Sunway Real Estate Investment Trust, a Malaysian owner and operator of shopping malls and other commercial real estate, has raised M$1.49 billion ($459 million) from its initial public offering after attracting good demand from yield-hungry investors.
The deal, which is the largest IPO in Malaysia so far this year and the largest Reit IPO in Asia ex-Japan since 2007, was comfortably oversubscribed, but there was some price sensitivity in the book and the price was fixed at the bottom of the range. Another key reason for keeping the price low, said one source, is that it will be another two weeks before the Reit starts trading in Kuala Lumpur on July 8 and, if the markets turn lower in the meantime, that could put a lot of downward pressure on the newcomer.
The defensive qualities of Reits -- they pay out virtually all of their profits as dividends and only 10% of their portfolios can be made up of projects under development -- in a still shaky market environment helped to attract interest to the offering. Or as one source said: "I wouldn't want to bring a true developer to market right now."
Sunway Reit has committed to pay out at least 100% of its distributable earnings for the fiscal years to June 2011 and June 2012, and has said it intends to distribute at least 90% thereafter.
The successful completion of the deal has opened the door for Singapore-listed CapitaMalls Asia to go ahead with the planned spin-off of its three shopping malls in Malaysia to a Reit that will also be listed in Kuala Lumpur. CapitaMalls Asia announced earlier this month that it had received approval from the Malaysian regulators to proceed with the IPO of CapitaMalls Malaysia Trust, but has been awaiting the outcome of Sunway's offering before kicking off its deal. Sources said it will start the institutional roadshow today.
At the final price of M$0.90, Sunway Reit offers a yield of 7.5% for its fiscal year to June 2011, which equals a sizeable premium versus comparable Reits in Singapore, including CapitaMall Trust, CapitaCommercial Trust and Suntec Reit, which trade at an average forward yield of just above 6%. It will also offer a yield pickup of about 350bp over the 10-year government bond, which is a key reference point for Reit investors.
International investors looked primarily at the Singapore comps for a valuation benchmark since the other 12 Malaysian Reits are small and very illiquid, meaning it isn't really practically possible for a large international fund to invest in them. According to one research report, Sunway Reit's free-float will account for about 73% of the entire current Reit sector combined.
The anticipated liquidity also helped to attract domestic investors to the deal, as they were faced with the fact that Sunway Reit is offering a yield that is lower than all the other Malaysian Reits, which trade at an average forward yield of about 8.6%. The fact that the newcomer was able to price at a discount to all of them was testament to the perceived quality of the assets, as well as the familiar management and proven track record -- the assets remained profitable and even saw rents increase during the latest financial crisis -- and the fact that it works as a proxy for Malaysia's fast-growing mass retail market.
One source said the new Reit is expected to trade at a yield in the 6% range thanks to these qualities and the promise of asset growth via a pipeline of potential acquisition targets available to it from its sponsor.
Sunway Reit is a spin-off from Sunway City, one of Malaysia's largest property developers, and currently owns eight properties split between the retail, hospitality and office sectors. Based on analyst estimates, it has a total asset value of about M$3.7 billion ($1.1 billion). Its largest asset is the Sunway Pyramid Shopping Mall, which accounts for 62% of the asset value.
The domestic buyers included three of the country's largest pension funds -- Employees Provident Fund (EPF), Permodalan Nasional Berhad (PNB) and Great Eastern -- which together with the Government of Singapore Investment Corp (GIC) came in as cornerstone investors. The cornerstones bought a combined 24.7% of the institutional tranche, which accounted for 91.9% of the deal.
The remaining portion of the institutional tranche was said to have been allocated roughly 50-50 between domestic and international investors, sources said.
Including the cornerstone portion, Sunway Reit sold approximately 1.654 billion new units to the public, equal to 61.7% of the trust. There is also a greenshoe of 87.104 million secondary shares that may be sold by Sunway City in case of good demand in the aftermarket. The shoe is equal to 5.3% of the base deal size.
Of the total number of units on offer, 8.1% were sold to Malaysian retail investors at a discounted price of M$0.88.
Credit Suisse and RHB are joint sponsors, global coordinators, and bookrunners for the Reit. They are joined at the bookrunner level by CIMB, HSBC, J.P. Morgan and Maybank.
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