Companies & Markets
MARK TO MARKET; Scrutinising discounted placements by Reits
Ben Paul , Scrutinising discounted placements by Reits
1171 words
6 December 2021
Business Times Singapore
STBT
English
© 2021 SPH Media Limited
Reit managers should disclose the extent to which potential upside from acquisitions are affected when placement prices are discounted

THE manager of Manulife US Real Estate Investment Trust (Manulife US Reit) could not have picked a worse time to attempt raising US$80 million through a placement of new units. But it managed to more than pull the deal off.

On Nov 30, even as markets around the world were reeling from the rapidly spreading Omicron variant, the manager of the US office property Reit said a total of US$100 million had been raised through the placement - with the "upsize option" fully exercised.

It said the placement was more than 2 times covered, and there was "strong participation" from new and existing institutional investors and private wealth clients.

Why were investors willing to hand over their money despite the worsening Covid-19 situation?

Supporters of Manulife US Reit will probably say it is because the bulk of the placement proceeds will be put towards the acquisition of 3 promising properties in the United States - namely Diablo Technology Park and Park Place in Phoenix, Arizona; and Tanasbourne Commerce Center in Portland, Oregon.

The 3 new assets, which are being purchased for US$201.6 million, are expected to provide Manulife US Reit with exposure to commercial tenants in the technology and healthcare space.

Manulife US Reit's manager also said the 3 properties offer potential for positive rental reversion, and are being purchased below valuation. In addition, the assets are expected to improve the Reit's portfolio-wide occupancy and weighted average lease to expiry.

Most importantly, the acquisition is expected to be immediately accretive to Manulife US Reit's distribution per unit (DPU). If the acquisition had been completed at the beginning of 2021, the Reit's H1 2021 pro forma DPU would have been lifted by 4.4 per cent - from US$0.027 to US$0.0282.

There is, however, another reason that investors stumped up the US$100 million when Manulife US Reit came knocking - the placement units were priced at a significant discount to their market price.

Manulife US Reit sold nearly 154.1 million new units at US$0.649 each - the absolute bottom of the indicated price range of US$0.649 to US$0.676, and 8.9 per cent below the Reit's volume weighted average price (VWAP) on the day before the placement.

The placement price of US$0.649 was also well below Manulife US Reit's net asset value (NAV) of US$0.71 per share as at Jun 30.

The significantly discounted price would have motivated some investors to take a chance on the placement - as long as the Reit's market price holds up, they will be able to book an immediate gain.

On the other hand, some existing unitholders might have participated in the placement only to avoid being diluted by the low price.

Is Manulife US Reit prioritising the expansion of its portfolio over the interests of its unitholders? What can investors do to protect themselves?

Reit returns waning

Manulife US Reit is not alone in raising money by issuing new units at a discount to market price in order to expand its portfolio.

At least 13 other Reits have done placements this year - all of which were priced at discounts to their VWAP the previous day. The discounts ranged from just over 2 per cent to nearly 10.8 per cent.

Of these 13 placements, 8 were also priced at discounts to the book values of the respective Reits.

For many investors, whether the dilutive impact of a placement is a concern depends on the extent to which the acquisitions funded with the proceeds spur a re-rating in the market value of the Reits' units.

Unfortunately, the performance of locally-listed Reits has generally waned since the onset of the pandemic.

Since the beginning of 2020, the FTSE ST Reit Index delivered a total return of minus 0.2 per cent. The STI returned 1.5 per cent.

Reits that own shopping malls, offices and hotels - such as CapitaLand Integrated Commercial Trust, Keppel Reit and Ascott Residence Trust - were naturally beaten down during the early stage of the pandemic.

In recent months, even once-hot industrial property Reits - including Mapletree Industrial Trust, Mapletree Logistics Trust and Keppel DC Reit - have begun to flatline and fall.

As of Friday, only 3 of the 14 Reits that have done placements this year were trading above their VWAP the day before placement: Cromwell European Reit, ESR-Reit and Frasers Logistics & Commercial Trust.

Manulife US Reit closed Friday at US$0.695 - more than 2.4 per cent below its VWAP the day before its placement.

More disclosure necessary

To be fair, Reit managers cannot control the ebb and flow of investor enthusiasm for different segments of the real estate sector. Their efforts to build a portfolio of promising properties may go unappreciated for long periods of time.

Reit managers can, however, determine the terms on which assets are acquired and funds are raised. And, they ought to disclose the extent to which the potential upside from an acquisition is affected when the placement to fund the deal is priced at a discount.

In the case of Manulife US Reit, the assumption behind the 4.4 per cent improvement in its pro forma H1 2021 DPU was that it would raise US$80 million through the placement of 120.8 million new units at US$0.662 each.

Given that the Reit ended up raising a larger amount of money and issuing units at a lower price, the uplift in Reit's pro forma H1 2021 DPU would logically be less than the initially projected 4.4 per cent.

To ensure investors have the full picture, Reit managers should, in my view, immediately update the pro forma financial effect of their announced acquisitions following the outcome of placement exercises.

Constant need for cash

In the meantime, investors ought to keep in mind that Reits are hardwired to expand their property portfolios.

When considering whether to invest in a Reit, investors ought to factor in the likelihood of it raising funds through placements or preferential offerings and weigh the ease with which the market will absorb all the new units.

As the world recovers from the pandemic, the pace of acquisitions and fundraising by most Reits is almost certain to accelerate.

Reits belonging to corporate groups involved in restructurings or merger and acquisition deals - such as CapitaLand Investment, Singapore Press Holdings, Keppel Corp, ARA Asset Management and ESR Cayman - might be among the most aggressive.

While there is something to be said for Reits with parent groups capable of providing them with a pipeline of assets, it is probably worth keeping in mind that a lot depends on whether the market has sufficient appetite for the assets in the first place.

SPH Media Limited

Opinion
HOCK LOCK SIEW
Jude Chan , CapitaLand needs to pull a rabbit out of the hat for Singapore's largest Reit to multiply
1330 words
9 December 2021
Business Times Singapore
STBT
English
© 2021 SPH Media Limited

*With the benefit of its size, CICT could gradually reconstitute its portfolio by divesting some of its retail properties and acquiring more exciting assets - without putting much of a dent into its DPU.*

CAPITALAND traded at significant discount to its book value until the real estate giant restructured itself earlier this year, in an exercise that saw its property development business going private while its real estate investment management activities and lodging business remained in the public market under an entity called CapitaLand Investment (CLI).

Since its trading debut at S$2.95 on Sep 20, CLI has climbed 14.2 per cent. It closed on Dec 8 at S$3.37 - a 9.8 per cent premium to its book value of S$3.07 per share as at Sep 30.

Now, the CapitaLand group needs to pull another rabbit out of the hat to ensure CapitaLand Integrated Commercial Trust (CICT) - the largest of its real estate investment trusts (Reits) - remains a useful and viable asset securitisation vehicle.

Previously a retail property-focused Reit called CapitaLand Mall Trust, CICT took on its current moniker after merging with its parent group's office property Reit, CapitaLand Commercial Trust - a move it said would make it easier to raise funds and grow.

However, with the onset of the pandemic and the ongoing disruption of the retailing industry, CICT has struggled to deliver on this promise. Since the beginning of 2020, it has delivered a total return of minus 10.1 per cent.

Earlier this week, it tested the market's receptiveness to its growth story.

On Tuesday (Dec 7), before the market opened, CICT launched a private placement of 103.6 million new units at an issue price of between S$1.930 and S$1.981 apiece to raise at least S$200 million in gross proceeds.

The placement units were eventually priced at S$1.96. With the exercise of the upsize option, a total of 127.6 million new units will be issued, raising the total gross proceeds to around S$250 million.

The issue price represents a discount of 4.6 per cent to the volume weighted average price of S$2.0561 per unit for trades done on Dec 6 - the day before the placement agreement was signed.

'Strong demand'

CICT's manager described the private placement, including the upsize option, as "oversubscribed" and said it drew "strong demand" from new and existing institutional investors.

Based on the middle-of-the-road issue price and the Reit manager's muted statement on the oversubscription rate, market observers can only infer that the private placement enjoyed modest success.

Relative to the size of CICT's market capitalisation, which stood at some S$13.3 billion as at Dec 6, the placement size was relatively small. But it came in the wake of a string of placements by other Singapore-listed Reits (S-Reits).

For example, Manulife US Real Estate Investment Trust (Manulife US Reit) on Nov 30 raised gross proceeds of approximately US$100 million in a private placement.

On Nov 24, Mapletree Logistics Trust said it would raise S$400 million through a private placement. It also plans to raise some S$292.8 million through a preferential offering of new units.

On Oct 13, CICT's sister Reit CapitaLand China Trust raised S$150 million through its own private placement.

Earlier that same month, on Oct 5, United Hampshire US Reit raised around US$35 million in a private placement.

Apart from fundraising exercises by other S-Reits competing for investors' cash, there have also been new additions to the S-Reit universe.

Logistics and industrial Reit Daiwa House Logistics Trust (DHLT) made its debut on the SGX mainboard on Nov 26, while pure-play data centre player Digital Core Reit commenced trading on Dec 6.

Accretive acquisitions

Like its peers, CICT will use its placement proceeds to acquire new assets, which it claims will be immediately accretive to its distribution per unit (DPU).

CICT's manager said S$150 million or 60 per cent of the gross proceeds has been earmarked to fund the proposed A$330.7 million (S$322 million) acquisition of 2 Grade A office buildings in Australia, which was announced late last week.

Including other expenses of A$43.6 million and acquisition fees of A$6.7 million payable in the form of units, CICT's total acquisition outlay for the acquisition will come up to about A$381 million, subject to completion adjustments.

The Reit manager added that some S$95.9 million or 38.4 per cent of the gross proceeds of the private placement will be set aside to partially fund potential acquisitions in Singapore and other developed markets, as well as associated costs, repayment and refinancing of debt and capital expenditure, and asset enhancement initiatives.

The remainder of the gross proceeds from the private placement will be used to pay for the estimated transaction-related expenses.

According to pro forma estimates in CICT's announcements, the placement and acquisitions would have boosted its H1 2021 DPU by 1.9 per cent.

This is assuming a loan-to-value ratio of approximately 50 per cent for the acquisitions, with the balance of the purchase consideration to be funded by a combination of proceeds from the private placement as well as the divestment of its 50 per cent interest in One George Street.

Curiously, around 5 pm on Dec 7, before the placement results were out, CICT's manager walked back its estimated pro forma net asset value (NAV) accretion.

It had originally guided that post-acquisition and placement, the Reit's pro forma adjusted NAV would be 1.5 per cent or S$0.03 higher at S$2.04. However, it subsequently clarified that the Reit's adjusted NAV is "expected to remain largely unchanged" at S$2.01. It did not explain the disparity.

So far, the completion of the placement has not boosted investor sentiment towards CICT.

On Dec 8, CICT closed at S$2.04 - just a whisker below its NAV per unit of S$2.05 as at June 30.

Much of this boils down to CICT's sizeable exposure to shopping malls in Singapore.

Retail properties will still account for the largest segment of CICT's portfolio after the acquisition of the 2 Australian office buildings and the divestment of its interest in One George Street.

On a pro forma H1 2021 basis, the retail sector will account for 39 per cent of CICT's enlarged portfolio by net property income (NPI). Office assets will account for 33 per cent while integrated developments will make up the remaining 28 per cent.

CICT's portfolio will comprise 25 assets with a combined property value of S$22.4 billion. Some 93 per cent of the enlarged portfolio by property value will be based in Singapore, with 4 per cent in Germany and 3 per cent in Australia.

With the benefit of its size, CICT could gradually reconstitute its portfolio by divesting some of its retail properties and acquiring more exciting assets - without putting much of a dent into its DPU.

But this could take a long time.

Perhaps CICT should consider another merger - this time with Ascendas Reit. This could create a real behemoth with relatively less exposure to the retail property sector, which might garner stronger market valuations.

What is stopping such a move that could bode well for CICT and the S-Reit universe in general? Nothing perhaps, but imagination - and a wave of the wand from CapitaLand.

SPH Media Limited

Just notice this Spore REIT thread. I hold quite a few. Nowadays you are given option take monies dividend or reinvest get shares or mixture. So all of you take dividends? For me I opt for mixture simply becuz I don't want to incur brokerage fees if I intend to top up new shares.

Some of them got rights and excess rights exercise sometime do you all participate? Just need pay $2 admin fees to apply. But now current Covid19 was thinking twice about my strategy.

Now you know my pain? That's why I said sg govt very old fashion. In this year and age still need person to have sg address for rights. Very old fashion when you it can be done online.

For rights or placement just use FSM SG. Can be done via online unless it's private placement. Actually not true. If you catch a REIT at very low price, any rights or placement basically no impact.

I believe such kind of things work both ways. Let's say Msia also have REITS stock and if investor does not have Msia address still can participate in rights exercise?

Just some history lessons if you are old enough to know. A lot of Sporean investors monies are burnt heavily. I escaped as I enter the investment world around 2000 and that happened around 1999.

https://www.singaporememory.sg/contents/SMA...98-35b268e0ab4d
https://sias.org.sg/latest-updates/dont-let...bber-you-again/

Companies & Markets
MARK TO MARKET; Mapletree Logistics Trust's latest acquisitions, equity raising could sow doubt among investors
Ben Paul , Mapletree Logistics Trust's latest acquisitions, equity raising could sow doubt among investors
1168 words
13 December 2021
Business Times Singapore
STBT
English
© 2021 SPH Media Limited

Meagre 2.2 per cent DPU accretion from proposed 17-asset acquisition likely to be diluted by placement and preferential offering

MAPLETREE Logistics Trust (MLT) does not appear to be the sort of real estate investment trust (Reit) that would face much difficulty raising capital to acquire assets and expand its property portfolio.

With Mapletree Investments as its sponsor, MLT theoretically has access to a "pipeline" of high-quality assets across the region.

MLT's units have also held up relatively well through the pandemic, ostensibly putting it in a good position to tap investors for equity capital.

From the beginning of 2020 to Dec 10, MLT has delivered a total return of 19.5 per cent (on a distributions reinvested basis). The Straits Times Index and the FTSE ST Reit Index have returned 4.6 per cent and 0.7 per cent, respectively.

Yet, a close reading of MLT's announcements over the past month might leave some investors doubting its supposed ability to raise funds and make acquisitions on attractive terms; and disappointed about the manner in which it has justified these transactions.

On Nov 22, MLT's manager said it plans to purchase 17 modern Grade-A logistics assets - 13 of which are in China, 3 in Vietnam and 1 in Japan - for S$1.47 billion, including acquisition-related expenses.

The manager of MLT said the acquisition is expected to be financed through a combination of equity and debt.

The Mapletree Investments group, as a vendor of the assets in China and Vietnam, has agreed to receive part of the consideration for those assets in the form of new MLT units.

MLT's manager said on Nov 22 that the precise funding structure was yet to be decided, but that the acquisitions are expected to be accretive to MLT's distribution per unit (DPU) and its net asset value (NAV) per unit.

Specifically, MLT's manager stated in a presentation deck dated Nov 22 that the Reit's DPU for FY2021 ended Mar 30 would have been boosted by 2.2 per cent on a pro forma basis - from S$0.08326 to S$0.08511.

MLT's NAV per share would have been lifted by about 4 per cent - from S$1.33 to S$1.38.

Pro forma assumptions

These pro forma figures, however, were based on assumptions that may give investors pause.

For one thing, MLT's manager stated that the acquisition of the Japan-based property alone would lift its pro forma DPU from S$0.08326 to S$0.08409.

But that assumes the Japan-based asset had an occupancy rate of 100 per cent. As at Nov 11, the property had an occupancy rate of 82.5 per cent.

Based on an occupancy rate of 82.5 per cent, the Japan-based asset would lift MLT's pro forma DPU from S$0.08326 to only S$0.08341.

Separately, MLT's manager said 7 of the China-based properties the Reit is to acquire are currently "undergoing stabilisation", and will receive income support of up to RMB20.9 million (or S$4.4 million) for a period of 1 year.

This income support was included in the overall pro forma DPU of S$0.08511. Without the income support, the overall pro forma DPU would have been S$0.08409 - that is, unchanged from the pro forma DPU reflecting the acquisition of the Japan-based asset.

Furthermore, one key underlying assumption of the pro forma figures is that all the units MLT will issue will be priced at S$1.92 each.

On Nov 23 - only 1 day after announcing the acquisitions - MLT's manager launched a S$700 million equity fundraising exercise, comprising a placement to be priced between S$1.86 and S$1.911 per unit and a preferential offering to be priced between S$1.82 and S$1.87 per unit.

MLT's manager subsequently said S$400 million had been raised through the placement of nearly 212.8 million new units at S$1.88 each. A further S$292.8 million will be raised through a preferential offering of 159.1 million new units at S$1.84 each.

Given the lower price at which MLT is issuing units in its equity fundraising exercise, it seems logical to me that the actual accretion in DPU will fall short of the pro forma DPU used to justify the acquisitions.

In fact, given that the overall pro forma DPU accretion was only 2.2 per cent, I cannot help but wonder if the acquisitions will deliver any immediate DPU uplift at all.

Questions raised

The fundamental issue here is not just that the assumptions behind MLT's pro forma DPU and NAV per share might have been too optimistic.

Among the questions investors should ask are: Did MLT's manager know that the price range for the placement and preferential offering was going to be less than S$1.92 when it announced the acquisitions?

Should MLT have even been allowed to launch a placement at a price range that did not encompass S$1.92?

Would MLT's manager have been able to justify the proposed acquisitions under the assumption that the Reit would raise equity at less than S$1.92 per unit?

The pro forma DPU and NAV per share figures that Reit managers provide when they propose acquisitions are not forecasts. And, acquisitions that do not result in a higher pro forma DPU or NAV per share could well prove to be attractive deals over the long term.

Investors are, nevertheless, comforted when acquisitions result in even a marginal improvement in a Reit's pro forma DPU and NAV per share - as it suggests that the market value of the Reit's units should not fall in the wake of the deal.

For Reit managers, being able to show that an acquisition and accompanying equity raising exercise would boost the Reit's pro forma DPU and NAV per share is an important means of justifying the whole deal.

Unfortunately, by giving investors reason to doubt that its proposed acquisitions will be immediately accretive, MLT's manager might have made it harder for the market value of Reit's units to gain traction as it pursues the rest of its equity fundraising plans.

It might also have made investors nervous about its future acquisitions and equity fundraising exercises.

MLT closed Friday at S$1.90.

SPH Media Limited

Sorry can I know where you get the above news? The linkage between Bursa and SGX ?

The problem with Msia is their changes are so unfathomable. E.g HSR project can scrap anytime. Last time it did not work out due to power change. If say this time it succeed and then later new election change power again shut off again then how? Sporean monies will be "trapped" in Bursa like last time CLOB saga. Even if the link is indeed established, it will benefit Msia investors much more than Sporean investors. What is the probability of Spore shutting down the link vs the other way round? I predict if the link is established, it is more of Msia monies flowing into SGX rather than the other way round.

whats are the possible benefits should the plan works as been planned, increase liquidity in the market?

wondering what will happen to existing stock after merge.

The proposed merger between Mapletree Commercial Trust (MCT) and Mapletree North Asia Commercial Trust (MNACT) is being presented as a win-win deal. The reality though is that MCT holders are being asked to approve the acquisition of an underperforming REIT at a hefty premium.

While MCT has delivered steady growth over the years, MNACT’s performance has been choppy and lackluster as seen from data on MNACT’s own website and in the appendix to the PowerPoint presentation shared by both REITs.

For instance, while MCT’s distribution per unit has grown by an average of 4.8 percent per annum since IPO, MNACT’s has increased by just 1.9 percent.

MCT’s unit price has increased by an average of 8 percent a year since IPO compared to MNACT’s 2 percent, while MCT’s gearing is much lower at 33.7 percent versus MNACT’s 42.2 percent.

The future does not look promising either as Festival Walk, MNACT’s key asset, is sitting on land with just 26 years remaining on the lease, according to its fiscal 2021 annual report. MNACT’s latest financial results indicate that rents at Festival Walk are likely to continue falling in the near future.

Despite MNACT’s poor track record and outlook, MCT unit holders are being asked to value their sister REIT at a premium of 7.6 percent to 17.8 percent over the market price depending on how it is calculated.

As such, I strongly urge fellow minority shareholders of MCT to reject this value-destroying proposed merger.

I used to regard Mapletree Investments as one of the better sponsors in terms of how it treats minority shareholders. I no longer hold this view.

Yours sincerely

Kevin Lim Fung Ming