Perennial China Retail Trust (PCRT) has raised S$776 million ($627 million) from its initial public offering, including S$20 million that it got from selling units to its ultimate sponsor, Singapore retail real estate veteran Pua Seck Guan. The trust will start trading in Singapore on June 9.
PCRT, which is structured as a business trust, focuses on the development and operation of retail malls in China, Hong Kong and Macau. It initially sought to complete a S$1.1 billion ($862 million) IPO in March, but that deal was called off before pricing due to the volatility in global markets. Investors also had a number of concerns related to the structure of the trust and after deciding to postpone the offering, the deal was restructured to take their feedback into account.
While the final demand wasn’t huge — sources say the institutional portion of the deal was close to 1.4 times covered — the fact that the deal got out the door shows that the restructuring did work.
One of the key differences is that two of PCRT’s China partners, the Shanghai Summit Real Estate Development group, which is its 50-50 joint venture partner in the five properties in its initial portfolio, and Nanhai Nenking (Holdings) Group, agreed to participate in the IPO as cornerstone investors. As a result, their relationship with the group has been firmed up and their interests better aligned with that of the trust. The Summit group, which is controlled by Tong Jinquan, agreed to invest S$30 million and Nenking, through a subsidiary called Vantage Up, bought $20 million worth of units. On top of that, the Summit group also invested an additional S$87 million in the IPO through the placement tranche, which means it will own 14.9% of PCRT at the time of listing.
Also, the acquisition price of PCRT’s 50% stake in the three properties in Shenyang that make up about 50% of its initial portfolio, have been reduced by 10%. At the same time, the fees payable to the management company and the trustee have been cut by about 10% after investors argued that the original fees were too high.
Another important improvement is that instead of just having a right of first refusal to buy at least 50% of the commercial component of the developments linked to the high-speed rail networks in the Chinese cities of Changsha, Chengdu and Xi’an, PCRT now has an option to buy the stakes in Chengdu and Xian. This makes the pipeline more solid and means that these assets can now be included into the future asset valuation of the trust. Collectively they have a value of at least S$3 billion, PCRT said in the prospectus.
And to further increase the attractiveness, the offer price per unit was lowered to a range between S$0.70 and S$0.76, from a fixed price of S$1 in March. Aside from reducing the overall size of the deal, this also means that the 2011 yield increased to 5% to 5.3% from 3%, based on PCRT’s own profit forecasts and a commitment to pay at least 90% of its distributable income as dividends in 2011 and 2012. The final price was fixed on Friday at the bottom of the range at S$0.70 for a yield of 5.3% and a 2012 yield of 5.5%.
However, even though the yield is significantly higher than the last time around, PCRT isn’t really viewed as a yield play since a large portion of its portfolio is comprised of development properties. Bankers working on the deal referred to it as being uniquely positioned between real estate investment trusts (Reits) and the Chinese developers. Indeed, many investors were said to have come into the deal mainly because of PCRT’s growth potential, although there was also a fair amount of demand from private wealth accounts, which tend to like high-yielding stocks.
Private wealth money was the main reason why the order book was covered on the first day, but in the end, sources said their allocations were cut back in favour of “real” demand from institutional investors, including real estate specialist funds and Hong Kong and China funds. Most of the demand came from Asia, but with some interest out of Europe as well.
Based on the final price, PCRT ended up selling a total of 1.08 billion new units to institutional, retail and cornerstone investors. The eight cornerstones invested a combined S$362 million and will own 46.1% of the trust at the time of listing. Aside from Summit Group and Nenking, they also included AEW Capital Management, Asdew Acquisitions, a Singapore investment company that will also own 10% of the PCRT management company, CB Richard Ellis Global Real Estate Securities, Henderson Global Investors, a unit of Nan Fung Group named Cosmo Top, and Prudential Asset Management.
AIA and Lion Global Investors, which were both part of the cornerstone line-up in March, didn’t return as cornerstones for the restructured deal. However, a source said both firms participated in the deal through the institutional tranche.
The retail tranche, which will remain open until June 7, will account for 4.8% of the total deal. In all, 50.2% of PCRT will be owned by institutions other than the cornerstones and retail investors when the trust starts trading next week. The cornerstones will own 46.1% and Pua and the management company will own a combined 3.7%.
Pua has doubled his economic commitment to the trust to S$20 million from the S$10 million he planned to invest in March and will also act as the CEO of the Trustee-Manager, which will be 78% owned by Perennial. Hong Kong-based real estate developer Nan Fung Group, which has a lot of development experience in China, will own 12% and Asdew the remaining 10%.
Perennial was founded in 2009 by Pua, who has a long background with the CapitaLand group, where among other things he ran the retail property unit. Since 2002, has acquired, developed and managed more than 110 retail malls in Asia, of which 70 were in China.
At the time of listing, PCRT will have five assets in its portfolio with a combined value of approximately Rmb5.9 billion ($908 million) — a 50% stake in an eight-level furniture mall plus car park that began operations in October last year; another 50% in a 10-level shopping mall that is due to open in the second quarter this year; and 50% in two adjoining office towers due for completion in the second quarter of 2012. These assets are based in Shenyang and are owned in partnership with the Summit group.
It will also hold the rights to acquire 100% of two shopping mall developments in Foshan and Chengdu, respectively, which are due to be completed in 2013-2014. As these are finished and start to generate revenues, PCRT’s yield and net asset value should grow significantly, observers say.
The net asset value is estimated at S$0.67 per unit, based on an independent valuation of the existing properties. Adjusted to take into account the two shopping mall developments in Foshan and Chengdu, NAV increases to S$0.99 per unit, according to the prospectus.
The deal was led by Citi, DBS, Goldman Sachs and Standard Chartered. Citi wasn’t part of the March deal, but joined the other three to help restructure the deal.