Perennial kicks off $862 million business trust IPO

Focusing on retail malls in China, Perennial China Retail Trust offers investors a unique opportunity to buy into property projects still under development.

Perennial China Retail Trust (PCRT), a business trust focusing on the development and operation of retail malls in China, Hong Kong and Macau, has set the terms for its initial public offering and will kick off the investor roadshow today. The trust is seeking to raise S$1.1 billion ($862 million) from the sale of 98% of its share capital to public investors and seven cornerstones at a fixed price of S$1 per unit.

The listing vehicle is sponsored by Perennial Real Estate, a Singapore-based company involved in various real estate-linked businesses including development, investment, asset management and capital raising. Perennial was founded in 2009 by well-known Singapore entrepreneur Pua Seck Guan, who has a long background with the CapitaLand group where among other things he ran the retail property unit. The latter has since been transformed into CapitaMalls Asia, which like PCRT is involved in the development of retail malls.

Since 2002, Pua has acquired, developed and managed more than 110 retail malls in Asia, of which 70 were in China. He left CapitaLand in 2008. While Pua will not invest much money in PCRT himself – he is investing S$10 million through Perennial -- he will act as the CEO of the Trustee-Manager, which will be 88% owned by Perennial. The remaining 12% will be owned by Hong Kong-based real estate developer Nan Fung Group, which has a lot of development experience in China, although primarily within the residential and office sectors.

While structured as a business trust, PCRT will be quite unique in that it is not primarily a yield play. In fact, the yield suggested by the offering price and the profit forecasts for the next couple of years, is well below that offered by China-focused Reits like CapitaMalls Asia. Instead, this trust is all about growth in net asset value, which will come as more malls are completed and begin operations.

At the time of listing, PCRT will have two assets in its portfolio – a 50% stake in an eight-level furniture mall plus car park that began operations in October last year, and another 50% in a 10-level shopping mall that is due to open in the second quarter this year (this project also includes two adjoining office towers due for completion in the second quarter of 2012. Both these assets are based in Shenyang and are owned in partnership with Tong Jinquan and his Shanghai Summit Real Estate Development group.

In addition PCRT 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.

PCRT has committed to pay at least 90% of its distributable income as dividends in 2011 and 2012, which based on its profit forecasts will result in a yield of 3.02% this year and 3.08% next year. By comparison, CapitaRetail China Trust, a China-focused Reit sponsored by CapitaMalls Asia, trades at a yield of approximately 6%. At the time of listing, the net asset value is estimated at S$0.96 per unit, based on an independent valuation of the existing properties. However, analysts put the NAV at a significantly higher S$1.25 to S$1.40 when also including the two malls still under development. And it can go even higher, if PCRT decides to gear up. The trust will have no debt at the time of listing, but may take on a gearing of up to 60% in the future, according to the prospectus.

Investors will be banking on Pua’s ability to successfully execute on the development properties in the portfolio. In addition to those, together with its Chinese partner, the Summit Group, PCRT also has a first right to develop shopping malls linked to the high-speed rail networks in three cities in China – Changsha, Chengdu and Xi’an. So far his execution track record is impressive and according to people familiar with his work, his rollerdex of potential tenants to fill the malls once completed is second to none. However, there is also always a risk when it comes to investing in unfinished buildings and since PRCT is the first business trust to offer this a business plan, some investors may be cautious.

The line-up of cornerstones suggests that big long-term investors have a lot of faith in Pua’s abilities and relationships, however. The seven cornerstones will buy a combined 432 million units in the IPO, which will account for 38.8% of the total deal and require a total investment of about $338 million. The cornerstones are AEW Capital Management, AIA Group, CB Richard Ellis Global Real Estate Securities, Henderson Global Investors, Lion Global Investors, a unit of Nan Fung Group named Cosmo Top, and Prudential Asset Management.

Aside from the cornerstone tranche, PCRT is offering 660.2 million units, or 59.3% of the total share capital, to international institutions and Singapore retail investors. The final split between these two tranches has yet to be determined, but Singapore retail investors typically get allocated between 5% and 10% of IPOs. The remaining 1.9% of the trust will be owned by Perennial and Perennial China Retail Trust Management, which will be responsible for the day-to-day management and operations of the trust.

The trading debut is scheduled for March 16, two days before the expected listing of Hutchison Port Holdings Trust, which is made up of ports assets in Guangdong and Hong Kong that are being spun off from Hutchison Whampoa. HPH Trust is expected to raise about $6 billion.

DBS, Goldman Sachs, and Standard Chartered are joint bookrunners for the PCRT offering.

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