A-Reit draws strong demand for $325 million placement

The proceeds from the upsized deal will be used to acquire two industrial properties.
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The Aries, one of A-Reit’s properties located in Singapore Science Park II</div>
<div style="text-align: left;"> The Aries, one of A-Reit’s properties located in Singapore Science Park II</div>

Singapore-listed Ascendas Real Estate Investment Trust (A-Reit) on Friday raised S$406 million ($325 million) of fresh equity that will be used towards the funding of two new properties.

The follow-on placement attracted a massive S$1.3 billion of demand from more than 100 institutional investors, according to a company statement. That allowed the upsize option to be exercised in full and the price to be fixed close to the top of the offering range.

Just like A-Reit’s previous placements, the deal had strong support from existing unitholders, as well as from global real estate specialists and other long-only funds. The bookrunners hadn’t lined up any anchors before launch, but rather chose to suspend the stock and open the deal at 7:30am on Friday (Singapore time) to give themselves ample time to build the book.

This may have been overly cautious, however, as the deal was covered within an hour. As a result, the leads closed the order book for Asian and US investors at 11:30am, while accounts based in Europe were given until 3:30pm to submit their orders.

A-Reit, which focuses on industrial properties, including business and science parks, warehouses and logistics centres, offered 140 million new units with an option to sell another 20 million in case of sufficient demand. As noted, the upsize option was exercised in full, resulting in a total deal size of 160 million units. The enlarged size represented 7.1% of the existing share capital and about 20 days of trading volume.

The units were offered at a price between S$2.50 and S$2.55, and priced at S$2.54 for a 4.2% discount to Thursday’s close of S$2.65.

As is common practice for real estate investment trusts (Reits), A-Reit will distribute the accumulated dividend (from January 1 to March 18) to its existing unitholders before completing the placement. That payment will amount to 2.70 Singapore cents per unit and means that the discount to the dividend-adjusted close was no more than 3.2%.

The placement price also translated into a 5.7% yield for the fiscal year to March 2014 and a hefty 35% premium to the net asset value at the end of December 2012.

The units were offered at a discount of between 3.8% and 5.7% versus last Thursday’s close and a discount of 2.8% to 4.7% versus the dividend-adjusted close of S$2.623.

The indicated discount range was slightly wider than on A-Reit’s latest placement in May last year, but the final discount was tighter. The May placement was priced at the bottom of the range for a 4.8% discount to the latest close and a 4% discount to the dividend-adjusted close – even though it was smaller in size, at $241 million.

The tight discount was even more impressive when considering that A-Reit was trading close to its 52-week high at the time of the placement. The unit price had risen 11.8% since the beginning of the year, which was more than twice the 4.2% gain in the Singapore Straits Times index. It had gained 27% since the May transaction.

The counter held above the placement price when it resumed trading yesterday and finished the session 2.6% lower at S$2.58. The benchmark index gained 0.1%.

About two-thirds of the deal was allocated to long-only funds and real estate specialists, while the rest went to hedge funds and private banking accounts, the source said. The great majority of the buyers were Asia-based, which isn’t surprising since the deal was open mainly during the Asian trading day. However, some US and European investors did participate as well.

According to a source, investors were drawn to the latest deal partly because the two acquisitions are expected to be dividend accretive. Placements that are intended to fund specific acquisitions also tend to be received better than more opportunistic fund raisings. The A-Reit management held a conference call on Friday to explain their strategy, which supposedly attracted more than 50 institutional investors.

The Reit space in general is also in strong demand right now, as investors are increasing their exposure to defensive real estate assets. And with a portfolio of 102 industrial properties, a top-quality management, a well-known sponsor and a loyal shareholder base, A-Reit is viewed as one of the key “blue-chip” Reits. It has been listed in Singapore since 2002.

This is the largest placement by a Singapore Reit since A-Reit’s own placement in April 2011, which raised S$400 million ($317 million), making it a good opportunity for investors to buy into the market.

The trust will use part of the gross proceeds to buy a multi-tenanted property located in Singapore Science Park II from its parent company. Negotiations are yet to be completed, but the acquisition cost is expected to be S$126 million and will be covered in full by the placement proceeds.

Another S$270 million will go towards the acquisition of an integrated industrial mixed-use property that is currently under construction. The property is located on Kallang Avenue at the fringe of Singapore’s Central Business District and is expected to have a value of approximately S$490 million.

The rest of the money will be used for the placement fee (S$5.8 million, or 1.4% of the gross proceeds), working capital and other general corporate proposes.

In an announcement, the Reit manager said it expects to acquire the two properties at attractive yields, which will result in dividend-per-unit accretion once the proceeds are fully deployed and the occupancy of the Kallang property stabilised. It added that it believes this will enhance the distributable income to unitholders.

The acquisitions will also strengthen A-Reit’s leading position in the business and science park segment of the market, bringing about economies of scale and greater operational efficiency, it said.

A-Reit’s aggregate leverage will increase to approximately 34.6% from 32.8% as a result of the property acquisitions. Without the placement of new units, i.e. if it had chosen to fund the properties entirely through bank loans, the leverage would have increased to 39.2%.

Based on a maximum allowed leverage ratio of 45%, A-Reit will still have a borrowing capacity of about S$1.4 billion following the acquisition and the placement, which will enable it “to capitalise on potential growth opportunities, as and when they may arise,” the Reit manager said in the announcement.

The placement was arranged and underwritten by Citi and DBS. It was the 11th equity fund-raising that Citi arranged for A-Reit since the IPO.

The US investment bank has also been active in the broader Asian real estate space this year. So far, it has helped six clients raise more than $2.5 billion of equity, giving it a good read of the market and a solid understanding of investor preferences. The deals include the $1.3 billion Singapore IPO by Mapletree Greater China Commercial Trust, which it worked on together with DBS, Goldman Sachs and HSBC; and a S$280 million convertible bond for Suntec Reit, where it was a joint bookrunner together with Nomura.

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