The real estate sector's moment in the sun continued late on Thursday, as Suntec Real Estate Investment Trust attracted decent demand for its S$300 million ($223 million) convertible bond sale, despite aggressive pricing.
It becomes the latest in a string of trusts to tap markets in recent months. Trusts managed by China's Forchn Holdings, Australia's Frasers Centrepoint and Manulife, offering a US office portfolio, have all launched Singapore IPOs since April. Hong Kong's Link Reit tapped the green bond market last month. That broke a long string of inactivity on the reit front, and all found a receptive audience despite economic uncertainty. Where Suntec stands apart is that it went down the convertible debt route.
Baa2-rated Suntec Reit is no stranger in the convertible debt market, having issued its debut S$250 million bond in 2008 and another S$280 million deal in 2013, which reverted to the company in March this year.
The Singapore-listed property manager is also well-known for its tight pricing. In the latest example, it settled the bond sold in 2013 at a coupon and yield of 1.4%, the lowest ever from a Reit in Asia ex-Japan.
Initial terms for the new five-year/three-year put deal were equally tight, being offered at a fixed 20.75% conversion premium that translated to a final conversion price of S$2.101. That is higher than the stock’s S$2.09 all-time high achieved in 2007, before the financial crisis.
The bond was marketed with a coupon and yield range of between 1.375% and 1.75% before settling at the wide end. While on paper that represents a 35bp pickup to the 2013 deal, pricing for the new bond is actually tighter when factoring in the roughly 80bp pickup in Singapore’s 3-year swap offer rate, according to a source familiar with the situation.
The deal came with another benefit for the issuer. Suntec only needs to adjust the conversion price — offering dividend protection to investors — when it pays annual dividends over 4%. The last dividend yield the Reit paid investors was 5.9%. At that rate, investors would only get dividend protection on 1.9%.
Such tight pricing should be pleasing from the issuer’s perspective, particularly when Suntec Reit is rated only two notches above high-yield credit.
Still, the fact that Suntec Reit’s new bond is tied to an acquisition perhaps helped attract some demand. According to a company statement last week, the Reit will use the proceeds to partly fund the acquisition of a 50% interest in a retail and commercial complex in Melbourne for A$289 million ($222 million).
In the end, the new deal was well-covered with more than 40 accounts in the final book, according to the source. Incremental demand allowed the issuer to fully exercise the attached S$50 million upsize option on top of the S$250 million base offering.
Allocations were skewed towards outrights with the top 10 accounts taking about 60% of the deal, the source told FinanceAsia.
Reits are not frequent issuers in the convertible debt space, given that investors normally get higher returns from regular dividend payments, making the instrument unappealing to many of them.
In Suntec’s case, regulator investors are getting a 5.9% yield from buying the Reit units, representing a 415bp pickup to the 1.75% convertible bond.
Yet for typical convertible bond investment managers, Suntec Reit’s new deal could be attractive given that it has a high bond floor, offers a coupon, and is sold by a rated issuer.
Underlying assumptions were a bond floor of 98.8% and 17.5% implied volatility based on a 130bp credit spread and 50bp borrow cost. Fair value of the bond is around 101 when pricing with a 20% stock volatility assumption.
Suntec Reit’s new bond was sparsely traded in Asia early Friday and was quoted at a bid/ask of 100%/100.25%.