ESR merges with Viva

I feel somewhat mixed at this outcome, positive as I knew that this was inevitable for both Reits. However, I thought that the ESR management should have held out more for a better deal for unitholders. The deal would have been much more accretive for the ESR unit holders, if it had been done more swiftly. The positivity at the beginning of the year has started give way to fear of rising interest rates.Overall, the street does not seem to be favoring companies with high debt levels (Reits, Thai Bev, etc).

Once the news was out, I spent the weekend thinking how the street would price both shares. My initial thoughts were that both would race towards the offer price of S$0.96 for Viva and S$0.54 for ESR. However this has not played out, with both ranging near pre-merger prices.

For Viva Unitholders, this would seem like a good conclusion for them. At an offer price of $0.96, it means that most can easily let go of their shares, which I suspect they are doing with glee. Though not exactly a windfall, at least they would not have to worry about the stop of the income stabilization or short land leases anymore.

For existing ESR unitholders, there is not have much to be happy about considering how DPU is likely to continue sliding in 2018. I feel that the management really does have a lot to prove, with this deal being at best, a status quo for the Reit. While I continue to believe in the general strategy, I feel that the earliest we can see it bear fruit is in 2019. The income visibility till that date is hazy at best. I do hope the management will continue to divest non-core assets and leverage on AEI’s to improve investor returns.

ESR+Viva Portfolio
Enlarged Reit Portfolio

As interest rates continue to go up, leveraged income stocks like Reits will continue to trail the street. Only a those of an appreciable size and solid credit rating will be able to command lower interest premiums. I’m keeping my bets on ESR intact and hope to accumulate more if price weakens below S$0.5.

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