(May 6): On March 27, during Manulife US Real Estate Investment Trust’s Investor Day event, Ronald Tan, director of Equity Capital Market at the Singapore Exchange, asked the audience a few questions. It was to gauge the public’s reception to various asset classes. Who would want another office REIT, Tan asked. Almost the entire audience of 400 raised their hands. MUST is an office REIT and the audience comprised MUST unitholders.
How about multifamily? The response was sparse, perhaps because it was not a familiar asset class to Singaporeans. What about hospitality? A few hands popped up.
Tan explains away the lack of enthusiasm for US hospitality trusts as a lack of familiarity. MUST has been a success and is managed well, hence the better reception for office REITs. “It comes down to education, which is why I’m quite excited when two same-sector REITs go out to market [at the same time]. I take it positively. It’s about a differentiated product,” he says in a recent interview with The Edge Singapore. “In one week, investors are going to get into a deep dive into the US hotel sector.”
The two IPOs have different portfolios. “If you want no-frills service hotels, there is one; and if you want luxury, there is another,” Tan says.
ARA US Hospitality Trust’s portfolio comprises 38 properties of Hyatt Place select service and Hyatt Stay extended service properties that sponsor ARA Asset Manager acquired last December. The IPO portfolio is valued at US$719.5 million ($979 million) and the hotels are managed by Aimbridge Hospitality, a third party.
Unlike other hotel REITs, which have a portion of their portfolio on master leases or minimum rents to stabilise net property income, ARA US Hospitality Trust’s managers will actively manage the properties to achieve growth in net property income (NPI), maintain optimal occupancy levels and enhance the value of the properties, according to the lodged prospectus.
Eagle Hospitality Trust has had a much longer gestation period. “I met Urban Commons straight after MUST listed, and they have been preparing the portfolio over the years,” Tan recalls. Urban Commons is the sponsor of Eagle Hospitality Trust. The portfolio comprises 18 full-service hotels — nine “upper upscale” hotels, five upscale hotels and four upper midscale hotels (three-star) — with a total of 5,420 rooms and a valuation of US$1.27 billion. Each hotel has a master lease agreement with the sponsor, which is the master lessee. Rental revenue comprises an annual fixed rent and a variable rent based on a percentage of gross operating revenue and gross operating profit. The master leases run for an initial term of 20 years, with the option to extend for 14 years.
In a nutshell, investors are being offered growth versus stability.
Why list in Singapore?
Tan travels overseas regularly to attract sponsors to list their REITs on SGX. In his presentations, he gives six key reasons to do so.
First, SGX is the largest global REIT Platform in Asia, with a market capitalisation of US$70 billion. Unlike other developed REIT markets in Asia-Pacific such as Japan and Australia — which are for domestic listings, where mainly Japanese
REITs are listed in Japan and mainly Australian REITs are listed in Australia — SGX has foreign sponsors listing REITs here as well local sponsors listing REITs with overseas portfolios here.
“We have the largest global REIT platform. You could start with a US portfolio and decide 10 years later to pick up European assets, and investors here would not have a problem with that,” Tan says. For instance, Frasers Logistics and Industrial Trust (FLT) was listed with Australian logistics properties and has since diversified to Europe. Ascendas REIT was listed with Singapore assets before branching out to Australia and, last year, it acquired two UK logistics portfolios. Ascott Residence Trust started with properties in Singapore and selected countries in Asia, moved north to Europe, south to Australia and, in the past four years, has crossed the Atlantic — it now owns three hotels in the US.
Cromwell European REIT, whose sponsor is Cromwell Property Group, in which ARA Asset Management acquired an associate stake, was listed on SGX with European assets. IREIT Global was listed with German suburban office campuses. On April 30, City Developments acquired a 50% stake in IREIT’s manager and 12.4% stake in the REIT.
Access to Asian capital
Singapore is an established private banking and wealth management centre, viewed as second only to Switzerland. This brings Tan to the second reason for listing here: access to a wide pool of wealthy investors — and not just high-net-worth individuals (HNWIs). Global and Asian institutional investors have offices in Singapore. In addition, the city state has become an attractive place for the wealthy, including those from Europe, Switzerland and Asia, to set up family offices. For instance, Quarz Capital (Asia) is based here and regularly invests in REITs. Wealthy Chinese investors such as Tong Jinquan and Gordon Tang and the companies they control also invest in REITs. “Access to capital is critical,” Tan emphasises.
Third, future sponsors may want to take note of MUST’s success. Its sponsor is Manulife, which planned to expand in Asia and had signed bancassurance agreements with various banks in Asia, including DBS Group Holdings. In addition, Manulife has an asset management arm based out of Singapore and Hong Kong. Yet, the listing of MUST has given the group a much higher profile. Within three years, MUST has grown to US$1.9 billion, with a market cap of more than US$1.1 billion, putting it within easy reach of entering the prized EPRA/ NAREIT Developed Markets Index.
“A listed platform is the fastest way to reach an Asian audience. MUST could have listed anywhere, but [Manulife] wanted a profile among Asians,” Tan says.
The fourth reason is usually a pitch that bankers make to wealthy real estate owners: Unlock capital from stabilised real estate assets and offer attractive distribution yields through a listed tax-efficient structure. Not only would sponsors be able to cash out, but they would also be able to retain control by owning the manager and units in the REIT.
External manager model a key attraction
Fifth is the fee income from the REIT. Most markets in Asia adopt the external manager model for listed REITs. The manager is owned by the sponsor and can garner fees. In the early days of S-REITs, base fees were calculated based on portfolio size as well as the performance fee on NPI. These days, fees are a lot more aligned to unitholder interests. For instance, the base fee component of Eagle Hospitality Trust and ARA US Hospitality Trust is a percentage of distributable income. Performance fee is calculated on the y-o-y growth in distribution per security.
“After selling into REITs in Singapore, the sponsors can continue to receive fee income. Urban Commons likes the model in which they keep managing their assets,” Tan says.
Finally, it is easier to raise equity for further asset acquisitions through a listed REIT. On April 30, MUST announced it had done an overnight placement to raise US$94 million to partly fund Centerpointe I and II, two office towers in Fairfax County, Virginia — across the Potomac from Washington, DC — acquired for US$122 million. According to MUST chief financial officer Jag Obhan, NPI yield is 8.3% and the capitalisation rate is 7.5%. The acquisition is accretive to MUST’s distribution per unit, Obhan says. On a pro forma basis, DPU rises from 5.57 cents to 5.76 cents, giving a 3.3% accretion.
What’s in it for investors?
Asian investors love properties, capital gains from property and yield. REITs provide property yields through DPU in a liquid asset that can be bought and sold with ease on SGX. With the different sectors, investors who are in it for the yield can invest in REITs with higher yields or REITs with the best managers (see Chart 3).
With the listing of MUST, Asian investors have access to tax-free distributions from US property. Normally, overseas investors are subject to a 30% withholding tax on distributions. However, MUST established and tested its four pillars, which enable investors to invest in tax-efficient Singapore-listed
REITs with US assets. For instance, if MUST’s 1QFY2019 DPU of 1.51 US cents were annualised, investors would receive the entire six US cents. If the REIT were listed in the US, foreign investors would receive just 4.2 cents.
As a recap, MUST relies on a parent US REIT structure, the US Portfolio Interest Exemption Rule, fiscally transparent limited partnerships such as a Barbados entity, and foreign sourced income in Singapore. “We have a page [in our presentation] where we explain MUST’s tax structure. This is the pitch for the US,” Tan says.
Despite investors’ griping about fees as well as dilutive acquisitions in some cases, S-REITs by and large have delivered significant returns to unitholders —through both their yield and capital gains. For instance, REITs such as Suntec REIT, CapitaLand Mall Trust, Frasers Centrepoint Trust and Mapletree Commercial Trust were listed at $1, 96 cents, $1.03 and 88 cents respectively. They traded at $1.86, $2.41, $2.39 and $1.93 respectively as at April 30. In addition, over the years, investors would have had their initial capital returned through DPU.
Read the prospectus
Investors need to avail themselves of REITs’ prospectuses and annual reports. “If you look at IPO prospectuses today, they have to reveal the differential in valuation between before master lease and after master lease rental income for properties with rental support. Our role is to make sure the disclosure is there,” Tan says. For instance, in the 2018 dilutive acquisition by OUE Commercial REIT, the impact of the acquisition was clearly stated, including the impact before and after income support. Similarly, Sasseur REIT had disclosed the impact before and after its entrusted manager agreement.
The REIT Association of Singapore, CapitaLand, Mapletree Investments and the Singapore Institute of Surveyors and Valuers, along with SGX, were part of the review committee to make valuations as transparent as possible. “Professionals understand that income support has to be revealed. The onus is on the investor to track the manager and where it is on the drawdowns, depending on how long the support is,” Tan says.
Looking ahead
Tan believes the next REIT IPOs are likely to be those with overseas assets. “If we look at the last 15 years, it’s very clear that, from a trending perspective, overseas acquisitions are going to be mainstream. All seven of REIT IPOs in the last three years were from overseas,” he says.
MUST was listed in May 2016, followed by FLT in June 2016, EC-World REIT in July 2016, Dasin Retail Trust (a business trust) in January 2017, Keppel-KBS US REIT in November 2017 and Sasseur REIT in March last year.
Since 2014, there have been no pure-play Singapore REIT IPOs, Tan adds. Interestingly, ASX-listed Lendlease Group is believed to be seeking a local listing for its Singapore malls, which are held through private-equity funds. The malls include Jem, Somerset 313, Parkway Parade and the upcoming Paya Lebar Quarter.
Far East Organization, which owns Far East Hospitality Trust, has nine malls in Singapore — including HillV2, Far East Square, Junction 10, Orchard Central, West Coast Plaza and Riverside Point — none of which are in REITs.
The next REITs to list in Singapore may turn out to be assets that local investors are even less familiar with than hospitality. Although companies such as Singapore Press Holdings and Mapletree Investments have acquired sizeable student accommodation portfolios, the capitalisation rates may be too tight for these portfolios to be accretive in a REIT platform to yield-hungry investors.
Tan suggests that a speciality centre portfolio could be in a REIT IPO at some point. Speciality centres are properties anchored by a supermarket and surrounded by essential services such as laundry. Self-storage in the US is quite big and may offer triple net leases that could suit investors in Asia.
Among the exciting developments ahead, Tan sees local real estate companies on the cusp of becoming global players. “We are seeing the emergence of the first global real estate managers [from Asia]. We are seeing our own Asian sponsors becoming global champions, and there is going to be a strong driving force to move beyond their portfolios in Asia into Europe and the US,” Tan says, “We hope to see CapitaLand and Mapletree Investments as [these] global real estate players.”
Local investors are likely to be spoilt for choice in terms of REITs with an array of asset classes and yields. Mostly, they should study in detail the REITs they invest in. SGX runs an education series, and annual reports are in the public domain.
What should investors look for in a REIT manager? Trust and ethics are important ingredients, Tan says. “As we grow in the REIT manager space, those sponsors and managers that have delivered on trust [will show results].”
REITs continue to steal limelight on SGX
(May 6): Last November, the real estate investment trust sector saw its first full merger — between ESR-REIT and Viva Industrial Trust through a trust scheme. On April 24, the enlarged ESR-REIT reported full-quarter results after the merger.
Gross revenue for 1QFY2019 surged more than 93% to $64.8 million; net property income more than doubled to $48.6 million; and total distributable income rose 136.6% to $32 million. Its distribution per unit rose 18.9% y-o-y to 1.007 cents because of an increased number of units. An annualised DPU of 4.028 cents translates into a DPU yield of 7.4%.
The larger market capitalisation from the merger resulted in increased liquidity. Average daily volume traded has more than doubled post-merger from 1.51 million units for 3QFY2018 to 3.59 million units in 1QFY2019.
In signs that the industrial sector is stabilising, rental reversions for 1QFY2019 were a positive 1.6% compared with a negative 2.9% for FY2018. ESR-REIT says it will continue its strategy of asset enhancement initiatives (AEIs) to raise rents.
One of the properties that could be earmarked for AEI is 8 Tuas South Lane, given its proximity to Tuas Mega Port and the land lease of 35 years. The property is occupied by Hyflux Membrane Manufacturing, which accounts for 3.7% of ESR-REIT’s portfolio by rental income, and rent has been paid up to March. The trust also holds three months of security deposit on the property. If Hyflux defaults and ESR-REIT is unable to fill the building, there could be a negative 4.9% impact on distributable income and DPU.
IREIT gets new strategic investor
During its results briefing in February, Frank Khoo, chief investment officer of City Developments, had hinted that he was looking at acquiring a platform. And, following the purchase of two UK office buildings in 2018, market observers believed any platform was likely to be non-Singaporean.
They were both right and wrong. CDL announced on April 30 that it paid $18 million for a 50% stake in IREIT Global’s manager, and a further $59.4 million for 78.6 million units in IREIT Global, giving CDL a 12.4% stake. Following the transaction, it appears that Tong Jinquan’s stake is down to 35% (from more than 50% earlier). Tikehau Capital owns 50% of the manager and 16.4% of IREIT Global units.
IREIT Global’s current portfolio, which comprises five freehold office properties in the German cities of Berlin, Bonn, Darmstadt (pictured), Munich and Münster, is valued at €504.9 million ($771 million). Annualised yield is 7.7%, based on FY2018 DPU of 5.8 cents and CDL’s purchase price of 75.5 cents. IREIT’s unit price is already up 2.6% since the announcement.
Analysts reckon that IREIT Global could get a new lease of life. Listed on the Singapore Exchange since 2014, its ABBA strategy failed to grab the imagination. ABBA stands for Grade-A properties in B cities, and Grade-B properties in gateway cities.
In November 2016, Tikehau Capital acquired an 80% stake in IREIT Global’s manager and a 3.61% stake in IREIT Global. Last July, Tikehau Capital acquired a further 4.39% of units in IREIT Global from Lim Chap Huat, the major unitholder of Soilbuild Business Space REIT, and an additional 4.5% stake in IREIT Global’s manager.
Tikehau Capital changed the investment mandate of the REIT from commercial by adding retail and industrial properties in Europe. Since controlling the manager, however, Tikehau has focused on operations rather than acquisitions.
Now, with CDL as a significant unitholder and part-owner of the manager, IREIT Global may attract investor attention. Khoo has said IREIT Global would make an immediate contribution to CDL’s recurring income through management fees and attractive yield. “Through our asset management and enhancement expertise, we can add value and potentially recycle capital by injecting properties into IREIT Global. We will continue to explore investments in suitable platforms to grow our fund management business,” he adds.
CDL aims to achieve $5 billion in assets under management within five years and, with the IREIT Global transaction, it has moved much closer to the target.
New IPOs in pipeline
Two new US REITs will be listing on SGX this month. ARA US Hospitality Trust has registered its prospectus, and Eagle Hospitality Trust has lodged its prospectus.
A third IPO that had been scheduled late last year, that of Prime US REIT, is also likely to lodge its prospectus soon. A fourth IPO — the commercial portfolio in the US owned by Ascendas-Singbridge — may find its way into a REIT either through a standalone REIT IPO or a merger with Ascendas REIT.
Just as in 2018, the largest IPOs and equity raisings on SGX are likely to be by REITs.
In April alone, Suntec REIT raised $200 million through a placement of 111.1 million units at $1.82 each; and Manulife US REIT raised US$94 million through an issue of 114.078 million units at 82.4 cents each.
Elsewhere, Lippo Mall Indonesia Retail Trust has announced the acquisition of Lippo Puri Mall for $354 million, for which it may need to raise equity. And OUE Commercial REIT has announced a merger-and-acquisition deal with OUE Hospitality Trust, which will be larger than the ESR-REIT merger.
