The yield, which is based on a guaranteed payout of at least HK$0.17 per unit, pitches the spin-off from property investment company Great Eagle Holdings in the middle of Hong KongÆs three existing REITs. It is on par with Prosperity REIT and slightly above the 10-year Exchange Fund note which currently returns 4.93%.
Champion REIT has only one Grade A office building in its portfolio in the form of Citibank Plaza in Hong KongÆs Central district. This makes it stand out from the other three, which are more diversified but focus primarily on commercial and industrial buildings outside the cityÆs main business area û or in the case of GZI REIT, in China.
The new REIT was lead managed by Citibank, JPMorgan and Merrill Lynch.
The price was fixed at $5.10 per unit, after the deal was initially offered to investors between HK$5 and HK$5.75, which equalled an indicative yield of 4.84% to 5.57%. However, the price range was narrowed to HK$5 to HK$5.25 during the roadshow, according to one source. It was the first Hong Kong REIT not to price its IPO at the top of the indicated range.
With 1.23 billion units on sale, representing 45% of the REIT, the deal size will be HK$6.29 billion ($812 million), which could increase to $934 million if the 15% greenshoe is exercised in full. Great Eagle will retain 49% of the REIT, while two other existing owners of Citibank Plaza will hold a combined 6%.
Sources say institutional investors submitted orders worth approximately $2.6 billion, which at the final price accounts for roughly 3.7 times the portion of the offer available to them after deducting the 10% retail tranche and the 4.4% preferential offer to Great Eagle shareholders.
One source says there was some price sensitivity in the book which stemmed from the fact that many investors equated the single-asset REIT with an acquisition of a stand-alone building and valued it based on the cap rate.
At the final price, the cap rate, or the income yield divided by the valuation of the property, was below 2%, the source said. The price also values the REIT at a 14% discount to its net asset value of HK$5.94 per unit.
About 60% of the demand came from Asia, while Europe accounted for more than 20% and the US for between 10% and 20%.
The retail tranche was said to have been about 6.6 times subscribed, which means it would have attracted about HK$4.68 billion ($604 million) worth of orders. That is significantly below the amount of money retail investors committed towards Hong KongÆs other three reits at the end of last year with Link REIT attracting HK$107 billion ($13.8 billion), GZI REIT HK$91 billion and Prosperity REIT just under HK$50 billion, and likely reflects the different interest rate scenario. However, the initial hype for REITs also seems to be fading.
Because the retail subscription ratio was below 15 times, Champion will be the first Hong Kong REIT not to see a reallocation of shares from the institutional tranche to the retail tranche. It is also only the third IPO overall this year (out of 17) not to see such a clawback after Advanced Semiconductor Manufacturing Corp and Modern Beauty Salon Holdings.
Market watchers said many investors didnÆt consider the yield attractive enough, especially in the current market environment where concerns of rising interest rates have again returned to the top of the agenda.
ôThere are a lot of IPOs to go for. The question is, do you really want to a REIT that provides steady income when you can have Bank of China or a ports company that may rise sharply on the first day?ö says one sales trader, referring to the IPOs from ChinaÆs second largest lender, which will open for retail subscription tomorrow, and Tianjin Ports (which will close today).
Hong KongÆs most recent listing of size, Dalian Ports, jumped 68% on its first day of trading on April 28 but has since eased back and yesterday closed 49.2% above its IPO price. There are also at least four other REITs looking to tap the Hong Kong market over the next few months, giving investors plenty of choices.
However, volatility in the overall market during the second half of the Champion REITÆs roadshow and a $1 billion share placement by Sun Hung Kai Properties last week - which sparked concern that the market may have reached its peak - were probably more important reasons explaining why some investors hesitated, observers say.
Great Eagle Holdings, which has been on a declining trend lately, jumped 2.56% yesterday amid an otherwise declining market, however, as investors banked on a successful listing of the REIT becoming the trigger for a re-rating of the stock.
There were also some suggestions during the roadshow that the assumptions of rental increases on which Champion based its growth projection were on the aggressive side.
Others argued though that the new REIT should see substantial growth over the next three years when 80% of its leases will expire and enable the company to increase the rent. Especially since there will be a shortage of Grade A office supply in Hong KongÆs key business district over the next few years.
Property agent Colliers forecasts office rents for Grade A office building in Central will increase by 40% in 2006 and by another 15% in 2007.
Citibank Plaza, which has a total floor area of 1.49 million square feet excluding car parks and houses two of the bookrunners for the deal (Citibank and Merrill Lynch), is valued at HK$22.67 billion ($2.9 billion). Champion will pay HK$19.3 billion to buy it from the previous owners.
As of TuesdayÆs close, the Link REIT offered a yield of 3.78% for the fiscal year to March 2007, while Prosperity REIT offered 5.45% and GZI REIT offered 6.48% for the 2006 calendar year.
Champion REIT is scheduled to start trading on May 24.
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