Regional Real Estate: May the best man win Mercatus
• Bids are in for Mercatus retail portfolio; key retail-focused landlords in Singapore and Hong Kong are reportedly interested
• Positive implications for CICT; tapping sponsor for capital a likely strategy
• Link REIT has financial muscle to be competitive, with enough debt-funded headroom for this deal
• We believe that other potential contenders (FCT, LREIT-led consortiums) could be conservative in their bids given the significant equity commitment
Bids are in! Since our last report (Singapore Retail REITs – prized portfolio up for grabs), we understand
that interested buyers including CICT, Link REIT, and FCT have taken a close look at this portfolio and bids have been received. Given the rare opportunity to gain (or deepen) one’s foothold in Singapore’s suburban retail landscape, we believe that a transaction (if materialised) will likely be at a tight cap rate. We look at the potential impact on the parties that are reportedly interested in this portfolio:
CICT (BUY, TP S$2.70): Will it try on its own? A portfolio in its “own backyard”, we see it as a good fit with CICT’s portfolio and believe that they can be competitive and have the financial muscle to undertake this deal. That said, the REIT may need to raise close to S$1.2bn in equity (8% of market cap), which may be a tough endeavour in our view, given the current market conditions. That said, we believe that the likely strategy is to tap into its sponsor/third-party capital to reduce its own capital commitment in pursuing this deal. On its own, CICT can deliver an accretion of up to 0.3% but could see gearing heading towards 45%.
Link REIT (BUY, TP HK$81.80): First foray in Singapore. If Link REIT turns out on top, we believe that investors will reward Link REIT with higher valuations, given its pivot back to retail (c.71% from 68% of assets), while improving the overall resilience of its earnings profile. A fully debt-funded deal will bring gearing to c.32%, with accretion ranging between 2.1%-2.8% of FY3/24F DPUs, based on our estimates. That said, we believe that Link will likely look to tap into third-party capital (or vendor) to keep its gearing <30% in the medium term in order to maintain its credit rating.
Other potentially interested parties (FCT/LREIT, amongst others). While we believe that the portfolio fits FCT “like a glove” in terms of suburban exposure and will enable it to further entrench itself in the suburban retail space. That said, the size of the deal, at c. S$4.0bn implies significant equity fund raising requirements that may mean relying on their sponsor for more capital. Meanwhile, though this deal is a strategic move, LREIT management recently took themselves out of the running for this portfolio.
