At first glance, the launch of yet another real estate investment trust (Reit) IPO in Singapore this past week is encouraging as it suggests that improving equity markets are giving issuers the confidence to push ahead with their listing plans.
But, the offering of up to S$469.2 million ($371 million) by Soilbuild Business Space Reit also highlights that there is still a lot of uncertainty about the short- to medium-term outlook for regional markets.
For one, Soilbuild has not been able to secure any cornerstone investors ahead of the launch. According to a source, investors aren’t staying away altogether, but they are reluctant for their involvement to be disclosed in the prospectus at a time when markets are still very volatile and turnover is at a low due to the summer holidays.
Many of the potential cornerstones did agree to participate in the deal as anchor investors instead, the source said. In fact, the 85.1% placement tranche was basically covered before launch and the response on the first day of bookbuilding (last Wednesday) was enough to push the order amount above the total deal size, he said. By late Friday, the interest had picked up a notch, with sources saying the deal is now covered at the top of the price range as well.
One reason why investors prefer to come in as anchors could be that they want to retain the flexibility to sell part of their positions without alarming the market should the stock trade down in the aftermarket. Since Singapore imposes no lock-ups on cornerstone investors, they too are free to sell their IPO shares at any time. However, cornerstones are disclosed in the listing prospectus while anchors are not, and there is always a risk that other investors could view it as negative if a known cornerstone chooses to sell early.
But perhaps more importantly, cornerstones also have to commit to buy the shares, or in the case of Soilbuild, the units, at any price within the price range. Anchor investors can usually set limits, which means they are a bit more flexible if sector valuations were to deteriorate during the marketing. Unlike cornerstones, anchors are, however, not guaranteed a specific allocation, which could become an issue if demand is high.
The second issue pointing to the lingering uncertainty is the fact that bankers once again seem to feel there is a need to line up buyers for almost the entire deal before they open the order books. Last year, the portion of IPOs that was “pre-placed” with cornerstones and anchors kept getting bigger and bigger as the market became more challenging and the practice has continued this year — especially for smaller deals that are not a must-own.
The challenges of bringing new and untested names to the market were highlighted on Friday when industrial estate developer Puradelta Lestari was forced to postpone the pricing of its IPO in Indonesia after a sharp decline in the valuation of its closest comparables. Together with further weakness in the rupiah this led to muted demand and a push back on the indicated pricing.
Puradelta, also known as Deltamas after the name of its industrial estate, hasn’t pulled the deal, but according to sources, it will try to see if it can find enough demand if it reduces the deal size and the price. If so, the IPO may be re-launched with new terms next week. Indonesia is on holiday this entire week to celebrate the end of Ramadan. The company was trying to raise between Rp1.569 trillion and Rp1.952 trillion ($154 million to $191 million) and was already offering its shares at a 60% discount to net asset value (NAV).
The difficulties facing Deltamas aren’t deterring other listing candidates from approaching the market, however. Not even in Indonesia. In addition to the launch of Soilbuild’s Reit IPO in Singapore, bankers also started investor education of Indonesian healthcare provider Siloam Hospital last Monday.
Depending on the investor feedback, the IPO may launch in mid-August. Siloam, which is 100% owned by Indonesia’s Lippo group, is seeking to raise about $200 million to $250 million. Credit Suisse, Goldman Sachs and domestic investment bank Ciptadana are joint bookrunners.
Soilbuild Business Space Reit
Soilbuild has seven assets in its initial portfolio — two business parks and five industrial properties. Business parks are made up of properties that are mainly used for offices, while industrial properties include factories, ramp-up facilities and other properties used primarily for manufacturing, engineering, logistics, warehousing and research and development.
The Soilbuild brand is well-known in Singapore and the sponsor, Soilbuild Group Holdings, is active throughout the property industry, from construction and development to leasing and fund management.
The Reit is looking to raise between S$451.6 million and S$469.2 million ($357 million to $371 million) from the sale of about 586.532 million new units (73% of the trust) to public investors. The remaining 27% will be bought by Lim Chap Huat, who is a co-founder of the sponsor and a director of the Reit management company.
The majority of the public shares, or 85.1%, will be offered to institutional investors, while 14.9% of the deal will be set aside for retail investors, the management, employees and business associates of the sponsor.
The units are offered at price between S$0.77 and S$0.80, which translates into an estimated dividend yield of 7.5% to 7.8% for the 2014 calendar year. The yield is pretty clean, except for the fact that the Reit management company will receive its fees in units for 2013 and 2014. One source noted that this has helped lift the yield from the mid-6% range, in response to the investor feedback.
The demand for a higher yield reflects the fact that the yield on the Singapore 10-year government bond has widened by about 80bp since the start of pre-marketing.
The current range puts Soilbuild at a slight premium (in yield terms) to Mapletree Industrial Trust and AIMS AMP Capital Industrial Reit, which sources say are the closest comps. However, analysts argue that because of its greater exposure to business parks (about 40% of its total portfolio value), Soilbuild should actually trade at a tighter yield than the other two.
One reason is that business parks have a larger and more diversified pool of tenants. Mapletree Industrial Trust, which has about 20% of its portfolio in business parks, is currently trading at a 7.1% yield for the fiscal year to March 2015, while AIMS AMP Reit is offering a yield of 7.4% for the same business year.
Singapore-listed Reits that focus almost exclusively on industrial properties, such as Cache Logistics, Cambridge Industrial Trust and the Sabana Shari’ah Compliant Reit, are trading at forward yields of around 7.5% to 8%, Bloomberg data show.
Soilbuild also comes with an overallotment option of 56.307 million secondary units that will be provided by Lim if the demand in the aftermarket is strong enough. The option accounts for 9.6% of the base deal and could increase the total proceeds to as much as S$514.3 million ($407 million). If exercised in full, the free-float will increase to 80%, while the portion held by Lim will drop to 20% from 27%.
The institutional bookbuilding will end tomorrow with the price expected to be fixed shortly afterwards. The retail offering will follow on August 7 to 14 and the trading debut is scheduled for August 16.
Interestingly, the bookrunners — Citi, DBS and OCBC — have chosen not to actively market the deal outside of Asia and the management will only visit Singapore and Hong Kong.
Puradelta Lestari (Deltamas)
The industrial estate developer was looking to sell 15% of its share capital, but can reduce that to 10% and still meet the minimum free-float required by the Indonesian regulators. However, after its closest comp, Bekasi Fajar Industrial Estate, fell 16.4% during the six-day bookbuilding, sources said the offering price will need to be revised down as well.
Some international investors have apparently shown interest at a lower price, but the question is how low the seller is willing to go. It had already reduced the size from an initial aim to raise about $300 million to the $154 million that it sought from investors at the bottom of the price range.
The company needs money to fund the basic infrastructure, such as roads, electricity and water, as well as residential housing, parks and other common facilities on the Kota Deltamas estate before selling land to various industries for development into factories.
If it isn’t able to complete the IPO at this time, it will likely have to seek alternative types of funding. That is probably also why it was so keen to go ahead with the IPO even though the response during the investor education was pretty mixed.
International investors were said to have been positive with regard to the underlying assets, but were asking for a sizeable discount versus other similar industrial estate developers, including Bekasi Fajar. They were also concerned about the sharp drop in the rupiah, which is making investments into Indonesia more costly, while also eating into any potential returns.
Citi, Macquarie and Nomura are joint international bookrunners for the Deltamas IPO, while Macquarie and Sinarmas Sekuritas are joint domestic underwriters.
