Quarz & unitholders seek MAS' support to ensure Mapletree North Asia Commercial Trust upholds corporate governance in the inferior merger proposal with Mapletree Commercial Trust

2022-03-18 15:39 2327

SINGAPORE, March 18, 2022 /PRNewswire/ -- Quarz Capital Management, Ltd today released a letter sent to the Monetary Authority of Singapore, the full text of which is provided below.  

To MAS Officer-In-Charge,


We are unitholders of Mapletree North Asia Commercial Trust (the "Trust", "MNACT" or "MAGIC SP"). We refer to the joint announcement dated 31 December 2021 regarding the Proposed Merger and our open letter in response to the Proposed Merger dated 10 February 2022 to Mapletree North Asia Commercial Trust Management Ltd. (the "MNACT Manager" or the "Manager"), the manager of MNACT.

Mapletree Investments Pte. Ltd. is the common sponsor for MNACT and MCT and has substantially larger economic interests in MCT and MCT Manager

The manager of Mapletree Commercial Trust ("MCT", or "MCT SP") is Mapletree Commercial Trust Management Ltd (the "MCT Manager"). Both the MCT Manager and MNACT Manager are wholly owned by Mapletree Investments Pte Ltd ("MIPL"). MIPL also has a deemed interest of 32.59% and 38.14% in MCT and MNACT. MIPL has a substantially larger economic interest in MCT and MCT Manager versus MNACT and MNACT Manager. MCT Manager and MNACT Manager generate S$20.5million and S$11.1million of net profit in FY2021 respectively. MIPL's deemed stake in MCT is valued at ~S$2.0billion, far larger than its ~S$1.5billion stake in MNACT.

Proposed Merger at a substantial discount to MNACT's NAV

The proposed merger offer is 0.5963x MCT units or 0.5009x MCT units + S$0.1912 cash per unit of MNACT.

With the Year-to-Date average price of MCT at ~S$1.83 (current market price of S$1.88[1]) the implied offer price for MNACT is ~S$1.10.

The proposed offer price is at a substantial discount of ~11% and ~13% to MNACT's NAV of S$1.23 and S1.27 in October 2021 and March 2021, making MCT's offer for MNACT the worst and at the largest discount to NAV in the entire 20-year history of SGX REITs.

In all the REIT transactions, almost all of the targets have traded below NAV prior to their offers. However, these transactions took place at a premium to NAV. Compared to those transactions, the 'convenient excuse' that the offer for MNACT should be below NAV (as it has traded below NAV previously) is completely illogical.

The offer is even more ludicrous when ~25% of MNACT's portfolio was purchased near NAV from Mapletree and 3rd parties in the last 4 years. With the proposed merger, the manager is essentially recommending its unitholders to now sell these assets at a substantial discount ~11% and ~13% to MCT, a related party.

The merger proposal recommended by the MNACT Manager will also compel MNACT unitholders to suffer a sizeable ~9% and ~11% reduction in their dividend per unit and NAV in the enlarged entity.

MNACT Manager did not initiate transparent and robust process to protect unitholders' interest in line with its fiduciary duties – it negotiated exclusively with MCT manager, a related party  

Despite the highly inferior offer from MCT, it is puzzling that the MNACT manager has chosen not to conduct a robust and transparent sale process and not seek or solicit offers from other parties to obtain the best possible price in line with its fiduciary duty to protect the interest of its unitholders.

Instead, it has only negotiated exclusively with MCT manager, a related party. Since both parties have the same sponsor in MIPL, the planned transaction does not seem to us to be a transaction at an 'arm's length'.

MNACT's manager claims that the granting of exclusivity to MCT is common in precedent trust scheme transactions in Singapore. However, the current offer proposed by the Manager differs significantly from precedent transactions.

In precedent transactions, the offer price was at and above NAV and unitholders enjoyed the increase in DPU and/or NAV. The transaction proposed by the MNACT manager is at a substantial discount to NAV, and unitholders also suffer sizeable cuts of ~9-11% in DPU and NAV.             

The only merger offer similar to the current proposed offer MNACT and MCT is the value destructive merger proposal to merge Sabana Industrial REIT ("Sabana REIT") and ESR REIT, another related party transaction in June 2021.

This related party transaction was intensely criticised by unitholders, noted academics and the press for its questionable corporate governance and potential conflict of interest and was overwhelmingly voted down by independent unitholders.

It is now clear that the proposed merger below NAV was done at the worst possible time to the detriment of unitholders and would have locked in Sabana unitholders at a substantial discount to NAV in the enlarged entity to the seeming benefit to the sponsor and ESR REIT.

The current inferior merger offer metrics for MNACT is seemingly similar to the value destructive offer in the ESR REIT-Sabana REIT proposed merger.

In our view, the highly limited scope and potential biasness of IFA report renders it meaningless and incomplete in helping unitholders to evaluate if the merger proposal is in their best interest

Despite the clear deficiencies of the merger proposal between Sabana REIT and ESR REIT, the manager of Sabana REIT continually justified the transaction through the Independent Financial Advisor ("IFA") report which was highly limited in scope.

The IFA report did not consider the merits of other alternatives to the merger. It also did not consider the critical factors such as the standalone future growth prospects, financial position, or earnings potential of the REIT versus the proposed merger. The IFA report did not even compare the pro forma DPU and NAV numbers with precedent transactions.

Due to the limited scope and the lack of consideration of key factors, the IFA report is potentially incomplete and meaningless for unitholders to evaluate if the transaction is in their best interest.

In fact, the recommendations and conclusion of the IFA report can be potentially biased as it mainly considers factors which are in favour of the merger. This can be seen as highly misleading to unitholders.   

The MNACT manager seems to be taking the same approach to justify the merger terms based on the IFA report with limited scope and the non-consideration of key factors and other better alternatives despite the Manager's fiduciary duty to act in unitholders' best interest.

In fact, MNACT Manager's appointed IFA, Deloitte & Touche Corporate Finance, is the same IFA who recommended that the clearly value destructive merger proposal of the Sabana REIT and ESR REIT was 'fair' and 'reasonable' by precluding important considerations in its term of reference to analysis the proposed transaction.

Opportunistic and inferior offer recommended by the MNACT Manager is unnecessary and to the detriment of MNACT unitholders

MNACT's financial position is highly secured. The Trust enjoys a substantially lower cost of debt of ~1.8% vs MCT's ~2.4%. As of 31 Dec 2021, it has undrawn credit facilities of S$723million and a cash balance of S$224million. Only S$568million of loans needs to be refinanced by March 2023. MNACT also has a sizeable market capitalization and asset base of S$3.9billion[2] and S$8.4billion respectively which enables it to pursue value accretive acquisitions, increase value and fulfil its investment mandate to unitholders.

With an estimated ~50% of Hong Kong's population already contracted COVID-19[3], the new infection rate is dropping significantly with movement restrictions soon to be lifted. The HK SAR government is also injecting substantial stimulus into the economy through the issuance of HKD 10,000 (~S$1,700) consumption voucher per resident (equivalent to ~19% of total retail sales in 2021[4]). Together with the impending reopening of the HK-China border, rental rates at Festival Walk, a major property of MNACT, are poised to bottom and rebound from 2H2022.

MNACT's Japan assets will also benefit from the full lifting of COVID-19 restrictions on 21st March 2022. These will all support the increase of MNACT's DPU and rerating of its unit price.

With more than ~75% of its net property income from developed markets and sizeable free float market capitalization, MNACT is also poised to be a significant inclusion in the FTSE NAREIT Developed and Developed Asia indices, which can also drive a rerating of its unit price.

There is therefore no need for MNACT to sell itself now and especially at the inferior discount to NAV offer which the manager is recommending.

Proposed Merger is simply a sale of assets with MNACT unitholders receiving MCT units as payment

MNACT manager's argument that the proposed merger is not a sale of MNACT's portfolio is highly flawed and a weak excuse to justify why it had not undertaken a rigorous sale process to obtain the best price in the interest of unitholders but to only negotiate with a related party.

While MNACT will contribute ~43% of the NAV of the proposed enlarged entity's NAV, MNACT unitholders will only hold a minority of less than ~35% of the unit count in the enlarged entity. This is as MCT new units are issued at a premium of ~9% to its NAV in payment for MNACT units priced at a ~11% discount to its NAV.

In simple terms, the proposed merger is just similar to any sale of asset transaction with unitholders receiving units as consideration.

Securities and Futures Act and the Trust Deed

The key question which the MNACT Manager has not sufficiently answered is: "Would the board and management of MNACT Manager have recommended to sell MNACT at ~S$1.10 per unit to a 3rd party and not MCT, a related party?"

If not, isn't this a conflict of interest and breach of fiduciary duties to MNACT unitholders?

MNACT's trust deed provides for a covenant by the Manager to act in accordance with the CIS Code, (including Appendix 2 of the CIS Code) and the SGX Listing Rules for so long as the Trust is listed. In this regard, the CIS Code provides:

(a)  Best interest: Paragraph 3.1aa) provides that "The manager should at all times act in accordance with the constituent document of a scheme and in the best interest of participants";

(b)  Duty of best execution: paragraph 3.1d) provides that "The manager should have arrangements in place to take all reasonable steps to obtain the best possible result for the scheme, taking into account the following execution factors: price, costs, speed, likelihood of execution and settlement, size, nature or any other consideration relevant to the execution of a trade or transaction." 

MNACT's trust deed also contain key clauses that require the manager to:

(a)  act in the best interests of the Trust and provide diligent and responsible management of the assets and liabilities of the Trust

(b)  use its best endeavours to ensure that its related parties will conduct all transactions with or for the Trust on an arm's length basis and on normal commercial terms

Given the above, unitholders are deeply concerned about the corporate governance at the MNACT Manager. In particular, if the MNACT manager has potentially failed to follow the terms of the trust deed as well as the legal obligation to act in the best interest of unitholders and prioritise unitholders' interests over those of the REIT manager, the sponsor and its shareholders in proposing the current inferior MNACT offer to merge with MCT, a related party. This is as the proposed offer is clearly to the detriment of the interest of unitholders.

While MNACT manager will claim that MNACT independent unitholders will have the opportunity to vote on the transaction, they fail to mention the amount of resources which MNACT Manager is currently using to recommend the clearly inferior current offer which MNACT independent unitholders have to pay. In the event that the transaction is voted down, MNACT independent unitholders will also have to pay for the substantial fees for the failed transaction.

We respectfully and urgently seek MAS support to protect unitholders' interest by ensuring that the MNACT Manager fulfils its fiduciary duty and negotiate a better offer with the MCT Manager or conduct a robust and transparent process where all 3rd parties can undertake due diligence and bid in a fair and unbiased process for MNACT assets. This is in line with the Securities and Futures Act and the Trust Deed to act in the best interest of all unitholders.

Many MNACT unitholders are retirees and retail investors who have invested in MNACT pre COVID-19 and at higher prices to the current inferior offer. They depend on this investment for their retirement income. The current value destructive offer will lock them at a permanent discount and loss in the enlarged entity with a substantial cut in dividend per unit

We thank MAS again for their strong emphasis on corporate governance and the regulatory protection for unitholders to increase investors' confidence and promote a sound, stable and successful Singapore REIT market.

Yours faithfully,

Jan F. Moermann
Chief Investment Officer
Havard Chi
Head of Research

[1] Unit price as of 17 March 2022 
[2] At unit price of S$1.12 as of 17 March 2022
[3] 8th Update (14 March 2022), Li Ka Shing Faculty of Medicine, Hong Kong University and World Health Organization (WHO) Collaborating Centre for Infectious Diseases Epidemiology and Control
[4] Estimated outlay of HKD 66.4billion for consumption voucher scheme and estimated retail sales of HKD 353billion in 2021

We invite all MNACT unitholders to visit and register at the website:  WWW.BETTERMNACT.COM

Please contact us at:

Source: Quarz Capital Management, Ltd.