected to be completed before the end of the second quarter of 2020.
The transaction for each CCT Unit comprises 0.720 new units in CMT and USD 0.192  in cash. Based on an issue price of USD1.92 per CMT Unit, the Scheme Consideration is USD1.57, implying a gross exchange ratio of 0.820x under consideration.
The total cost of the Merger is currently estimated to be approximately USD6,120.1 million. This consists of the following:
1) Total Scheme Consideration of USD6,062.7 million, comprising USD739.3 million as Cash Consideration and 2,777.5 million Consideration Units
2) An acquisition fee of USD41.1 million, payable wholly in new CMT Units to the CMT Manager in relation to the Merger, being 0.5% of the purchase price of CCT;
CMT will attain the financing of the cash component of its acquisition through its preexisting debt facilities.
This merger is expected to form the third-largest REIT in the Asia Pacific region, with total portfolio property value increasing to approximately USD16.9 billion and market capitalization increasing to an estimated USD12.4 billion. Additionally, the deal will expand CMT’s portfolio of Singapore malls with CCT’s portfolio of office assets in both Singapore and Europe.
"As the largest S-Reit, CICT will be CapitaLand's primary investment vehicle for commercial real estate in Singapore and other developed markets,"
CapitaLand (The Parent Company)
Company details (Acquirer – CapitaLand Mall Trust)
CMT is Singapore’s first and largest retail real estate investment trust. Focused primarily on Singapore, its main aim is to own and invest in real estate assets for retail purposes. CMT is the largest shopping mall owner in Singapore; it owns 15 properties made up of both downtown and suburban malls with close proximity to public transport and various attractions. It has been listed on the SGX-ST since July 2002.
Founded in 2001, headquartered in Singapore CEO: Tan Tee Hieong Number of employees: 12,100 (Technically, it is 0 as it is an externally managed REIT; it is managed by the Manager and Property Managers, which are employees of the parent company, CapitaLand)  Market Cap: USD7.1 billion (at the time of the announcement), USD5.8 billion (as of 16 June 2020 close)
EV: USD7,938.4 million LTM Revenue: USD572.5 million
LTM EBITDA: USD327.36 million LTM EV/Revenue: 13.8x
LTM EV/EBITDA: 24.2x
Company details (Target – CapitaLand Commercial Trust)
CCT is Singapore’s first REIT focused on commercial offices. Focused primarily on Singapore and developed markets, its main aim is to own and invest in commercial real estate and real estate-related assets. The company possesses the largest portfolio of Grade A assets in the Singapore Central Business District, in aggregate of 104 quality offices and commercial buildings. Additionally, it owns 2 offices in Frankfurt, Germany. It has been listed on the SGX-ST since 11 May 2004.
Founded in 2004, headquartered in Singapore CEO: Chee Tien Jin Number of employees: 124 Market Cap: USD8.2 billion (as of the time of announcement), USD4.7 billion (as of 16 June 2020 close)
EV: USD6,574.8 million LTM Revenue: USD292.7 million
LTM EBITDA: USD209.9 million LTM EV/Revenue: 22.5x
LTM EV/EBITDA: 31.3x
Projections and assumptions
As CMT utilized existing debt facilities for this deal, no additional debt was taken on, thereby preventing the incurrence of additional interest payments for the merged entity. Despite this, CICT is projected to see a Pro-forma aggregate leverage of 38.3%. This is in contrast to the 32.9% pre-merger on CMT’s balance sheet, which is is a consequence of having taken on remaining debt on CCT’s balance sheet. At present, based on its latest financial statements for the year ended 31 December 2019, CCT’s total debt stands at USD2,817.3 million. This brings it dangerously close to the leverage limit of 45%  instituted by the Monetary Authority of Singapore. Traditionally, REITs have funded acquisitions of real estate assets through a mix of debt or equity, or either instrument exclusively. Should CICT switch to equity to finance future projects, this could see a fall in the Distribution Per Unit, which is the most important metric for shareholders.
For the REIT industry, DPU functions in a similar manner to dividend payouts. According to Singapore Law , 90% of taxable income for REITs need to be paid out each year; this is for REIT firms to enjoy the benefit of tax transparency treatments by the Inland Revenue Authority of Singapore.
This tentative leverage situation is balanced out by a more optimistic accretion analysis. The merger is expected to be Distribution Per Unit (DPU) accretive, increasing from 12.17% to 11.97%. This is notable when considering CMT’s issuance of 2,777.5 million Consideration Units as part of the deal structure. Based on projections, the merged entity will see an increase to USD 584.8 million in available distributions as compared to the previous pre-merger distributions available, valued at 326.8 million. This higher DPU will surely see higher payouts for shareholders of the merged entity.
Prospectively, the merger will bring about an enhanced ability to handle larger-sized cross-geographical transactions. Post-merger, CICT will have the ability to undertake up to USD 3.4 billion of overseas acquisitions in developed countries without deterring from Singapore as its primary market.
Furthermore, CICT will be able to ride the wave on increasing demand for integrated developments. Commercial development has shown a trend towards larger-scale mixed-use or “integrated developments” due to a greater focus on land use intensification and attractiveness of integrated developments. These investments tend to be larger in size, requiring higher capital outlay. The merger allows a superior balance sheet to undertake larger commercial projects across the retail, office, and integrated developments.
This phenomenon is not unique to Singapore. Global, international hubs are looking to optimize the use of scarce land in prime locations and towards more urban rejuvenation projects. This has resulted in an emergence of integrated developments such as the New District at Canary Wharf in London, Barangaroo development in Sydney, and Hudson Yards in New York. This trend does not show any signs of slowing, as urbanization increasingly sees the need for integrated developments to provide “all-in-one” amenities of offices being near enough to residential areas and mall complexes for leisure.
Perhaps most importantly, in a post-COVID world, CICT will possess a balanced portfolio with exposures that are diversified across various integrated developments, offices, and retail assets. The expansion of the portfolio will act as a hedge against the current market cycle.
Risks and uncertainties
REITs are highly dependent on occupancy rates, in addition to rising rents. It is unsurprising that the largest threat to the success of this merger lies in the form of the COVID-19 pandemic, as low occupancy rates due to Singapore’s circuit breaker measures during this period have rendered office and retail spaces to be redundant. As people are forced to work from home, demand for space is currently at a low, preventing REITS from raising income from rents. How CICT will navigate this situation will be no easy feat.
As proof of the pandemic’s damage to the industry, the Monetary Authority of Singapore has allowed for the leverage limit for Singapore REITs to increase from 45% to 50% . This should give leeway for CICT to carry out further real estate acquisitions to expand its portfolio and will invariably cut into its long-term profits should it take on further leverage.
A more insidious trend that has taken place prior to COVID which has only since been catalyzed by the pandemic has been the move to e-commerce. Retail has been suffering prior to the current crisis; this is not isolated to the context of Singapore, but internationally. Retail may see greater declines as services such as online food deliveries and online shopping take greater prominence. Perhaps this merger was a defensive move in hedging against the consolidations taking place in the retail industry by diversifying through office space . It is ironic then, that the global pandemic has thrown a spanner in the works for CICT’s plans.
 All financial figures are converted to the 22 January 2020 USD/SGD = 0.73998 exchange rate
 https://cmt.listedcompany.com/misc/capitamall_ar2016/index.html#72  https://www.mas.gov.sg/-/media/MAS/resource/publications/consult_papers/2019/Consultation-Paper-on-Proposed-Amendments-to-the-Requirements-for-REITs.pdf  https://www.moneysense.gov.sg/articles/2018/10/understanding-real-estate-investment-trusts-reits  https://www.mas.gov.sg/news/media-releases/2020/new-measures-to-help-reits-navigate-operating-challenges-posed-by-covid-19#:~:text=MAS%20will%20raise%20with%20immediate,by%20the%20COVID%2D19%20pandemic.  https://www.businesstimes.com.sg/companies-markets/cmt-cct-in-proposed-merger-to-form-third-largest-reit-in-asia-pacific