Singapore-listed Fortune Reit raised $148 million yesterday (June 15) from a 184.6 million unit placement to institutional investors led by DBS, HSBC, JPMorgan and UBS. The deal was priced at HK$6.23 per unit, which represented a 4.93% discount to the VWAP (Volume Weighted Average Price), or a 4.15% discount to the stock's HK$6.5 close on Tuesday.
However, the real discount was 2.48% to an adjusted VWAP and 1.7% to spot. This is because the stock does not go ex-divided for an additional two weeks and investors in the new deal will not benefit from the accrued dividend over this period. As a result, the new deal will not become fungible with the outstanding units until June 28.
The institutional placement was the first of three tranches to close. This is because the four bookrunners were on risk after the price was set on Tuesday night and wanted to clear the deal through the market as soon as possible. The stock was suspended on Wednesday, while the placement was taking place.
At the same time, F-Reit launched a 48.32 million unit preferential tranche to existing shareholders on a one-for-10 basis. This will close on June 21.
There is also a 12 million unit tranche for retail investors that will launch today (June 16) on a first-come, first-served basis.
Finally Focus Eagle Investments Ltd will subscribe to the preferential tranche and also purchased 73.9 million units bolted onto the institutional tranche to maintain its shareholding at the 27.2% level. Focus Eagle is owned by Cheung Kong. Pre-deal Hutchison Whampoa also owned 11.3% and DBS 8.9%.
Together all three tranches will net F-Reit $255 million from a total sale of 318.78 million units. The equity deal represents a significant transaction for the company, which has always been fairly illiquid.
As such it represents about 500 days trading volume, over 100% of the freefloat and 60% of the existing share capital. The potential for expanded trading volume and inclusion in the indices was one of the major selling points of the deal.
Specialists say the order book closed just over four times covered, with participation by about 100 accounts. Having completed a roadshow in Asia and Europe, the company was said to have significantly diversified its shareholding base out of Singapore. But bankers also say that while investors are moving out of cash positions and starting to put money back to work, order sizes are still on the small side.
Proceeds are being used to acquire six regional shopping malls in Hong Kong, which will double the company's asset base and diversify its earnings stream - a second major selling point. The acquisition will be mildly yield accretive and boost the DPU (Dividend Per Unit) from HK$0.31 to HK$0.33.
This should expand the company's forward yield from 5.2% at the time the HK$3.4 billion ($436 million) acquisition was finalised to about 5.5%. Because of the company is incorporated in Hong Kong it is not subject to Singapore's witholding taxes and is consequently the highest yielding Reit in the country on a net basis - a third major selling point.
Specialists argue that investors responded warmly to the deal because F-Reit was finally able to show it can grow its asset base. This is said to have been a major concern during the original IPO in 2003.
However, it has also shown how difficult it is to find yield accretive acquisitions in an environment of rising property prices. Net of acquisition costs, the yield accretion generated by the six malls is negligible.
Boosting the yield has been largely a function of increasing the company's gearing, since part of the acquisition is being financed by a syndicated loan. This will lift the company's gearing from 22.5% to 31.5%.
Year-to-date, the stock is up 3.17%, though down from a high of HK$6.9 in early March.
