Singapore-listed Suntec Real Estate
Investment Trust has raised S$250 million ($179 million) from the sale of
convertible bonds to help finance its earlier acquisition of a one-third
stake in One Raffles Quay, an office and retail complex in the heart of
Singapore.
The deal was somewhat unique among the Asian CBs issued so far this year
in that it was sold without any credit bid and also without any access to
stock borrow, meaning it wasn’t a volatility trade. This also makes it
difficult for investors to hedge the trade.
Consequently, most of the investors who participated in the deal would have
done because they expect the Reit to continue to generate solid growth. The
fact that it was able to pull this off was testament to the quality of the
underlying assets and the management, but the company did have to make some
concessions on the price, with both the yield and the conversion premium
pricing at the best-end for investors.
However, part of that may have been due to a tough day in European equity
markets while the CB was being marketed with the FTSE100 index off 1.8% and
Germany’s DAX index slumping 1.9%. Indeed, there was reportedly very
little demand for the Suntec offering from European accounts. The latter are
also faced with a prolonged period of weakness in their own European Reits,
which has led to poor sentiment for the sector overall and has made them
less inclined to take a bet on lesser known names in Asia, one source notes.
Asian investors on the other hand know the name well. Listed in December
2004, the Reit started out as the owner of the majority of properties in
Singapore’s largest integrated commercial development office and retail
complex Suntec City. It has since expanded to include a few more assets such
as the Park Mall and Chijmes, a historical building housing restaurants and
retail shops.
At the time of the listing, Suntec was sponsored by a consortium of 12 Hong
Kong developers, including Cheung Kong Holdings’ Chairman Li Ka-shing, New
World Development Chairman Cheng Yu-tung and Henderson Land Chairman Lee
Shau Kee. Lee sold his entire 5.3% stake in the Reit for $100 million at the
end of June last year, cashing in just before the downturn.
The Suntec Reit CB was offered with a conversion premium between 23% and 28%
over yesterday’s close of S$1.60 and priced at 23%. This gives a
conversion price of S$1.968, which is slightly below the closing high of
S$2.09 from June last year. The yield was fixed at 4.25% after being offered
in a range between 3.75% and 4.25%.
However, the company got away with a coupon of only 3.25%, which represents
quite a low cost of funding in the current market environment. The wide-end
terms may also allow it to exercise the S$50 million overallotment option.
According to a source, the offering was covered including the shoe and
attracted about 40 investors.
The bonds, which were jointly arranged by Citi and Deutsche Bank, have a
five-year maturity, but can be put back to the issuer on the third
anniversary. There is also an issuer call after three years, subject to a
130% hurdle.
They were indicated with a credit spread of 300bp, which the source
suggested was quite generous for a credit that is rated BAA1 by Moody’s.
However, investors remain cautious as the continued volatility in both
credit and equity markets make it difficult to project where valuations will
be a week from now and the sell-off in Europe wouldn’t have helped.
In addition, Moody’s last Friday revised its outlook on Suntec’s ratings
to negative, citing concerns over the trust’s near-term refinancing risks
in light of the challenging credit market conditions.
"Suntec Reit has 40% of its total debt, mostly related to the bridge
financing for its One Raffles Quay acquisition, falling due in the coming
eight months," Moody's lead analyst for the company, Kathleen Lee, said
in a statement. "A third of its short-term debt is due to mature at
end-April 2008, but committed long-term financing to term out the debt has
yet to be finalised. At the same time, Moody's draws some comfort from the
Reit’s high asset quality and the fact that its operating performance is
in line with expectations,” Lee said.
The fact that Suntec was able to come to the market and complete a deal so
quickly after Moody’s revised outlook shows there is a fundamental level
of support for the credit as well as a great deal of belief in the growth
story even though the entire Singapore Reit sector has been under pressure
since the subprime crisis took hold in August last year. Suntec is no
exception, in this regard and by late January the unit price was down as
much as 33% from the highs six months earlier. However, after hitting a low
of S$1.41 the unit price has assumed a rising trend in recent weeks.
It is worth noting though that Suntec has another S$350 million to refinance
in October, which means there is more risk to come.
Other underlying assumptions include a conversion price adjustment for
dividend payouts that exceed a 6.3% yield and a 5% stock borrow cost. Based
on this – and a 300bp credit spread - the bond floor comes out a 97% and
the implied volatility at about 23%. The latter compares with a 100-day
volatility of 29%.
Suntec Reit in $128m Chijmes deal
CEO Yeo sees its synergy with Suntec City Mall and Park Mall
Suntec
Reit, which appears to be stepping up
its property acquisitions, is now planning to buy Chijmes - owned by Low
Keng Huat, Jetaime Investments and the Lei Garden restaurants - for $128
million.
Last week it completed the acquisition of Wing
Tai's Park Mall for $230 million. Another deal to buy 11 properties from
City Developments for $788 million has, however, almost certainly fallen
through.
The latest acquisition, which values Chijmes at a
property yield of 5 per cent, is expected to be yield accretive. The
acquisition will be funded wholly by a loan from Citibank. Suntec Reit's
gearing ratio is expected to go up to just under 40 per cent.
Suntec Reit CEO Yeo See Kiat acknowledges that the
Chijmes property is comparatively small, but added that it nevertheless has
'potential' for asset enhancement. Explaining that he sees 'a lot of
synergy' with existing properties Suntec City Mall and Park Mall, Mr Yeo
said there is strong demand for food and beverage space - and he expects
'organic growth' within its portfolio. 'I have many restaurant operators at
Suntec who are looking to expand, but we don't have enough space there,' he
added.
Enhancement of the property will likely be limited
to the re-configuration of units there. Chijmes Hall and Caldwell House are
protected by strict conservation guidelines, but Mr Yeo says there could be
room for expansion in the basement level. There may also be some
re-configuration of the larger units.
The acquisition of Chijmes, which has about 80,000
sq ft of lettable area, is a bit of a surprise, not least because tenants
have in the past come and gone quickly. 'Turnover used to be high but over
the last year, we have seen a change,' Mr Yeo said. He also added that
rentals there are close to 'market rates' and that 17 per cent of its
existing tenants will be renewing their leases next year. The lease at Lei
Gardens, one of the more successful restaurants, taking up 15,000 sq ft of
space, will expire in 2007.
In a statement released by Low Keng Huat, the net
book value of Chijmes (at January 2005) was said to be approximately $90.8
million. The 1.4 ha site was bought in 1990 for $26.8 million but it has
cost $100 million to restore.
Chijmes Investment Pte Ltd, of which Low Keng Huat
has a 50 per cent share, will continue to operate Chijmes Hall and its
supporting catering business.
Chijmes Investments will also continue to run
three restaurants it currently owns there.
The sale is expected to be completed by Dec 15.
- by Arthur Sim SINGAPORE
BUSINESS TIMES 31 Oct 2005
Expanding market seen for Reits
Centrepoint, Keppel Land have shown interest but remain
non-committal
This has been a signal year for property asset
securitisation in Singapore, which saw the launch of its first two real
estate investment trusts (Reits).
More securitisations are expected in the new year,
but while developers, namely Keppel Land and Centrepoint, have indicated
interest, they have stopped short of committing themselves.
Initial public offerings for Singapore's first
Reits - CapitaLand's retail CapitaMall Trust (CMT) and Ascendas' industrial
A-Reit - were both five times subscribed. The response underlined major
investor interest in such instruments. CMT shares were sold at 96 cents,
offering a 7.06 per cent yield, while A-Reit stock was issued at 88 cents,
offering a yield of about 8 per cent.
Performance thereafter has not been uniform,
however, with CMT shares posting yields close to or exceeding 7 per cent
consistently, while A-Reit shares have found it hard to push much higher
than its issue price. CMT shares closed unchanged at $1.04 yesterday while
A-Reit shares finished half a cent up at 87.5 cents.
Analysts have blamed the economy, which hurts A-Reit's
performance even more as the outlook for industrial properties is largely
seen by retail investors to be directly related to the country's economic
health.
A spokeswoman for the trust's manager, Ascendas-MGM
Funds Management, agreed, saying: 'The preliminary growth forecast for 2003
by MTI (Ministry of Trade and Industry) in Q3 this year is 2-5 per cent.
Year 2002's forecast will be revised to 2-2.5 per cent. The overall
manufacturing PMI (purchasing managers' index) has rebounded in November
this year.
'We have assumed conservative assumptions in our
forecast. If the economy recovers next year, it bodes well for us.'
CapitaMall Trust Management chief executive Pua
Seck Guan added that the economic outlook for H1 2003 is uncertain, though
he is hopeful that the second half will brighten.
'Nonetheless, we expect rentals of our properties
to be fairly resilient, particularly given the success story of suburban
malls in good locations, which were close to full occupancy even during the
Asian financial crisis in 1998,' he said.
Still, consultants such as Cushman & Wakefield
managing director Donald Han have reason to believe that the A-Reit can
afford to be 'cautiously optimistic'.
'A-Reit properties are located in or near clusters
of high value-added industries such as the biomedical sector,' he said.
'With Singapore trying to attract such firms, the
A-Reit buildings will be well placed to take in the demand when it finally
arrives as Ascendas is a subsidiary of statutory board JTC Corporation.'
Analysts agree that any pick-up in real estate
will be seen six months after a broad-based economic turnaround, hence
putting the earliest property recovery late next year or in early 2004.
But what remains clear is that the market has
endorsed Reits as an attractive proposition, with the first two Reits
launching within six months of each other - in July and November.
The Ascendas-MGM spokeswoman said: 'We are not
aware of specific details but with the success that Reits have enjoyed in
2002, we certainly hope that this sector continues to broaden and deepen in
2003 with more developers contemplating such trusts and with more classes of
assets being put into them.'
In a recent BT report, property fund manager and
investor Rodamco Asia's chief financial officer Nico Kop observed that, on
the investor's side, the low interest-rate regime in the past few years has
made returns from Reits and bonds issued for asset securitisations more
attractive than holding cash.
At the same time, the stable returns from these
instruments backed by rental income from good quality properties are 'less
volatile than investing in, say, Internet stocks', he said. 'And such income
stability is appealing in times of economic uncertainty.'
Centrepoint Properties chief executive Jeffrey
Heng told BT that while the firm is exploring trust possibilities, there is
no current desperate need given its strong cash position.
'When you go into (the question of) cash, there is
the question of reinvestment,' he said.
'When you find that you have too much cash, you
feel the pressure to reinvest and take greater risks. You must find the
balance.'
The property arm of Fraser & Neave turned in
revenues of $1 billion - or a 61 per cent annual rise - for the year ended
Sept 30. Net profit rose a more moderate 8 per cent to $170 million.
Meanwhile, Keppel Land would only say that it is
'continuously monitoring the market for an office Reit'.
In fact, judging from consultants' comments,
developers exploring possibilities of launching Reits may face a timing
dilemma.
CB Richard Ellis executive director Chan Fook
Kheong was one who felt that such developers have a 'window period' in the
next 4-6 months.
He said: 'If the equities markets locally and
globally recover in the second half of 2003, Reits will compete with
equities for funds as investors seek to position money in 'bombed-out'
equities in expectation of a stock market rally based on higher company
earnings after two consecutive years of earnings and equities downturn.'
'Hence, there is a 'window period' of 4-6 months
to sell Reits to investors.'
At the other end, Mr Han is expecting to see firms
studying the A-Reit first for 2-6 months before taking the Reit plunge.
'We may see a combined Reit next as developers may
try to mix the portfolio to get higher yields,' he said.
'Yields for an office Reit would have to be at
least 6 per cent, with a pure retail one going for above 7 per cent. An
industrial Reit, like the A-Reit has proven, has to offer at least 8 per
cent. So a combined Reit may average out at 7 per cent.'
- By Vince Chong
Singapore Business Times 24 Dec
2002
