SINGAPORE (Oct 21): To date, real estate investment trusts are likely to have raised more than $4.3 billion in “follow-ons” such as placements and preferential equity offerings, and excluding IPOs.
On Oct 17, Mapletree Commercial Trust announced that its private placement of 200.9 million units at $2.28 per unit was seven times covered. MCT has also announced a preferential equity offering of 205.6 million units at $2.24 to its unitholders. In total, MCT has stated that it plans to raise “not less” than $902 million to part-fund its acquisition of Mapletree Business City Phase 2 (MBCII), which it is buying for $1.55 billion, or $1.57 billion including expenses and fees.
Since MCT’s private placement units and preferential equity fundraising (EFR) units are being issued at premiums of 31% and 34% respectively to its net asset value (NAV) of $1.70 (as at Sept 30), the acquisition of MBCII is some 4.5% accretive to MCT’s distributions per unit. DPU as at March 31 was 9.14 cents, and annualised DPU based on DPU for the three months to Sept 30 was 9.28 cents. MBCII would add 0.41 cent to its DPU.
So far, MCT’s manager has articulated that the REIT plans to remain focused on Singapore. As a result, MCT’s market price is likely to remain elevated relative to its NAV.
This is because local risk-free rates are low — at around 1.7% for yields on 10-year Singapore Government Securities, which are down from 2.05% at the start of the year and 2.6% y-o-y.
Interest rates affect REITs in three main ways. First, REITs are priced off risk-free rates in a yield spread. The lower the risk-free rate, the more compressed REIT yields are, and the higher their price. Hence, MCT’s unit price is up 41.7% this year alone. Secondly, because all its assets are in Singapore, its debt is likely to be in the local currency, so lower rates mean lower interest expenses. Because MCT has no currency or foreign jurisdiction risk, its discount rates are likely to be lower than those for overseas properties, and capitalisation rates — which are indirectly affected by interest rates — would also be moderately low.
According to placees, MCT’s private placement was more than three times subscribed within the first hour. Keppel Pacific Oak US REIT (KORE) announced a placement of around 104.3 million units at an indicative price range of 70.1 US cents to 72.5 US cents to raise not less than US$73.1 million ($99.9 million). The proceeds will be used to partly pay for One Twenty Five, a Class A office complex in Dallas that costs US$101.5 million.
Based on a combination of debt and equity with an additional 100 million new units, the accretion is 1% to the indicative DPU of 6.22 cents KORE used in its calculation in a Sept 6 announcement. KORE announced a DPU of 1.5 US cents for 3QFY2019. Hence, based on the annualised DPU for the latest quarter with the latest private placement of 104.3 million units, the accretion could be around 1.7%.
In addition, KORE’s manager says One Twenty Five’s in-place rents are 10.7% below market rents, implying that there is scope for upward reversions over time.
KORE trades at a higher yield of 7.89% compared with MCT’s 3.9% because of the additional perceived risks of being denominated in a foreign currency in a jurisdiction with different risk-free, discount and capitalisation rates. The manager has also highlighted a technology-heavy tenant profile.
Separately, Ascendas REIT announces its 1HFY2020 results on Nov 1. Market observers are expecting it to also announce the acquisition of Ascendas-Singbridge’s 3.3 million sqft campus-like commercial properties in San Diego, Raleigh and Portland in the US. The capitalisation rates in these cities for commercial properties range from 6.5% to 7%.
With an investment property portfolio of $11.1 billion, total assets of $11.4 billion and a market capitalisation of more than $9.7 billion, Ascendas REIT could acquire a $1 billion portfolio with a combination of debt, private placement and preferential EFR, which is more efficient and accretive than a rights issue. Ascendas REIT last traded at a yield of 5.1%, and its unit price is up 22.5% this year.
