Allco Commercial Reit is aiming to raise up to S$504.9 million ($311 million) from the sale of 495 million units in a trust that will comprise three assets in Singapore and Australia with a combined total asset value of S$680 million.
Credit Suisse is the sole global coordinator and joint bookrunner together with DBS. Macquarie Securities and UOB are acting as co-leads.
Bankers believe the diversification of the assets to countries outside Singapore will initially help enhance the yield as income earned from the Australian portion of the portfolio û about 55% of the net incme - will not be subject to withholding tax. The pan set-up will also give Allco a greater catchment area for finding yield-accretive acquisitions.
Based on the mid-point of the offer price range of S$0.98 to S$1.02, Allco Reit will yield 6.4-6.5% after adjusting for the tax difference, which compares with an average 5.3% for other Singapore Reits. On a net basis, Allco will return about 5.7-5.9%, compared with an S-Reit average of 4.8%.
The trust is offered at a price to book value of 1.04 to 1.08 times, which is a slight discount to the average 1.14 times for the existing S-Reits. It will have a gearing of about 35%.
Allco Finance, a private Australian fund manager which is also the sponsor of Allco Reit, will buy up to 15% of the units on offer, while three cornerstone investors - Capital Research, Och-Ziff and CQS - will share 19.5%. Institutional investors will get 90% of the remaining 65.5% portion, while 10% will be earmarked for retail investors.
There is also a 10% greenshoe that could boost the total proceeds to S$555 million.
The trust is committed to pay out 100% its distributable income, which is projected to be about S$24 million in 2006 and increase by 25% to about S$30 million in 2007.
The initial portfolio will be made up of a 100% stake in a grade-A office building in SingaporeÆs Central Business District, called China Square Central; a 50% stake in the tallest office tower in Perth, called Central Park; and a 15% stake in the Allco Wholesale Property Fund which owns three properties in Sydney and Melbourne. Offices account for about 78% of the assets, while retail make up 13% and car parks 9%.
The Singapore property, which also has some retail space and car parks, accounts for 57% of the asset value, while the Perth property will account for 34%. However, on a revenue basis China Square Central only accounts for about 40% of the revenues and 45% of the net property income.
This property is where analysts see the most growth potential with regard to the original portfolio, however. The building was completed only three years ago, but this meant that most of it was let out during the Sars epidemic, resulting in an unfavourable tenant mix and low rents.
According to syndicate research, the building is being rented at about S$4.40 per square foot, compared to the current market rate of $5 per square foot, suggesting upside room as rental agreements are being renewed.
ôAllco is of the view that it will be able to reposition the asset and they expect the retail field and the office tenancy to change dramatically and quite rapidly over the next couple of years,ö one observer says.
The fact that Allco has a master lease with Straits Trading, from whom it bought the assets, which guarantees a minimum yield of 6% for six years, means the management can take on this repositioning û and the refurbishment that will go with it û without any impact on its cash flow. After the initial six years, Allco and Straits Trading will share the upside.
In addition, the office markets in both Singapore and Perth are expected to see strong growth over the next couple of years. In Singapore there is only one new office building being completed û the Raffles Plaza û which is already about 90% rented, and in Perth there is virtually no new supply at all in the next two years.
Because of the boom bust cycle in the early 1990s, developers and banks have been unwilling to go ahead and fund or build new office buildings without a high degree of certainty that there was going to be take-up for them. This means there is now zero supply despite the onset of another boom, analysts say.
The aim is to make Allco Reit a pan-Asian trust and the manager, which is majority-owned by Allco Finance, will almost certainly look for potential acquisitions in Hong Kong as well as further assets in Singapore, they believe.
ôThe focus is prime commercial property and they want to find what they view as undervalued properties, such as China Square, which they can reposition in four or five years and then start to charge rents accordingly,ö noted one observer.
Investors will be asking themselves whether they believe Australia-based Allco Finance, which aside from property is also active within transport leasing and airport finance, will be able to find similar high-quality assets and negotiate as favourable contracts in other parts of Asia to deliver on its growth strategy.
Allco may initially offer a dividend yield that is more attractive than other Singapore-listed Reits, but investors buying the three Reits in Hong Kong have pushed yields to such low levels that there is no question they are focusing on capital growth rather than a stable bond-like income. They are unlikely to be impressed by the additional few basis points of yield.
And while the cross-boarder nature of the Allco Reit may be an advantage in terms of tax and diversification, it will also bring higher risks in the form of foreign exchange fluctuations and interest rate differentials that investors will have to take into account.
But perhaps the greatest challenge for any sponsor bringing out a Reit at the moment is the fact that the pipeline is bulging with alternatives. In Hong Kong alone there are at least seven companies seriously considering issuing Reits and in Singapore there are five, including a serviced apartment Reit that is currently in the process of being spun-off from Ascott Holdings through an exclusive rights offer to the companyÆs existing shareholders.
All of these will try to differentiate themselves in one way or another to attract investors, which suggests the sector will more and more become a buyers market.
AllcoÆs roadshow is expected to start next Wednesday and will wrap up on March 21 ahead of the retail offering. The shares are expected to start trading in the final week of March.