SINGAPORE (Dec 23): Real estate investment trusts raised $6.4 billion this year, excluding two REIT mergers that were completed and two acquisitions by Mapletree North Asia Commercial Trust (MNACT) and BHG Retail REIT that need unitholder approval. Dasin Retail Trust and Ascendas India Trust, which are property trusts structured as business trusts, raised a further $220 million. As business trusts, Dasin Retail Trust and A-iTrust can also develop property. REITs can take on development only under certain conditions.
During the year, 17 REITs raised equity, some more than once. Manulife US REIT came to market in April with a placement, then again in September with a placement and preferential equity fundraising, where existing unitholders are offered units based on their pro rata stakes.
Mapletree Industrial Trust (MINT) also raised equity twice, with a placement in February and then September. Of the equity raising, two of the largest were carried out by Mapletree Commercial Trust and Ascendas REIT. MCT acquired Mapletree Business City Phase 2 (MBCII) for $1.57 billion (including expenses, the property cost was $1.55 billion) funded by a placement and preferential equity fundraising of a total of $918 million.
The largest transaction was Ascendas REIT’s acquisition of a US business, IT and science park portfolio and two business parks in Singapore from sponsor CapitaLand for $1.66 billion. Ascendas REIT raised $1.31 billion through an accretive rights issue.
Both MCT and Ascendas REIT are trading at compressed yields and above net asset value. So, acquisitions are likely to be accretive anyway. Both their pro rata equity fundraisings — preferential equity fundraising for MCT and rights issue for Ascendas REIT — were well received. MCT had acceptances of 90%, or for 185.68 million new units at $2.24 each. With excess applications, its subscription rate was 145.4%. Ascendas REIT had acceptances for 96%, or for 478 million new units at $2.63 each. With excess applications, Ascendas REIT’s subscription rate was 136.4%.
Sponsor interest aligned with unitholders
The interests of the managers and sponsors of MCT and Ascendas REIT are completely aligned with those of their unitholders as has been proven time and again through their support of the REITs during equity fundraising and also in terms of their pipelines for the REITs’ growth.
The criticism for externally managed REITs was that managers and sponsors are incentivised to increase assets under management because base fees are usually calculated as a percentage of AUM. In the last eight years, performance and base fees have changed for some REITs to align the interests of managers and sponsors with those of unitholders.
Under the REIT code, managers are instructed to act in the interest of unitholders. At any rate, REITs have a general mandate that is renewed annually through a unitholder vote. The general mandate limits the placements and other types of equity raisings REITs can undertake in any given year. According to Singapore’s listing rules, the limit is 50% of a REIT’s issued units on a pro rata basis, and there is a limit of 20% of issued units for placements. The 20% limit is included in the 50% limit — that is, a REIT cannot raise more than 50% of its issued units in any given year.
“The general mandate of most REITs provides management with the discretion to issue new units of up to 50% of the total outstanding units. Of this limit, new units that are not issued on a pro-rata basis to existing unitholders should not exceed 20% of the total outstanding units.
“Most private placements offered to new and existing unitholders rely on this 20% limit. If a REIT intends to raise in excess of these limits, it will have to seek approval from its unitholders,” confirms Eng-Kwok Seat Moey, managing director and head of equity capital markets at DBS Group Holdings.
“The acquisition decision should always be driven by the merit of the opportunity — whether the acquisition is accretive and creates value for unitholders. The choice of the fundraising method to support the acquisition is then driven by considerations such as offering size, ease and timing of execution, and market conditions.
“A private placement, under the general mandate, is best suited for modest-size fundraisings, which require swift execution, for example, a third-party acquisition.”
Not all REITs have general mandates. There have been cases in which managers lost their general mandate because of unitholder dissatisfaction in the way REITs were managed. At an annual general meeting held in April 2015, unitholders of Cambridge Industrial Trust (since renamed ESR-REIT with a new sponsor and manager) did not pass a resolution to provide the manager with a general mandate to issue new units.
In April 2017, Sabana Shariah Compliant Industrial REIT’s unitholders denied its manager a general mandate. In effect, such a move makes it hard for the manager to expand the REIT’s portfolio through acquisitions or to issue units in lieu of cash for management fees. This year, because of the low interest rate environment, REITs have been in demand. S-REIT yields have compressed as their unit prices rose. Investors therefore need to be particularly mindful of the quality of REIT managers, given the local market’s externally managed REIT structure.
Accretive and well received
Mapletree Investments-sponsored REITs are among the year’s best-performing. Part of the reason is sponsor support. In September, for instance, MINT formed a 50:50 joint venture with sponsor Mapletree Investments to acquire 10 Powered Base Building data centres from Digital Realty for US$557.3 million ($774.2 million).
In addition, MINT and Mapletree Investments entered into a joint venture with Digital Realty to co-invest in three existing Digital Realty Turn-Key Flex hyper-scale data centres for a consideration of US$810.6 million. The total transaction value is US$1.37 billion, and the data centres are located across North America.
The Turn-Key Portfolio joint venture is expected to be completed this month and the Powered Shell Portfolio acquisition is expected to be completed early next year. Since MINT’s year-end is March, the real benefits of the transaction would probably accrue only in FY2021. MINT’s unit price is up more than 33% despite a recent retreat.
Sponsor support crucial to success
Elsewhere, Mapletree Investments has pulled out all the stops to support Mapletree North Asia Commercial Trust, which has been affected by the closure of its largest asset, Festival Walk in Hong Kong. On Dec 4, MNACT announced a proposal to acquire two freehold, multi-tenanted office properties located in Greater Tokyo for the equivalent of $482.5 million, including expenses. The manager will waive acquisition fees. The acquisition would be paid for by debt and issuance of new units to the sponsor to raise $145.5 million. The transaction is subject to an EGM for independent unitholders to vote. Among the resolutions is a whitewash waiver for the sponsor.
Sometimes, a sponsor has difficulty growing the REIT and needs to look for partnerships. On Dec 12, ARA Asset Management announced a strategic partnership with LOGOS Property. On Dec 11, LOGOS acquired the manager of Cache Logistics Trust and a 10% stake in the REIT in exchange for ARA’s taking a stake in LOGOS. According to a filing on the Singapore Exchange, ARA Logistics Venture 1 agreed to the subscription of new shares in LOGOS China, in exchange for 108.7 million units in CLT. LOGOS is developing logistics properties in China, Australia, Indonesia and India. CLT closed at 72.5 cents on Dec 11.
Continued fundraising in 2020
The US Federal Reserve has indicated no change in its low interest rate policy, suggesting that REITs may continue to fund their acquisitions with debt and equity. Manulife US REIT has been making acquisitions and performing equity fundraising annually since its IPO in 2016, and 2020 is unlikely to be any different.
Prime US REIT is a prime candidate for acquisition. ARA US Hospitality Trust was listed in May and has already announced a debt-funded acquisition to boost distributions. In 3QFY2019, its first full quarter, ARA US Hospitality Trust’s net property income was 22% below its forecast.
On the IPO front, the REIT IPOs that were unable to make it to market this year are likely to attempt listing next year. On top of the list is a US grocery-led shopping and self-storage REIT with an asset size of US$586 million.
A European office REIT with office buildings in the UK and Europe is also waiting in the wings. Its initial asset size is about £500 million ($905.3 million).
“The IPO pipeline continues to be very strong. We continue to see interest originating from the US, Europe, China and Australia. We already have a variety of asset classes represented in S-REITs, but hope to bring more opportunities in logistics, data centres, student housing and multi-family in coming years,” Eng-Kwok says.
For REIT investors, there is plenty to look forward to in 2020. Just make sure the managers’ interests are aligned with yours.
