Ascendas Real Estate Investment Trust (A-Reit) has become the first Singapore-listed entity to raise new equity this year through the completion of a S$299.3 million ($201 million) placement of new units to institutional investors. The deal, which was sealed late on Thursday Hong Kong time, is the first leg of a fundraising plan that will also see A-Reit seek approximately S$110 million from a preferential offering to existing shareholders.
According to sources, the great majority of the placement too was taken up by existing unitholders who took the opportunity to move early to prevent their holdings from being diluted. Since the preferential units will be sold at the same price as the placement, there was not much point to wait for the preferential offer. The latter still has a function though as it will give A-Reit’s sponsor, Ascendas Pte, and retail investors an opportunity to participate, while also giving institutional investors who may have missed Thursday’s placement a second chance to participate.
The placement was in good demand, coming as it did on a day when A-Reit, which focuses on investments in real estate for industrial and business use, including entire IT and industrial parks, also announced a pretty strong third quarter earnings report. But perhaps more importantly, the combined placement and preferential share issue will also take care of all of A-Reit’s refinancing and funding needs for the next two years – putting it in a prime position to continue to grow even as the financial markets remain challenging. The company said it will use about S$200 million of the proceeds to fund committed or future development projects, S$100 million to repay an issue of commercial mortgage-backed securities that matures in August this year, and S$89.9 million for the partial repayment of outstanding revolving credit facilities.
“The completion of the equity fundraising, together with our ongoing capital management strategy will strengthen A-Reit’s balance sheet and enhance its credit profile,” said Tan Ser Ping, CEO of the A-Reit management company. “We are confident of meeting all our debt refinancing requirements over the next two years. With the completion of the equity fundfaising, A-Reit will be in a strong position to take advantage of growth opportunities which have arisen due to the current market dislocation.”
Meanwhile, A-Reit’s share price is heavily depressed as investors have shunned the Singapore Reit market – and property stocks in general for that matter – for the past 18 months and on the day of the placement it closed a mere 11.5% above its two-year low from September last year. As a result, more and more analysts and investors are now seeing value in the sector and after falling 62% from its highs of S$3.28 in July 2007, A-Reit is generally their top pick in the sector. Of the analysts following the stock, according to Bloomberg, 14 have a “buy” recommendation, against only three “sells” and one “hold”.
Deeming for the allocations received by investors, the placement was about two times subscribed and sources say it attracted about 60 names. Another indication of the strong interest was the fact that the price was fixed at the top of the range at S$1.16. The units were offered at a price between S$1.13 and S$1.16. Based on Thursday’s closing price of S$1.26, this translated into a discount of 7.9% to 10.3%. However, as part of the fourth quarter earnings announcement that was published after the market closed on the same day, A-Reit said it will pay an estimated dividend of 4.78 Singapore cents per unit for the period from October 1, 2008, to January 20, 2009 and since the buyers of the placement won’t have a right to that dividend, the discount to the adjusted close of S$1.2122 was an even tighter 4.3% to 6.8%.
Adding to the challenge for Citi and Macquarie Capital, which acted as joint bookrunners and underwriters, was the fact that the placement was marketed off Thursday’s volume-weighted average price, which ended up being higher than the close due to a sharp drop in A-Reit’s share price in the final hour of Thursday's trading, suggesting news of the deal leaked before launch. In any case, it left A-Reit 7.4% down on the day and resulted in a discount to the adjusted VWAP (S$1.2469) of 7.0% to 9.4%. Since the deal was priced at the top of the range, the investors achieved only the minimum discount of 7% against the adjusted VWAP, or 4.3% against the adjusted close – the lowest on any Asian equity deal so far this year, including the investor sell-downs in Hong Kong.
A-Reit sold 258 million new units through the chunky placement, which corresponded to 19.4% of the existing share capital and about 60 trading days. One source said about 65% of the offer was bought by Asian investors or global accounts based in Asia, while about a quarter went to the US. The remainder was split between Europe and Australia. None of the units went to hedge funds. Some were said to have subscribed, but with limits, which meant they fell away when the placement price was fixed at the top of the range. The unit price gained 1 Singapore cent to S$1.27 when the trust resumed trading after the placement on Friday.
The preferential offer, which will be open between January 29 and February 5, will comprise approximately 95.9 new units, on the basis of one new unit for every 15 existing ones. Investors who own A-Reit units as of the close of trading on January 23 will be eligible to participate in the preferential offering. Since these units will be sold at the same price of S$1.16 apiece, A-Reit will raise an additional S$111.3 million ($75 million) from the preferential offer, bringing the total proceeds from the combined fundraising exercise to S$410.6 million ($276 million). Singapore-based Ascendas Pte, which develops and manages business space solutions around Asia and also manages real estate funds, has committed to subscribing to its entire 27.1% entitlement and will also pick up any units that are not subscribed by minority unitholders, giving A-Reit the comfort of knowing that it will get its money either way.
The combined fundraising will account for 26.6% of the existing share capital, or 21.1% of the enlarged capital.
A-Reit, which owns 88 properties in Singapore with a total asset value of about S$4.6 billion, said in a separate announcement on Thursday that its net property income increased by 20.9% in the fiscal third quarter (to end December) to S$74.2 million from S$61.4 million in the year-earlier period. Organic growth contributed about 38% of the improvement and was underpinned by double-digit growth in rent renewals across all sectors. The Business & Science Park and Hi-Tech Industrial properties recorded 60.6% and 85.8% growth over the previous contracted rate.
The company said it will pay a third quarter dividend of 4.05 cents per unit, which is 13.8% higher than for the third quarter 2007 and translates into an annualised dividend yield of 11.6%, based on the December 31 closing price of S$1.37.
“With only 1.6% of the portfolio’s leasable area up for renewal for the rest of the financial year, the manager expects to be able to deliver a return that is in line with its recent performance,” says Tan Ser Ping of Ascendas Funds Management. “However, 2009 is expected to be a difficult year given the global financial and economic crisis. The outlook for A-Reit in FY09/10 will depend largely on the extent and depth of the unfolding impact of the global economic recession on our existing tenants as well as on demand for industrial space.”
One example of the challenging environment is that the occupancy rate in A-Reit’s multi-tenanted buildings declined marginally throughout the sectors. However, the decline in occupancy rates was mitigated by the increase in rental rates. In view of the negative economic sentiment, the A-Reit manager said it will focus more on maintaining occupancy than on maximising rental revisions in the future.
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