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Hong Kong-listed Yuexiu Real Estate Investment Trust, which was previously known as GZI Reit, has raised $415 million from an equity placement to complete the financing package for the Rmb8.85 billion ($1.4 billion) acquisition of Guangzhou International Finance Centre from its parent company.
The placement is almost as large as Yuexiu’s pre-deal market cap and a massive deal for a real estate investment trust (Reit) that trades only about $1 million worth of units per day. Indeed, earlier attempts to get the deal done have met with scepticism among investors, who on the one hand felt Yuexiu may be buying the mixed-use commercial building in Guangzhou’s central business district at too full a valuation, and on the other thought the price at which it tried to do the placement was too high.
The pending fundraising, which was approved by existing unitholders in July, created an overhang on the counter that saw it underperform the rest of the Hong Kong Reit sector, making it even more difficult to gain traction for the deal. After several months of trying to piece together a solution, the bookrunners saw a window when the unit price started to edge higher in mid-September and the transaction launched at about lunchtime on Wednesday.
However, the new units were offered at a fixed price of HK$3.30, which is lower than the HK$3.56 that the issuer, in an earlier circular, had indicated would be the minimum price. The placement was also smaller than the close to $500 million that it had initially hoped to raise. Yuexiu is making up some of that difference by taking on a bit more debt, and it also plans to raise an additional $50 million of equity through a private placement of new units to PICC Asset Management. The latter will need approval from both unitholders and regulators, although sources said yesterday that this isn’t expected to be a problem.
This means the Reit is issuing a total of $465 million (Rmb2.95 billion) of new equity. The rest of the financing will come from Rmb1.579 billion worth of consideration units issued to its parent company, Yuexiu Property; Rmb2.4 billion worth of deferred units that will be issued to Yuexiu from 2016 onwards; and a HK$2.592 billion (Rmb2.121 billion) three-year bank loan with an annual interest rate 2.8% above Hibor. This gives a total financing package of Rmb9.05 billion, which will cover the acquisition cost as well as Rmb200 million of underwriting commissions and other fees.
The restructuring of the overall package (Yuexiu had previously planned for no more than Rmb1.5 billion of bank borrowing) as well as the lower price per unit hit the spot with investors, and the deal saw a lot of demand. High-net-worth retail investors were particularly keen, but there was also decent interest from long-only institutions and some hedge funds. When the order books closed at 6pm Hong Kong time the deal was about four times covered and had attracted more than 100 investors, sources said. About 50% of the demand came from private wealth management clients, but there was also enough demand from long-only investors to cover the entire transaction. The allocation was skewed in favour of the latter.
It did help that Guangzhou IFC is a well-known asset and investors are also quite familiar with Yuexiu Reit, which listed in 2005 and was the first Hong Kong Reit to offer exposure to Chinese properties. But investors were also drawn to the deal by the promise of a 7.6% dividend yield, which is backed by a rental guarantee by the seller, ie the parent company, until the end of 2016. This income support is meant to limit the risks related to the fact that the building has only recently been completed and the Four Seasons hotel and the serviced apartments are still at a start-up level.
They also liked the fact that PICC is effectively supporting the deal as an anchor investor.
To further ensure that the transaction was successful, the bookrunners had secured additional anchor demand for about two-thirds of the offering before launch.
They also launched the deal at a slightly smaller size of $385 million to begin with, perhaps to make sure investors didn’t get too overwhelmed by the transaction. Investors were told that the other $30 million may be sold to China-based investors, issued as additional deferred units to Yuexiu Property, or essentially be used as an overallotment option. In the end, the additional units were placed with international investors for a total placement size of $415 million.
This meant that Yuexiu issued a total of 975.2 million new units at a price of HK$3.30 each. The price translated into a discount of 8.6% versus Wednesday’s closing price of HK$3.61.
The new units are equal to 91% of the number of outstanding units before the deal, which means that the market cap of the Reit will almost double. And together with the 584.6 million consideration units issued to the parent, it will more than double. The injection of Guangzhou IFC will also more than triple Yuexiu’s portfolio value to about Rmb22 billion from about Rmb6.6 billion, making it a truly transformational acquisition. Before this deal, Yuexiu had five properties in its portfolio, which are all located in the prime commercial areas in Guangzhou.
Guangzhou IFC is one of the tallest skyscrapers in the world. It houses a six-storey shopping mall, 58 storeys of grade-A office space, a five-star Four Seasons hotel that started operations in July, 314 units of luxury serviced apartments and 1,700 car park spaces. It has an appraised value of Rmb15.37 billion and a transfer value of Rmb13.44 billion.
The placement did seem to get the approval from the broader market as well, as the unit price edged up 1.4% to HK$3.66 yesterday. However, the Reit is still trading close to 5% below where it was when the acquisition of Guangzhou IFC was first announced in May. Concern about the size of the acquisition sent the unit price sharply lower at the time, but it has recovered about half of those losses since then.
BOC International, DBS, Goldman Sachs, J.P. Morgan, Morgan Stanley and Standard Chartered were joint bookrunners for the transaction.
