RECENT developments in the S-Reit market suggest that consolidation has begun and more merger and acquisition (M&A) activity is imminent, says Macquarie Capital Advisers executive director and global head of property group Antony Green.

In case there is any doubt, future M&As could turn hostile and will almost certainly grab the headlines. But Mr Green says: ‘History shows the first few deals are always friendly.’

He believes that the current state of the S-Reit market corresponds to that of the Australian market about 10 years ago.

In 1999, the number of Australian-listed property trusts (LPTs) peaked at 46, then slowly dwindled to around 26 today, with the asset pool remaining largely the same.

Consolidation, if or when it is considered by S-Reit players, will be trickier because property assets have surged in value recently, making acquisitions less likely to be yield-accretive.

Mr Green says that although yield-accretiveness ‘is one of the first tests’ when making an acquisition, ‘you have to think of total return’.

‘There is strategic merit in buying something that in several years’ time is going to create more value for you as an investor,’ he adds.

He also says: ‘With a bit of synergy, maybe a management fee waiver of some sort, a bit more or less debt, you can make it positive for both sides.’

Mr Green could, of course, be talking about Macquarie MEAG Prime Reit (MMP Reit), which recently announced a strategic review, on which he is advising.

MMP Reit could be sold in its entirety or have its underlying assets sold piecemeal.

On the attractiveness of MMP Reit, Mr Green says that while it was trading for around $1.05 a unit before the strategic review announcement, its NAV based on the underlying assets had been valued around $1.61 a unit. And at the end of the trading day on Thursday, it closed at $1.19 a unit unchanged.

For current investors, however, MMP Reit has not delivered growth.

‘A lot of S-Reits have traded on the fact that they will provide growth. MMP Reit, given its cost of capital, struggled to provide the acquisitions and the growth,’ Mr Green says.

He has no comment on the details of MMP’s strategic review, but says it is in Macquarie Group’s interest not to sell its 26 per cent independently but to seek an offer for all unitholders instead.

On consolidation of the S-Reit market and the Reit market in Asia in general, he believes this will make it more ‘efficient’. ‘Some Reits will disappear and some will go from strength to strength.’

Mr Green does not think the S-Reit market has matured yet. But the perception that S-Reits are a growth vehicle is changing. ‘Some of that gloss has come off a bit,’ he says.

‘It is not a bad thing that people realise what Reits actually are and not what they think they are supposed to be.’

MMP Reit refinances $220m short-term loans

MACQUARIE MEAG Prime Reit (MMP Reit) has refinanced $220 million of short-term loans, $190 million of which are due in May and $30 million in August.

‘In light of the strategic review of MMP Reit announced on Feb 19, the new funding has been arranged to extend the maturity of the facilities until end-September,’ said Macquarie Pacific Star, the manager of MMP Reit. This will allow the review to proceed with flexibility. It also removes the need to incur additional costs to unwind longer-term loans, which may be necessary if there is a transaction arising from the strategic review, said the real estate investment trust (Reit) manager.

In its Feb 19 announcement on the strategic review, the Reit manager said the specific objective is to enhance value for MMP Reit unit-holders. The review includes the possibility of the Macquarie Group selling its stake in the Reit.

The financing renewals have been secured on competitive terms and will not have a material impact on distribution per unit to unit-holders, the Reit manager said, adding that the successful refinancing – a continuation of support for the trust by finance providers – shows the strong credit quality of MMP Reit.

‘MMP Reit’s creditworthiness is supported by the high quality of underlying assets, low gearing, rental reversions, occupancy levels and tenancies,’ said Macquarie Pacific Star chief executive officer Franklin Heng.

MMP Reit recently announced an increase in its net asset value to $1.61 per unit as at Dec 31, 2007. The Reit is trading at a discount to this value, closing yesterday at $1.22.

‘We remain committed to securing the most optimal financing arrangements to maximise returns to unit-holders,’ Mr Heng said yesterday. ‘We will continue to monitor MMP Reit’s funding position throughout the strategic review.’

MMP Reit posted a 15.7 per cent year-on-year rise in distributable income to $16.2 million for the fourth quarter ended Dec 31, 2007.

Secured refinancing

Secured refinancing for short-term loans. MacQuarie MEAG Prime (MMP) REIT has refinanced S$220m of short-term loans, S$190m of which are due in May 08 and another S$30m in Aug 08. The new funding was arranged to extend the maturity of the facilities until end September in light of the strategic review announced on 19 Feb 08. The renewal was secured on competitive terms and will not have a material impact on Distribution Per Unit (DPU). The refinancing will allow the review to proceed with flexibility.

Strategic review could result in restructuring. MacQuarie Pacific Star has embarked on a strategic review with the objective of enhancing value for all MMP REIT unitholders. The review will consider both corporate and asset level strategies and could involve a proposal to take over 100% of MMP REIT.

Reiterate BUY. We like MMP REIT for strategic frontage on Orchard Road. MMP REIT gains full year contribution from overseas investments in China and Japan in FY08. The on-going strategic review could also unlock value for investors. MMP REIT provides FY08 distribution yield of 6.13%, an attractive spread of 4.09% over 10-year Singapore government bond yield at 2.04%. Our target price is S$1.55 based on 2-stage dividend discount model (required rate of return: 7.85%, terminal growth: 2.5%).

Unassailable frontage on Orchard Road

MacQuarie MEAG Prime (MMP) REIT invests in real estate used for retail and office purposes in Singapore and overseas. MMP REIT’s initial portfolio comprises 74.2% strata title interest in Wisma Atria (WA) and 27.2% strata title interest in Ngee Ann City (NAC). WA and NAC are landmark retail malls within the Orchard Road shopping district next to Orchard MRT station. MMP REIT is managed by MacQuarie Pacific Star Prime REIT Management, which is owned by MacQuarie Bank (50%), MEAG Munich Ergo (25%) and Investmore (25%). MacQuarie Real Estate Singapore owns 23.9% of MMP REIT.

NAC: positive impact from rent review with Toshin. MMP REIT will review rental of master lease for 226,275sf of retail space with Toshin Development, a subsidiary of Takashimaya, in Jun 08. The magnitude of rent increase is capped at 25% and we have assumed an increase of 12.5% in our forecast. MMP REIT will also reconfigure 16,780sf of space previously occupied by National Library into a beauty and wellness precinct. Management expects rental to increase from S$7.10 to S$14psf pm after reconfiguration is completed in May 08.

Benefiting from positive office rental reversion. MMP REIT owns a total of 239,972sf of office space at WA and NAC. Rentals for renewed and new leases has increased from S$7.70psf pm in 1Q07 to S$12.10psf pm in 4Q07, substantially higher than average passing rent of S$6.22psf pm in 4Q07. According to Colliers, asking rents for office space in Orchard Road were as high as S$16psf pm in 4Q07.

Riding on rapid growth in Sichuan, China. MMP REIT has acquired Renhe Spring Department Store in Chengdu, the capital city of Sichuan Province, for Rmb350m or S$70m. The mall houses premium foreign brands such as Burberry, Prada, Dunhill, Ermenegildo Zegna, Gucci and Hugo Boss. The property achieved sales of Rmb263m in 2006, an increase of 23%, and will be linked to Chengdu’s new subway system in 2010. The vendor Renhe Spring Group provided guaranteed net profit of Rmb26.4m for four years, equivalent to net distribution yield of 7.5%. MMP REIT has been granted right of first refusal for another two malls in Chengdu with total GFA of more than 1m sf.

Strategic review could result in restructuring. MacQuarie Pacific Star has embarked on a strategic review with the objective of enhancing value for all MMP REIT unitholders. The review will consider both corporate and asset level strategies and could also involve a proposal to take over 100% of MMP REIT. Management intends to refinance borrowings of S$235.8m with short-term borrowings to provide flexibility. MMP REIT has earlier established a S$2b multicurrency Medium Term Note (MTN) with tenor of one to five years.

Upgrade to BUY. We like MMP REIT for strategic frontage on Orchard Road. MMP REIT gains full year contribution from overseas investments in China and Japan in FY08. The on-going strategic review could also unlock value for investors. MMP REIT provides FY08 distribution yield of 6.56%, an attractive spread of 4.32% over 10-year Singapore government bond yield at 2.24%. Our target price is S$1.55 based on 2-stage dividend discount model (required rate of return: 7.85%, terminal growth: 2.5%).