Mapletree Greater China Commercial Trust (MGCCT) has attracted 11 cornerstone investors to support its initial public offering, which is seeking to raise between S$1.52 billion and S$1.61 billion ($1.2 billion to $1.3 billion).
The cornerstones, which include real estate specialists, insurance companies, sovereign money and other long-term investors, will buy 55.1% of the total offering, implying a combined investment of about $678 million at the bottom of the price range. The largest among them are real estate specialist CBRE Clarion Securities and Norges Bank Investment Management, the manager of Norway’s oil revenues, which will each invest at least $94.5 million.
The issuer has also lined up numerous anchor investors and according to a source, the deal is already well covered when the institutional bookbuilding starts today. The anchors are said to be similar in type to the cornerstones and since there is no lock-up on the latter, the only real difference between the two types of investors is that the anchors aren’t disclosed in the prospectus.
Their combined support should help attract other investors to the deal and will essentially guarantee that the offering is successful, which is important since it is the first IPO of size in Singapore this year. Even at the bottom of the range, it is also the biggest Reit IPO in Singapore ever and the second-biggest in Asia after Hong Kong’s Link Reit, which raised $2.8 billion in connection with its listing in 2005.
MGCCT is the fourth Reit to be sponsored by Singapore developer and property owner Mapletree. It will focus on commercial real estate in Hong Kong and in first- and second-tier cities in China and will have two properties in its portfolio at the time of listing — the Festival Walk shopping mall in Hong Kong and the Gateway Plaza office complex in Beijing.
The two properties have a combined valuation of S$4.3 billion ($3.5 billion).
Some 65% of the trust will be offered to public investors, while the remaining 35% will be bought by entities owned by Mapletree. The sponsor’s stake will fall to 32% if the greenshoe is exercised in full. The greenshoe will be all secondary units and will account for 10.3% of the portion of the IPO sold to investors other than the cornerstones. If it is exercised it could increase the total proceeds to S$1.68 billion ($1.4 billion).
MGCCT will sell a total of 1.73 billion units to public investors and cornerstones. The latter will take up 953.475 million of the units (55.1% of the IPO), while 511.279 million units (29.6%) will be offered to institutional investors and 265.357 million (15.3%) to retail investors and to directors, management, employees and business associates of the Mapletree group.
The units are offered at a price between S$0.88 and S$0.93 each, which will translate into an implied yield of 5.6% to 6.0% for the fiscal year to March 2014 based on the trust’s own revenue projections.
The final price will be determined after the institutional bookbuilding closes on February 25 and the listing is scheduled for March 7.
This is quite attractive versus its key comparables, particularly Link Reit, which trades at a one-year forward yield of about 3.6%, according to one syndicate research report. Hong Kong-listed Link Reit owns and operates a large number of retail assets formerly owned by the Hong Kong government and is viewed as a key comp since Festival Walk will account for about 76% of the MGCCT’s total property value and 75% of the rental income.
Fortune Reit, which focuses on retail properties in Hong Kong and is listed in both Hong Kong and Singapore, is trading at a one-year forward yield of 5.1%, while Hong Kong-listed Champion Reit, which owns both retail and office properties, is offering a yield of 5.3%.
CapitaRetail China Trust, which is listed in Singapore, but owns and operates retail properties in mainland China, is trading at a 5.7% yield on a one-year forward basis, according to the report.
MGCCT is forecasting an 8.6% increase in its distribution yield in the fiscal year to March 2015, bringing the yield on offer to 6.1% to 6.5%. This increase is based solely on organic growth assumptions, including step-up rents, renewals of expiring leases, new leases and growth in turnover rent. Any potential acquisitions, asset enhancement initiatives or redevelopment works could lift the yield even further.
The yield is viewed as particularly attractive as it doesn’t involve any form of structuring to artificially increase the payout — a feature that investors have shown time and again that they don’t like, even if it does result in a higher return in the first one or two years. Indeed, the use of artificial revenue-boosting measures is viewed as a key reason why Dynasty Reit failed to attract much interest from institutional investors for its Singapore IPO in October last year and ended up cancelling the deal.
Dynasty Reit was sponsored by Li Ka-shing’s ARA Asset Management and was set to focus on commercial properties in China. It was aiming to raise up to $777 million.
According to a source, the yield offered by MGCCT is supported by the high quality of the assets and the fact that Mapletree is selling the two properties to the Reit at a reasonable price — the acquisition cost will be on par with the independent valuation if the IPO is priced at the top of the range and at a 3% discount if the IPO price is fixed at the bottom.
Also helping to support the yield is the fact that the Reit will have a gearing of about 40% at the time of listing.
As per the listing prospectus, the manager of MGCCT believes that an investment in this Reit will provide investors with “an attractive risk-return proposition, given the proven, stable and resilient performance of its high quality premium assets with an attractive yield plus growth return profile.”
Festival Walk in particular is viewed as a very safe asset that is ensuring a steady cash flow for the Reit. It was opened in 1999 and has been pretty much 100% occupied since then. The rental income has also increased consistently year-on-year since inception, even in the tough years during Sars and the global financial crisis.
The Mapletree group acquired the mid- to up-market shopping mall in Hong Kong’s Kowloon Tong district from Swire Properties in August 2011 for $2.4 billion.
Meanwhile, Gateway Plaza offers significant rental growth upside, driven by a robust supply and demand dynamics in Beijing’s office market and a lack of comparable properties.
The grade-A office complex is located at the crossroads between the third ring road and the airport expressway in Beijing, and consists of two office towers connected by a retail podium. It is currently about 97% to 98% occupied with prime tenants like BMW, John Deere, Bank of China, Posco, BASF and United Airlines.
Gateway Plaza was previously part of RREEF China Commercial Trust (RREEF CCT). Mapletree bought the asset when RREEF CCT was broken up and delisted from the Hong Kong stock exchange in 2010.
The Mapletree sponsorship is another key selling point for MGCCT. As noted, the group already has three other Reits — Mapletree Logistics Trust, Mapletree Industrial Trust and Mapletree Commercial Trust — and observers note that investors have done pretty well from these other entities.
Mapletree Logistics Trust, which was the first of the three to go public, has seen its portfolio grow approximately 10 times since the IPO in 2005 and as of the end of last year, it traded at a 27% premium to net asset value. Its unit price was up 68.4% from the IPO price at the same time, the listing prospectus shows.
A 100% subsidiary of Temasek Holdings, Mapletree also has several unlisted real estate funds, some of which own commercial assets in Greater China that may be injected into MGCCT in the future. The manager of MGCCT is wholly owned by the sponsor.
MGCCT will pay the manager based on the distribution growth, which will give it an added incentive to increase dividends. Normally, Reit managers in Asia are paid a fee based on the value of the assets. Under the trust deed, the manager will receive an annual base fee of 10% of the distributable income plus a performance fee of 25% of the increase in dividends per unit.
The key risk for MGCCT — and for investors — is likely to be the cross border nature of the portfolio, as this leaves it exposed to exchange rate fluctuations. The manager says it will use hedging strategies where appropriate to manage both its foreign exchange exposure and any potential interest rate volatility.
The following institutions will support the deal as cornerstone investors: CBRE Clarion (132.8 million units), Norges Bank Investment Management (132.8 million units), Henderson Global Investors (113.7 million units), Newton Investment Management (107.5 million units), AIA (92.4 million units), Hwang Investment Management (92.4 million units), Morgan Stanley Investment Management (66.67 million units), Asdew Acquistitions (53.8 million units), Columbia Wanger (53.8 million units), Myriad Asset Management (53.8 million units), and Phileo Capital (53.8 million units).