Fortune Real Estate Investment Trust has announced a HK$1.889 billion ($244 million) renounceable rights issue, which will be used as part payment for the HK$2.09 billion ($270 million) acquisition of three shopping malls in Hong Kong.
Backed by Li Ka-shing's Cheung Kong Holdings, Fortune is listed in Singapore but its existing portfolio of 11 retail malls and properties are all located in Hong Kong. Unusually, the stock also trades in Hong Kong dollars.
The rights issue is interesting because, according to bankers, it is really the first among the recent Singapore Reit fundraisings that is principally about supporting growth, as opposed to recapitalisation or debt refinancing. As such, it may well signal that the sector has finally turned the corner after the prolonged slump and is now ready to expand again. However, the rights issue is part of a wider financing package that also includes a HK$3.58 billion three-tranche bank loan, of which the largest tranche will be used to refinance an existing term loan.
Both the rights issue and the bank loan are arranged by DBS and Standard Chartered. The two banks are also underwriting half of the rights issue, in equal parts, while the remainder is underwritten by Cheung Kong entities.
According to a statement on Monday, Fortune will offer existing shareholders one new unit for each unit they already own at a price of HK$2.29 per unit. The price represents a 44.1% discount to last Friday's closing price of HK$4.10 and a 28.3% discount to the theoretical ex-rights price (Terp) of HK$3.20. It also equals a discount of 54% versus Fortune's pro forma net asset value after the completion of the rights issue, which is estimated at HK$4.98 per unit.
Focus Eagle, a wholly owned subsidiary of Cheung Kong which owns 25% of Fortune, has committed to take up its full entitlement of 25% and will also underwrite an additional portion of the rights issue for a total take-up of 43.2% of the deal. And Ballston, which is a wholly owned subsidiary of Cheung Kong subsidiary Hutchison Whampoa, will take up its entire entitlement of 6.8%.
The acquisition of the new malls, which like the rest of Fortune's portfolio are located away from Hong Kong's Central business district in Kowloon and the New Territories, will enhance the diversification of the Reit's portfolio, increase its economies of scale, and improve its liquidity in its shares thanks to the rights issue.
But because of the new units issued as a result of the rights issue, the acquisition will not be yield enhancing. In fact, the dividend yield will drop to 7.2% when calculated against the Terp from 9% based on last Friday's closing price. Using balance sheet data from the end of 2008, the net asset value per unit will drop to HK$4.80 per unit after the transaction from HK$7.50 before. But Fortune Reit's total NAV will increase to HK$7.9 billion from HK$6.2 billion. The total portfolio value will increase to HK$11.1 billion from HK$8.9 billion.
Compared with the paltry interest rates offered on Hong Kong savings accounts, however, the new rights units are offering quite a significant return.
"Being able to get yield is an attractive thing for investors, therefore we believe people will support this," said one source close to the deal.
That said, the reduction in the dividend yield and NAV per unit is likely to have been a contributing reason for the 10.5% dip in Fortune's share price on Monday after the announcement. On Tuesday the stock recovered somewhat, gaining 3.8%, only to fall another 3.2% yesterday. The latest close of HK$3.69 puts the stock 10% below where it closed on Friday.
The stock has had a massive run since it registered a low of HK$1.61 in early December last year, however, and even after the losses over the past few days, it is still up 121% since then, making it the best performer in the Singapore Reit sector this year.
According to a circular issued to its existing investors, the new properties -- Metro Town in Tseung Kwan O, Caribbean Bazaar in Tung Chung and Hampton Loft in Hoi Fan Road, Kowloon -- are strategically located in high population growth areas and at regional transportation hubs and are expected to benefit from growing demand. They are already more than 95% occupied on average, which is above the Hong Kong retail occupancy average of 91.3% in 2008.
Metro Town, which Fortune is buying from Cheung Kong and Nan Fung Development, is the largest of the three malls with a gross rentable area of 180,822 square feet. This makes it a rare find in Hong Kong where shopping centres in good locations tend to be tightly held by the developers. Since 2004, only three shopping centres larger than 120,000sqf have changed hands. As of June 30, the property was valued at HK$1.48 billion by two independent property valuers and the acquisition cost is HK$1.45 billion.
Hampton Loft is also being bought from Cheung Kong (for HK$159 million), while Caribbean Bazaar is being acquired from MTR Corp, the operator of Hong Kong's underground and railway lines (for HK$428 million).
Fortune said it will use HK$1.59 billion of the proceeds from the rights issue to finance the acquisition, while HK$111.4 million will go towards working capital and other general corporate purposes. It will set aside $100 million for "asset enhancement initiatives".
The rest of the money for the acquisition will come from a HK$480 million acquisition facility due on June 28, 2010, which carries an interest rate of Hibor plus 2% and makes up tranche A of the bank loan. Tranche B is a HK$2.83 billion term loan, also referred to as the refinancing facility, which will be drawn on or before June 28, 2010, and will be used to refinance an existing HK$2.35 billion term loan facility due on that date as well as the HK$480 million acquisition facility. Tranche C comprises a HK$270 million revolving loan facility, which will be used for corporate funding purposes.
Thanks to the rights issue, Fortune Reit's gearing will fall to 24.9% after the acquisitions from 25.7% before.
The acquisition of the properties is subject to approval by Fortune Reit's existing unitholders at an extraordinary general meeting on September 11 and the rights issue is also subject to the unitholders' approval of a whitewash waiver. The latter will ensure that Cheung Kong doesn't have to make a mandatory offer should the rights issue lead to an increase of its existing stake in Fortune.
The definitive time table for the rights issue has yet to be determined, but as of now it is expected that the nil-paid rights will be tradable on the Singapore Exchange between September 23 and October 1 and that the subscription period will close on October 7.