SPH Reit to kick off Singapore IPO of up to $393 million today

SPH Reit, the real estate investment trust that is sponsored by Singapore Press Holdings, has decided to go ahead and launch the institutional bookbuilding for its Singapore initial public offering today. The issuer had initially been expected to kick off the roadshow on June 20, but chose to hold off on the deal after it finished pre-marketing due to the volatile market environment.

The Singapore Strait Times index (STI) is still down 1.1% since then, but regional markets have stabilised somewhat during the past two weeks and yesterday, the STI closed 3.4% above its June 24 low.

SPH Reit is seeking to raise between S$475.9 million and S$503.9 million ($371 million to $393 million) from the base deal, which will account for 22.4% of the trust. The deal also comes with a 10% overallotment option. If that is exercised in full, the total proceeds could increase to as much as S$554.3 million, which is in line with the S$540 million that Singapore Press Holdings initially said it was aiming to raise.

The money will be used to pay for the acquisition of the two properties that will make up the initial portfolio — the Paragon mall and office complex on Orchard Road and the Clementi Mall, a mid-market suburban mall in the west of Singapore. SPH Reit will pay a combined S$3.07 billion ($2.4 billion) for the two properties, with the balance to be covered by bank borrowings and the issue of new units to the vendors.

SPH Reit has lined up five cornerstones, including Norges Bank, the manager of the Norwegian sovereign wealth fund, and Morgan Stanley Investment Management, that will take up a combined 251 million units, or 44.8% of the base offering.

In addition to that, the three bookrunners have also used the two-and-a-half weeks since the issuer decided to postpone the roadshow to firm up additional anchor demand. Base on those indications and the cornerstone commitments, the total demand already exceeds the deal size, according to one source. Singapore-based institutions account for a large portion of this demand, but the anchors also include global long-only accounts and hedge funds, the source said.

Clearly the issuer, and its bankers, feel confident that they will get the deal done with that much demand already lined up, which explains why they have decided to go ahead even though the equity market is still feeling shaky and quick to respond to negative news.

OUE Reit, which is sponsored by Stephen Riady’s Overseas United Enterprise, is looking at a similar solution and may also launch its offering in the next couple of weeks before the sponsor runs into an earnings-related blackout, one source said yesterday. It too chose not to launch the deal as planned after it finished pre-marketing and obtained a shareholders’ approval on June 25.

The trust is aiming to raise about S$900 million, according to sources, and will comprise one hotel and an immediately adjacent shopping mall along Orchard Road.

SPH Reit is offering 559.884 million units at a price between S$0.85 and S$0.90, which translates into a 2013 yield of 5.7% to 5.9%. The yield for the fiscal year to August 2014 is 5.8% to 6.0%.

The Reit is using no financial engineering to artificially boost the yield, although the manager of the trust, which is owned by Singapore Press Holdings, will receive its fees in units until the end of fiscal 2014. After that it can choose whether it wants to receive cash or units.

The vendor of the Clementi Mall, which opened in 2011, will also provide income support to ensure that the new property income doesn’t fall below S$31 million per year in the early years. The income support will remain in place for five years from the listing date, but will amount to a maximum of S$20 million. The projected income support for fiscal 2014 is S$4.7 million, which represents 18.1% of the projected net property income for the mall, according to a preliminary prospectus published yesterday.

Excluding the income support, the implied yield for fiscal 2014 would be 5.6% to 5.8%, the prospectus show. The income support is expected to account for a decreasing percentage of the net property income as the mall matures and its performance stabilises.

In addition to the 44.8% being taken up by the cornerstones, 40.2% of the base deal will be offered to institutional investors, while 15% has been set aside for Singapore retail investors.

The Reit will also issue approximately 1.94 billion units to the vendors of the properties, which aside from Singapore Press Holdings include a supermarket cooperative and an insurance cooperative run by the Singapore Federation of trade unions, NTUC.

Singapore Press Holdings, the media company that publishes the Singapore Straits Times and numerous other newspapers and magazines, will own 72.2% of SPH Reit at the time of listing, while NTUC Fairprice and NTUC Income Insurance will each own 2.7%. The cornerstone investors will together hold 10% and other public investors 12.4%.

As the overallotment option is made up of all secondary shares coming from the sponsor, the stake held by Singapore Press Holdings will fall to 70% if that is exercised in full, while the portion held by public investors other than the cornerstones will increase to 14.6%.

The sponsor has earlier said that the listing of the Reit will help unlock value in its properties and will allow the group to pursue growth strategies across its various business lines. It will also use part of the proceeds received from the sale of the properties to pay a special cash dividend of S$0.18 per share to its existing shareholders. The proposed divided is quite significant as it is equal to 75% of the dividend paid for the entire financial year to August 31 last year.

Singapore Press Holdings’s shareholders approved the listing at an extraordinary shareholders meeting on June 18.

The biggest of the two properties in the initial portfolio is Paragon, which is expected to account for about 80% of the net property income in the 2014 fiscal year. The property includes an upscale retail mall, a 14-storey office tower and another three-storey tower that sits on top of the retail podium and houses more than 60 medical and dental specialist clinics and offices.

It has a committed occupancy rate of 100% and generates a net property income yield of 4.8%.

The institutional order books will close next Tuesday (July16) at the latest and the trading debut is scheduled for July 24.

Credit Suisse is the sole global coordinator and a joint bookrunner together with DBS and OCBC.