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Activist hedge fund urges Singapore REIT merger to boost value

Ascott Orchard Singapore is one of the four properties managed by Ascott REIT in Singapore. (Photo: Ascott Residences Trust)

By Pooja Thakur

(Bloomberg) -- Two Singapore REITs are being urged to join the wave of consolidation starting to sweep the industry.

Ascendas Hospitality Trust and Ascott Residence Trust should join forces to boost shareholder value and avoid potential conflicts following a separate deal in January that will see CapitaLand Ltd. gain ownership of the managers of both REITs, according to Quarz Capital Management Ltd.

As part that transaction, CapitaLand will hold 45 percent of Ascott units and about 28 percent of Ascendas Hospitality. The firms’ overlapping investment mandates could lead to corporate governance concerns, particularly when it comes to acquisitions, Quarz said in a letter to the board of Ascendas Hospitality and obtained by Bloomberg News.

“Despite its prime asset base, Ascendas Hospitality trades at about a 10 percent discount to its net asset value,” Quarz said in the letter. “We believe the continued undervaluation is due to its sub-optimal size.”

An Ascott spokesperson said the overlapping investment mandates of both had been noted. “We shall be considering various options with the objective of maximizing value for our unit holders and will make an announcement when there are material developments.”

The push for a deal comes as other Singapore REITs join forces. Earlier this month, OUE Commercial REIT agreed to buy OUE Hospitality Trust to create one of Singapore’s 10 biggest REITs, giving the combined entity greater firepower to make acquisitions. Last year, ESR-REIT and Viva Industrial Trust merged to create a larger logistics trust, and in January, developer CapitaLand struck a S$6 billion ($4.4 billion) deal to buy Temasek Holdings Pte units Ascendas Pte and Singbridge Pte.

A merger between Ascendas Hospitality and Ascott would create a firm with a market value of more than S$3.6 billion, and total assets of S$7.2 billion, making it the eighth-largest REIT in the city-state, Quarz said. That would qualify for inclusion in global benchmark indexes, potentially boosting trading volumes and the share price, the fund said.

The recommendations would result in Ascendas Hospitality generating a potential return of more than 40 percent in capital appreciation and dividends in the mid to long-term, Quarz said.

Ascendas Hospitality units closed up 0.6 percent at 91 Singapore cents Thursday, having gained 18 percent this year, beating the benchmark Straits Times Index’s 9.3 percent rally. Ascott closed unchanged. It’s gained 10 percent since January.

The enlarged trust would also have increased financial flexibility to make larger acquisitions and “establish itself as market leader in new and lucrative hospitality formats,” Quarz said. Ascendas Hospitality owns hotels in Tokyo, Osaka, Seoul and Sydney, while Ascott has a portfolio of hotels targeting business travelers.

Quarz first started buying into Ascendas about a year ago and has discussed the merger proposal with some of its other institutional investors, Chief Investment Officer Jan Moermann said. He declined to disclose Quarz’s stake, but said the fund had support from about 10 percent of the shareholder base.

CapitaLand has said it’s reviewing all options for the two trusts after gaining control of their management arms in the Temasek deal. At a shareholder meeting earlier this month to seek approval for the acquisition, a shareholder flagged the potential overlap from the enlarged portfolio.

“There are various possibilities to resolve the conflict,” CapitaLand Chief Executive Officer Lee Chee Koon told the meeting, according to the Business Times newspaper. “One is we go to shareholders to ask for a narrower mandate for each REIT. The second possibility is to sell one of them. The third is to merge the two. All this, we need to review,” he said.

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