The IPO, which comes less than two weeks after Cambridge Industrial Trust had to pull its REIT offering due to a lack of demand among institutional investors, suggests there is still life in the Singapore REIT sector now that global equity markets seem to be stabilising following a six-week sell-off.
It also shows that investors are still happy to buy steady yield plays in a rising interest rate environment when they can envisage potential for rental income improvements and asset growth down the road.
This should be good news for CDL Hospitality Trusts which is currently in the market trying to raise up to S$382.5 million ($239.2 million) from the sale of 60.9% in two separate trusts paired together as one unit.
FCT, which has three shopping malls in its portfolio and has identified two more potential acquisition targets currently owned by its sponsor, sold 241.93 million units to institutional investors and is offering another 20 million units in a 4.5-day public offering that opened yesterday (June 27). The public offer includes 8.5 million units that have been set aside for directors and employees of the sponsor and its parent company.
The remaining units, equal to 57.4% of the total trust, will be retained by the sponsor, Frasers Centrepoint Ltd, through two wholly-owned subsidiaries. There is a 15% greenshoe option that will come out of the sponsorÆs stake if it is exercised.
The offer is arranged by DBS, OCBC Bank and UBS.
The price was fixed at S$1.03 per unit, after the deal was marketed to potential investors in a range between S$1.00 and S$1.07. The final price corresponds to a 0.96% discount to net asset value and will result in an annualised yield of 5.50% for the period from listing until September 30 this year based on a forecast distribution of 2.83 Singapore cents per unit.
In the next fiscal year (October 1, 2006 û September 30, 2007) the payout is expected to increase to 5.86 cents per unit, resulting in a yield of 5.68%. The company intends to pay out 100% of its taxable income in these first two periods and at least 90% thereafter.
The projected returns compare with a forward yield of about 5.7-5.8% for CapitaMall Trust, which investors regarded as the key comparison for FCT, meaning the newcomer was actually priced at a premium to its more established peer.
As a group, the 10 Singapore-listed REITs trade at an average forward yield of about 5.6%.
One observer says investors liked the fact that FCT was offering a ôcleanö yield without any financial engineering to boost the returns in the early years and also had great confidence in the sponsor and its ability to deliver on its growth strategies.
The order book was said to have been about two times covered with good demand from top tier European and global accounts, despite the tight price versus the comparables.
ôWe wonÆt be seeing too many deals with oversubscription rates of eight or 10 times like we did two months ago as the momentum players and speculative funds that tend to leverage up their orders have become much more cautious,ö notes one source. ôBut itÆs very clear from this IPO that quality institutional accounts still have the confidence to commit new money to the market and thatÆs encouraging.ö
Frasers Centrepoint Ltd. (FCL) is the wholly-owned property arm of Fraser & Neave, which is one of the largest listed companies in Singapore with businesses ranging from food and beverage to printing and publishing. Having begun as a single shopping centre property company in 1990, FCL has evolved into one of the fastest growing and most reputable real estate owners and developers in Singapore, according to FCTÆs listing document.
The listing candidate is expected to leverage that expertise, which includes the management of seven shopping malls, and to derive synergies through joint advertising and promotions..
The sponsor has also granted FCT a right of first refusal for five years with regard to future sales of the Centrepoint shopping complex on Orchard Road and the Yishun Property. If it ends up buying both these properties, the net lettable area in FCTÆs portfolio would increase by more than 400,000 square feet, or about 62.5% compared with its current holdings.
ôThe pipeline may not have 20-30 names in it, but this is the first (Singapore) REIT that has identified any of the potential acquisition assets at the time of listing. Investors are viewing that as a good indication that it will end up buying them,ö says one observer.
A modest initial gearing of 30% should ensure it will be able to raise the financing needed for such expansion.
The portfolio currently includes three Singapore retail properties with a combined value of S$915.2 million, of which the seven-storey Causeway Point shopping and entertainment complex in the heart of Woodlands is the largest. The other two are the Northpoint suburban shopping centre in Yishun Town Centre and Anchorpoint, a food and beverage hub located in Queenstown.
According to the listing prospectus, the properties are enjoying stable cashflow and high tenancy demand with a weighted average occupancy rate of 99.1% in the final three months last year and a three-year historical rate of 98.8%, which compares with a market average of 92.6%.
Property consultant Knight Frank forecasts that the average rental rate at the properties will grow by between 2% and 3% in the near term. In fiscal 2005, the trust posted a total rental income of S$66.0 million.
FCT is scheduled to start trading on July 5.
CDL Hospitality Trusts, which is sponsored by Millennium and Copthorne Hotels and is essentially a play on the Singapore tourism industry, is primarily made up of CDL HospitalityREITi (H-REIT), which invests in real estate used for ôhospitalityö purposes including hotels, motels, other lodging facilities, serviced residences and resorts.
It will also include CDL Hospitality Business Trust (HBT), which will be dormant at the time of listing but may eventually end up holding certain of H-REITÆs hotels, if the latter isnÆt able to find a ômaster lesseeö for any of them, as well as other hospitality projects that donÆt fit into H-REIT.
The combined listing vehicle is offering 425 million units at a price between S$0.83 and S$0.90 each, which will give an annualised 2006 yield of 6.16%-6.37%. For 2007 the yield is expected to increase slightly to 6.45%-6.69%.
DBS and BNP Paribas Peregrine are joint bookrunners for the offering, which is expected to close on July 3.