Fortune Real Estate Investment Trust, which is backed by investor Li Ka-shing and focuses on shopping malls and other retail properties in Hong Kong, has raised HK$975 million ($125 million) from a sale of new units, after upsising the deal by 23.5%.
The deal attracted about 50 accounts, with allocations heavily skewed towards long-only investors and current unitholders, according to a source close to the placement.
The price was fixed just below the mid-point of the range, resulting in a 4.3% discount to the average close on Monday. Fortune Reit is listed both in Singapore and Hong Kong, and the average close referred to the mid-point of the latest price in each of these two markets.
The funds raised will be used to part-finance the proposed acquisition, announced yesterday, of a Hong Kong shopping mall and certain adjacent properties from a company owned by Fortune Reit’s largest unitholder, Cheung Kong Holdings. A memorandum of understanding signed by the Reit manager to buy the newly built Kingswood Ginza Mall is non-binding and the deal is still subject to due diligence, Fortune Reit said in an announcement.
The mall, in Tin Shui Wan in the New Territories, will be added to Fortune Reit’s existing portfolio of 16 malls and retail properties, located mostly in Kowloon and the New Territories.
The indicated acquisition cost of HK$5.849 billion ($754 million), subject to adjustments for net current assets and liabilities, is at a discount of less than 0.2% to the appraised value of the acquisition target.
Before the placement was upsized, Fortune Reit said it intended to use approximately HK$764 million of the net proceeds towards the mall acquisition. The rest of the acquisition would be funded by drawing down HK$5.085 billion under a lending facility to be arranged by DBS and Standard Chartered. That meant that 86.9% of the acquisition would be financed by debt.
The equity portion may increase slightly as a result of the larger placement size, but even so, this is an unusually large percentage of debt for a Reit asset, raising the question of whether the acquisition would actually be yield-accretive without the additional leverage. The assumption was that it wouldn’t.
Fortune Reit provided no answer, saying only that the acquisition is “expected to be yield-accretive and improve the earnings and distribution per unit to existing unitholders”. Further details on the accretive effect will be outlined in the acquisition circular that will be issued to existing unitholders in due course, it added.
Based on the indicated financing structure, Fortune Reit’s gearing ratio will increase to 34.5% from 20.9%. ARA Asset Management (Fortune), which is responsible for the day-to-day management of the Reit, said it believes this [gearing] level is prudent under the current market conditions.
Together with the fact that the proposed acquisition is still under negotiation, the high leverage did give the placement of new units a different look and feel to most other acquisition-related Reit follow-ons. There was some talk in the market yesterday afternoon that the deal had been difficult to sell because of that.
However, the pricing inside the wide end, along with the upsize, told a slightly different story. A source said last night that the deal had attracted strong support from global and regional long-only investors, as well as real estate-focused funds and existing unitholders.
Fortune Reit initially looked to sell 115.728 million units, accounting for 6.8% of the existing share capital. This was later increased to 142.962 units, or 8.4% of the total trust.
The price was fixed at HK$6.82 per unit, versus an indicated range of HK$6.74 to HK$6.92. As mentioned, that translated into a 4.3% discount to Monday’s average close. The shares closed at HK$7.12 in Hong Kong and at HK$7.14 on the Singapore Exchange (where they are quoted in Hong Kong dollars). The discount versus the one-day volume-weighted average price (VWAP) was slightly wider, at 4.4%.
Contrary to usual practice among Singapore-listed Reits, there will be no payout of accumulated dividends to existing unitholders prior to the placement, and investors who participated in the deal will be entitled to all distributions for the period beginning July 1.
Fortune Reit shares were suspended in both Hong Kong and Singapore yesterday in order to carry out the transaction. The deal launched at 12.15pm and the order books were kept open until 7.30pm yesterday.
According to Fortune Reit’s announcement yesterday, the Reit manager expects to sign a share purchase agreement by the end of September. However, the acquisition will need the approval of existing unitholders at an extraordinary general meeting. The date of that meeting has yet to be set.
Aside from the Kingswood Ginza Mall, the proposed acquisition also includes a kindergarten, parking lots and other retail and ancillary spaces. The mall was completed in January 1999 and has an occupancy rate of 95.5%. In the first six months this year it generated a net property income of HK$110.4 million.
It was described in the announcement as the largest shopping centre in the Yuen Long district of Hong Kong, which is located pretty close to the mainland border.
Fortune Reit said it will benefit from the increased portfolio size that will create a stronger platform to enjoy greater operating synergies and economies of scale. Based on data available on its website, the acquisition will increase the value of Fortune Reit’s existing portfolio by about 26%.
DBS and Standard Chartered were joint bookrunners for the placement.