Following CapitaLand Ascendas REIT’s (CLAR) A17U placement to raise $450 million, S-REITs would have raised $950 million this year (and it’s only May). In April, ESR-LOGOS REIT J91U completed a preferential equity fund raising $150 million taking its total fund raising to $300 million. On March 31, Mapletree Logistics Trust raised $200 million in an overnight placement.
On May 16, CLAR announced a capital raising of $450 million at a price of S2.713-$2.769. The immediate reaction from investors ahead of a resumption in trading of CLAR units was dismay. The price will fall by 8 cents, moaned a CLAR unitholder.
In the immediate term, CLAR’s unit price may well fall to the placement price. However, both E-LOG and MLT are above their respective EFR and placement prices of 32.5 cents and $1.649 cents respectively.
The biggest EFR to-date was a HK$18.8 billion rights issue by Link REIT. The rights price was HK$44.20 and Link REIT is comfortably above its rights price.
Despite high borrowing costs – for CLAR’s latest acquisitions this could be above 4% for Singapore and more than 5% for Europe – S-REITs believe there is value to be had from acquisitions. Of the $450 million, $139.5 million will be used to partly fund the proposed acquisition of six-storey building in One-North from Seagate, The Shugart. The acquisition price is $218 million, or $232 million including expenses. The net property income yield works out at 7.8% including expenses.
CLAR’s manager also announced the proposed acquisition of a European property, which is undergoing due diligence. The property is in a key gateway city in which it has a presence. CLAR has earmarked $129.9 million from the placement for this property. In an SGX filing, the manager announced that the accretion of the two acquisitions to pro forma DPU is 1.2% to 1.3%, while DPU accretion from The Shugart alone is 0.7%. In FY2022, CLAR’s DPU was 15.88 cents. However, if the estimated advanced distribution is annualised, it works out as 15.56 cents.
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Separately, $64.4 million will be spent on the redevelopment of a logistics property, and $108.5 million will be used to pare debt. The SGX filing indicated that aggregate leverage drops to 35.6% from 38.2% (as at end-March) with the purchase of The Shugart; but rebounds to 37.2% if CLAR acquires the European property, and moves up marginally to 37.6% if CLAR acquires The Shugart, and European property and redevelops the warehouse.
During a media and analysts’ briefing, William Tay, CEO of CLAR’s manager says, referring to The Shugart, “It’s a good quality tenant with 10 years lease, with the option of to extend for another 10 years with 2.5% rental escalation. That builds a lot of stability for our income in the portfolio. We have been quite focused looking at assets with less risk and higher probability of land extension.”
Low land lease
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The land tenure for the building is only 20 years. But since One-North is a designated R&D hub for life sciences, medtech and tech, Tay believes chances of land tenure extension are possible. “There’s no application from us or anyone to request for a land extension. But this being one of the key innovation hubs of the Singapore government, we expect that we have a good chance for the land extension. It always goes back down to the quality of the tenant, the quality of the investment. If Seagate continues, it puts us in a good position for extension on the land,” Tay elaborates.
Since the land tenure is 20 years, the NPI yield (excluding interest expense and management fee) is relatively high. According to Tay, the valuers used a capitalisation rate of 5% for the building and adjusted it for the low land lease. Although land values will fall, Tay points out that rentals, the quality of the tenants and the building can also support valuation.
Two other acquisitions made in 2022, Philips APCA Center, and a cold storage facility at 1 Buroh Land have land leases of around 21 years, but CLAR was compensated by higher NPI yields.
There were also some concerns among the analysts on Seagate’s financials, as it had made a net loss in 3QFY2023 (three months March 31). Seagate is undergoing a restructuring exercise which would probably see it making a net loss of 20 US cents in 4QFY2023.
According to Tay, valuation for its logistics and data centre properties in the UK and Europe fell because cap rates expanded. He also says that there is no stress in CLAR’s portfolio.
Large buffers from stress tests
“The buffer is so big based on some of the stress tests we have done for dire scenarios. We are in a very good place; 60% of our assets are in Singapore. Australia, UK and Europe are still strong. In the US, despite news of stresses, our leasing is holding up very well. We are still able to find leases with positive rental reversions. During Covid our Ebitda was very resilient,” Tay says.
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In 1Q2023, CLAR reported an interest coverage ratio of 4.7 times. While ICR is one of the bank covenants REITs (and banks) have to watch, CLAR’s ICR is way above its bank ICR covenant of 1.5x.
On March 30, MLT announced the proposed acquisitions of eight prime, modern and mostly new logistics assets in Japan, Australia and South Korea for total acquisition price of $913.6 million and the potential acquisition of two modern logistics assets in China for $209.6 million. These acquisitions would be partly financed by the potential divestment of non-core property in Hong Kong for $100.3 million, placement proceeds of $200 million and debt. The accretion based on 9-month pro-forma DPU for FY2023 (MLT has a March year-end) is 2.2%.
E-LOG has not announced plans for its EFR except to say that part of the monies is to pare debt. However, market watchers believe E-LOG could redevelop its Cold Centre, which has 43 years of lease left.
The interesting part of the recent capital raisings is how steady the unit prices of the S-REITs are following the S-REITs’ EFR. All this should augur well for CLAR, and CLAR’s unitholder is unlikely to be too damaged from the placement despite the various nuances of the its recent acquisitions.
