SINGAPORE (July 1): Real estate investment trusts are still bankers’ best friends. In the first half of this year, Singapore REITs raised $1.35 billion (see Table 1) through placements that was used mainly for acquisitions. In general, these acquisitions have been accretive to distribution per unit (DPU).
Among them, Frasers Centrepoint Trust and ESR-REIT announced placements and preferential equity offerings in Singapore dollars to acquire Singapore assets. FCT’s main acquisition is a one-third stake in Waterway Point. Waterway Point is a successful suburban mall that is connected to Punggol MRT in an up-and-coming residential area.
See: ESR-REIT raises funds, announces AEI, acquires logistics warehouse
The monies raised also partly paid for FCT’s 18.8% stake in PGIM Real Estate Asia Retail Fund (PREARFL), a non-listed retail mall fund in Singapore. PREARFL owns and manages six retail malls (Tiong Bahru Plaza, White Sands, Liang Court, Hougang Mall, Century Square and Tampines), an office property (Central Plaza) in Singapore and four retail malls in Malaysia.
The reason for taking a minority interest has yet to be revealed, but analysts point out that FCT, along with Frasers Property, holds more than 66% of PREARFL. Eventually, assets such as the suburban malls in Singapore could be offered to FCT, they suggest.
Whatever the case, FCT’s transaction is DPU-accretive (see Table 2). And, at any rate, FCT’s placement and preferential equity offering were oversubscribed, as it rarely asks its unitholders for equity. Its market cap is now $2.87 billion, and sponsor Frasers Property owns 36.26% because of dilution following the placement tranche. The free float of around $1.8 billion implies that FCT fulfils the free float condition for inclusion into the FTSE EPRA NAREIT Global Real Estate Index.
For REITs such as Cromwell European REIT (CEREIT) and CapitaLand Retail China Trust, their properties are in cities that are unfamiliar to local investors. This is unlike Waterway Point and ESR-REIT’s logistics warehouse on Pandan Road, which are within easy reach of local investors.
See: CRCT to acquire three malls from CapitaLand, aims to deliver DPU accretion up to 1.7%
Investor fatigue sets in
CEREIT announced on June 21 that it plans to acquire six properties for €246.9 million ($380.6 million). Of the six, three are suburban office assets in Grand Paris. The Paryseine asset and Lénine asset, both in Ivry-sur-Seine, are freehold, majority office properties with a total 23,066 sq m of net lettable floor area, including an adjacent 10,024 sq m three-level modern warehouse. Occupancy of the buildings is 95.4% and its weighted average lease to expiry (WALE) is 5.1 years.
The Cap Mermoz asset is a freehold office building north of Paris comprising 10,720 sq m of net lettable area (NLA) with occupancy of 96.8% and a WALE of 5.3 years.
The properties in Poland comprise two freehold, predominantly office properties in Kraków, and a freehold office property in Pozna.
Boosted by the yield in the Polish cities, the net property income (NPI) yield of the acquisition properties is 7.4% compared with 5.8% for the current portfolio. “While it may be up the risk curve (in terms of city), the growth potential as one of the fastest-growing economies in Europe is promising. Tenant profile at the properties is also strong with international demand including HSBC, IBM, UBS and IKEA. We expect stable rents pegged to inflation near 2%,” UBS says of CEREIT’s Polish properties.
To part pay for the acquisitions, CEREIT upsized its placement to 326 million units from 228 million units, raising €150 million, up from €100 million. Based on the larger, new number of units, the acquisition is accretive to DPU if the DPU for FY2018 includes the rights issue. The upshot of a larger equity portion is a lower aggregate leverage of 36.6% compared with an expected 38%.
This is CEREIT’s fourth acquisition and its second round of equity raising since its IPO in November 2017, when the portfolio size was €1.35 billion. The portfolio size is now €2.04 billion. CEREIT’s manager and sponsor may consider giving acquisitions a rest and focus on leasing and organic growth instead, as the REIT could start to suffer from acquisition fatigue. Based on CEREIT’s last done price of 46 euro cents, its DPU yield ranges from 6.57% (based on dilution) to 8.14%, using CEREIT’s own computation.
MUST approaches critical size for index inclusion
In May, Manulife US REIT (MUST) completed the acquisition of grade A buildings Centerpointe I & II in Fairfax County, Virginia. Although Fairfax County is not in the same state as Washington DC, nearby Arlington is home to the Pentagon, Reagan National Airport, Arlington National Cemetery and the new Amazon HQ2. The latter can be reached by subway from DC. The rationale for acquiring Centerpointe I & II is similar to that for Exchange in Jersey City, which is minutes away from Freedom Tower (Manhattan) by the PATH train. The Centerpointe I & II acquisition was part funded by a placement of 114 million units to raise US$94 million ($127 million) and lifts pro forma DPU by around 3%. Aggregate leverage falls to 36.8% after the acquisition and placement, from 37.6% as at March 31.
Based on MUST’s last done price of 86 US cents, DPU yield including this year’s acquisition is likely to be around 7%, or 7.22% if the drag from the DPU is normalised from the enlarged unit base from the preferential equity offer to fund two acquisitions in 2018.
Despite coming under some mild pressure after its third transaction and third equity fundraising in three years, MUST is approaching a critical size, which could garner it more recognition. Its market capitalisation is around US$1.1 billion, just US$100 million short of the magic figure of US$1.2 billion, which would gain the REIT a possible inclusion into the hallowed FTSE EPRA NAREIT Global Real Estate Index. That in itself would buoy MUST’s valuation and provide it with a lower cost of capital.
Upcoming acquisitions, placements
On June 13, Lippo Mall Indonesia Retail Trust announced the issuance of a high-yield bond at a discount to the face value of the bond to attract investors. The senior, guaranteed US$250 million five-year notes with a coupon of 7.25% per annum was issued at 98.973% of the principal amount of the notes. According to an announcement by LMIRT, a swap transaction has been entered into, to swap the US dollar proceeds into Singapore dollars, at a rate of 6.75% per annum. Both the coupon and the interest on the Singapore dollars are payable semi-annually. LMIRT will pay the banks 6.75% per annum, and the banks in turn will pay the noteholders.
The high-yield bond issuance is to part pay for Lippo Mall Puri, which LMIRT is acquiring from its sponsor Lippo Karawaci for the equivalent of $354.7 million. While the mall comes with vendor (income) support, this is not taken into account for the valuation of the mall, LMIRT’s manager says in an announcement. However, Puri Mall’s NPI yield of 9.41% includes income support, which starts from the acquisition date to Dec 31, 2023.
Income support is necessary because parts of Puri Mall are still in their first lease term, which expires this year and next. LMIRT’s manager has negotiated for the sponsor (and vendor) to lease uncommitted space on a quarterly basis during the vendor support period.
Based on LMIRT’s FY2018 annual report, 25.8% of LMIRT’s gross revenue was contributed by the sponsor and its affiliates including master leases.
LMIRT’s reported aggregate leverage, based on its total debt of $680 million, excluding its perpetual securities of $259.2 million, and total assets of just over $2 billion is 33.9%. However, if the perpetual securities are classified as debt, LMIRT’s aggregate leverage would rise to 46.9%. If LMIRT’s assets are upsized to include Puri Mall, and the high-yield bonds are added to debt, aggregate leverage would rise to 43%. However, if the perpetual securities are considered as debt, LMIRT’s aggregate leverage would rise beyond the regulatory ceiling of 50%. This suggests that LMIRT is likely to announce a placement to keep its leverage at a more reasonable level.
Prior to the issuance of the high-yield bond, LMIRT received a corporate family rating of Ba3 from Moody’s Investor Service, and BB(EXP) from Fitch Ratings. Ba3 is the bond rating given to debt instruments that are generally considered speculative in nature.
While LMIRT’s placement is likely to be fully subscribed, the high-yield bonds make the acquisition accretive because -LMIRT’s annualised DPU yield is 9.5%. DPU fell 17.9% y-o-y in 1QFY2019 to 0.55 cents, which translates into an annualised DPU of 2.2 cents.
No surprise then that investors prefer the safety of FCT, despite its 4.7% yield based on its pro forma DPU. Perhaps investors will have a second look at MUST, with its 7% yield. It appears that REIT investors are becoming increasingly savvy, realising that acquisitions — even though they are accretive whether immediately or subsequently — are not a substitute for good management and sound leasing strategies.
