SINGAPORE (Dec 31): Real estate investment trusts were bankers’ best friend in 2018.
S-REITs raised $4.4 billion through a mixture of rights issues, preferential share offerings, placements and perpetual securities (see table). Separately, the February IPO of Sasseur REIT, which owns four outlet malls in China, raised $421.6 million — eclipsing all other IPOs during the year. Taken together, the REITs raised more equity than the rest of the market.
Despite raising the most monies, however, Sasseur REIT performed poorly, down 14.5 cents, a loss of 18% for the year. Part of the reason is the poor reception to the outlet mall model. Also, the REIT is sponsored by an unfamiliar mainland Chinese company. In addition, Sasseur REIT’s lease and rental structures are different from those of traditional retail REITs. And, its claim that it is unaffected by ecommerce has been met with scepticism.
Nevertheless, investment bankers are looking at a robust pipeline of new REIT listings in the new year. For one thing, Singapore is an attractive listing venue for REIT issuers because of fee income from its external manager model. This is where the REIT’s sponsor owns the manager, and the manager gets to charge unitholders a wide range of fees.
In 2017, for instance, US fund manager KBS divested the assets from its KBS Strategic Opportunity REIT into Keppel-KBS US REIT (KORE) for a gain of almost 40%. KBS would have received fees for the divestment and possibly promote fees for outperformance of the Strategic Opportunity REIT. The gains for the KBS SOR on some properties, such as Powers Ferry and Northridge Center in Atlanta and Westech 360 in Austin, were as high as 237%, 180% and 118% respectively. KBS also receives fees from KORE and is likely to have received acquisition fees when KORE completed the acquisition of the Westpark portfolio of 21 properties on Dec 3.
KBS’s success with KORE was so overwhelming that a second KBS fund is planning to divest its assets into another KBS-sponsored REIT, Prime US REIT, to be listed on the Singapore Exchange. The managers for Keppel-KBS REIT and Prime US REIT are different entities, as the former clarifies in a statement, and likely to compete for investors in Asia.
Prime US REIT has yet to file a prospectus, given rising interest rates and a challenging capital-raising environment. Yields on 10-year Singapore Government Securities rose to a high of 2.63% in June, up from 2% at the start of the year, and ended at 2.27% on Dec 11. US 10-year Treasury yields rose from 2.4% at the start of 2018 to a high of 3.239% in November, and ended at 2.89% on Dec 11. With higher risk-free rates, Prime US REIT would have to offer higher yields to attract new investors. As a guide, Manulife US REIT (MUST), with a portfolio of Grade-A and trophy buildings, was trading at a forward yield of 7.8% as at Dec 11.
Pipeline of REIT IPOs
According to newswire services and investment bankers, there are four REITs with US assets waiting to list in Singapore including Prime US REIT. REIT IPOs are popular among bankers if they can find the investors to fund the IPOs. For a REIT to list, its assets under management should be in the $800 million-to-$1 billion range. So, the monies raised are likely to be in the range of $400 million to $500 million — larger than most of the IPOs in 2018.
A more likely REIT IPO is that of a US portfolio acquired by Ascendas-Singbridge on Sept 7 comprising 33 office properties with a net lettable area (NLA) of 3.3 million sq ft in Portland, Raleigh and San Diego. According to the company’s press release, the properties are built on freehold land and centrally located near major freeways, airports and mass transit, as well as retail outlets and amenities.
The portfolio has a high occupancy rate, with tenants from Fortune 500 companies such as Oracle and Nike and also those in aerospace, biotech and the internet. Ascendas-Singbridge did not disclose the cost of the acquisition but, in a recent interview, its chief investment officer He Jihong said the NLA was more or less equally distributed in the three cities. The Ascendas-Singbridge portfolio is heavily weighted towards the technology and innovation industry. The valuation is believed to be US$750 million ($1 billion) to US$800 million, and the IPO is expected to raise US$500 million.
Another US-based REIT IPO could be sponsored by ARA Asset Management. On Dec 3, ARA announced it had acquired a portfolio of 38 select service hotels branded as Hyatt Place and Hyatt House across 21 states in the US. The portfolio last changed hands at US$590 million when a Lone Star fund acquired it in 2014. “We will look at injecting this quality portfolio into our growing REITs and private fund platforms in the near future as part of our multi-platform, multi-product global fund management strategy,” says ARA CEO John Lim. ARA will open an office in Dallas, Texas that will serve as its base of operations in the US.
Meanwhile, Urban Commons, a privately held Los Angeles-based property investment and development company, is believed to be studying Singapore as a listing venue as well, most likely for its portfolio of hospitality assets. Other S-REIT listings could come from Europe, China and South Korea, with at least two from Europe aiming for listing in 2019.
Acquisitions and rights issues destroy value in short term
Despite a dearth of IPOs, bankers have been kept busy with rights issues, placements and preferential offerings. REITs are the prime movers of equity raising because they do not hold cash reserves on their balance sheets. To maintain and grow distributions per unit (DPUs) in the face of a rising interest rate cycle, REITs — which have to pay out at least 90% of distributable income for tax transparency reasons — have to raise equity and debt to buy more properties.
REITs have a regulatory ceiling of 45% for their aggregate leverage (debt-to-asset ratio). MUST listed with an aggregate leverage of 36.8%, and KORE with an aggregate leverage of 36%. Sasseur REIT listed with an aggregate leverage of 31.2% and a form of income support. Most REITs have a general mandate by which they can issue up to 20% of the number of units in issue for placements, and up to 50% for rights issues.
The most dilutive rights issue this year was undertaken by OUE Commercial REIT. Its 83-for-100 rights issue, at 45.6 cents a unit, raised $567.5 million. The theoretical ex-rights price (TERP) is 57 cents, but units are now trading at 46 cents, down 28% year-to-date on an adjusted basis. OUECT’s rights issue circular stated that DPU fell from 4.67 cents to 3.54 cents on a pro forma basis, making the acquisition non-accretive. The new monies were to part-finance the acquisition of OUE Downtown for $908 million.
In November, KORE bought a portfolio of 33 properties in Washington state for US$169.4 million from a fund managed by KBS. KORE raised US$93.1 million through a 295-for-1,000 at 50 US cents per unit rights issue. KORE remains well below its TERP of 66.6 US cents, however, falling from 86 US cents — adjusted for the rights issue — in January to 56 US cents on Dec 11, a loss of more than 30%.
DBS Group Research says KORE’s current valuation with forward DPU yields of 10% to 11% is a buying opportunity. “KORE’s share price has corrected over the last few months, owing to the disappointment over having a rights issue so soon after its listing, potential for another US office REITs listing and concerns over a negative ruling on its tax structure,” says DBS in recent report dated Dec 7. “However, we believe the majority of these concerns have also been priced in, given that KORE now trades at a 10% to 11% forward yield (or, in the worst-case, 7%, assuming the current tax structure is ruled invalid) and a discount of about 25% to book value during a period when rents are still on an upswing.”
In November, Cromwell European REIT raised €224.1 million ($348.9 million) via a 38-for-100 rights issue. It issued 600.83 million units at €0.373 each to acquire a portfolio of 23 properties across five countries in Europe. Sixteen are in the Netherlands, Finland and Poland; two in Italy; and five in France. The properties are a mix of office and warehouse.
CEREIT’s rights price is at a 25% discount to its TERP of €0.498 a unit. CEREIT is tightly held, and its sponsor Australia Securities Exchange-listed Cromwell Property Group and its related corporations subscribed to their 35.31% share, as did major unitholders Gordon and Celine Tang, who own 13.9%, and Hillsboro Capital, with 11.6%.
Mapletree Logistics Trust acquired $1.56 billion worth of properties this year, and raised $595 million. DBS Group Research says the market is not according MLT the right valuation. “Our price target of $1.50 is above consensus average of $1.35. We believe the street has not accounted for the improved fundamentals post-acquisitions, and the potential to surprise on the upside organically and through more acquisitions.” DBS expects MLT’s DPU to grow 2% to 3% next year, driven mainly from acquisitions. It also expects $300 million worth of acquisitions by FY2020, half to be funded by equity. MLT’s units have lost 5% this year, which is a modest figure. MLT’s units grew by 494 million units excluding fees, and its number of units in issue stands at 2.49 billion.
REITs remain steady; analysts reiterate buys
While the Straits Times Index had lost 9.3% this year and the FTSE REIT Index was down 8.26% as at Dec 12 (according to Bloomberg), REITs with blue-ribbon sponsors such as CapitaLand, Mapletree Investments, Ascendas-Singbridge, Frasers Property and City Developments had stayed steady. One of the strongest REITs this year is CapitaLand Mall Trust, which is up around 6% this year excluding DPU which yields around 5.5%. In November, CMT raised $277 million in a placement to part-fund its acquisition of a 70% stake in Westgate.
Most analysts are “neutral” on CMT, but DBS recently took a mildly contrarian view and issued a “buy” call. “Anchored by resilient yields, CMT has been a safe harbour for investors, but is also starting to emerge as a growth play. As the retail sector bottoms out, CMT is set to outperform as full contributions from Westgate and the return of Funan take DPU back on a multi-year growth path. CMT’s share price should re-rate as earnings growth returns to an upward trajectory of 3% to 4% a year (versus S-REIT’s average of 1% to 2%),” the DBS report says.
In a report dated Dec 10, RHB Securities reiterated its positive prognosis for S-REITs. “We recently met with fund managers in Bangkok as we marketed S-REITs. Investor sentiment was generally positive, with most positioning on a neutral to slightly overweight stance on the sector moving into 2019. The recent dovish statements by the US Federal Reserve also seem to have given added confidence that interest rates are unlikely to spike sharply, consequently benefiting REITs,” the report says.
