OUE Hospitality Trust is set to price its initial public offering at the bottom of the range for a total deal size of S$600 million ($470 million), according to sources. This comes after SPH Reit confirmed yesterday that it had raised S$503.9 million ($393 million) after fixing the price of its IPO at the top.
The two real estate investment trusts (Reits), which feature assets that are located just across the road from one another, show that investors are still interested in yield plays with good assets — as long as they are priced appropriately.
Based on the final price, SPH Reit, which focuses on retail properties, is offering a yield of 5.7% for 2013 and 5.8% for the fiscal year to August 2014. OUE Hospitality, which focuses on hotels and other hospitality-related properties that are typically more volatile because of their lack of long-term tenants, offers a yield of 7.15% for 2013 and 7.5% for 2014.
However, anecdotal evidence and the different level of demand suggest that many investors chose to put an order in for just one of the two deals, which could indicate that the market capacity for absorbing these kinds of transactions is limited right now. And that in turn could make it difficult for the other listing candidates in the pipeline, which like SPH Reit and OUE Hospitality chose to put their planned offerings on hold when the market turned sour in late May.
One source noted that there is still a lot of uncertainty about where US Treasury yields will be heading in the coming few months and on top of that, many investors are still long of the Reit sector. Hence, they aren’t exactly looking to add new exposure.
According to an announcement by the sponsor yesterday, SPH Reit’s institutional tranche, which accounted for 40.2% of the deal, was approximately 42 times covered. By comparison, sources said the institutional portion of OUE Hospitality’s offering, which made up 56.2% of the deal, was about two to three times covered. The institutional tranches exclude shares set aside for cornerstone investors.
SPH Reit also seems to have attracted about twice the number of investors, even though its IPO was smaller than OUE Hospitality’s. According to a source yesterday, SPH Reit had received more than 100 institutional orders when it closed the order books on Tuesday evening Hong Kong time, while a separate source estimated that OUE Hospitality had attracted about 50 institutional investors when its books closed 24 hours later.
The quality of the assets held by the two vehicles is largely similar, but observers noted that SPH Reit did have greater momentum from the start with a stronger cornerstone tranche and more anchors lined up at launch. Together with its slight timing advantage, that may have made it the more favoured of the two deals.
SPH Reit is due to start trading next Wednesday (July 24), with OUE Hospitality following suit a day later.
SPH Reit, further details
SPH Reit is sponsored by Singapore Press Holdings, which publishes the Singapore Straits Times and numerous other newspapers and magazines.
It has two retail properties in its initial portfolio — the Paragon mall and office complex on Orchard Road (Singapore’s number one shopping and tourist area) and the Clementi Mall, a mid-market suburban mall in the west of Singapore. Both malls have an occupancy rate of 100%, according to the prospectus, which some observers noted may limit the potential upside. However, like with most other Reits, the manager is aiming to create value through an active asset management and asset enhancement strategy that will enable it to continue to raise rents.
It is also expected to acquire at least one other asset from its sponsor, the Seletar Mall, which is under development and scheduled for completion by the end of 2014.
The Reit sold 559.884 million units, which accounted for 22.4% of the trust. The units were marketed at a price between S$0.85 and S$0.90 each and sold at S$0.90. There was said to be very little price sensitivity in the order book.
According to sources, there was particularly strong demand from ultra-high-net-worth individuals and private banks, but there was also good interest from institutional investors, property specialists and companies. Some of the five cornerstones also put in additional orders on top of their guaranteed allocations.
As reported earlier, the bookrunners had enough indications from cornerstones and anchor investors to cover the entire base deal at launch and they did confirm to investors that the deal was covered on day one. This helped drive the momentum and led to the strong oversubscription ratio.
The cornerstones took up a total of 251 million units, or 44.8% of the base deal. In alphabetical order they were Great Eastern Life Assurance, Hong Leong Asset Management, Morgan Stanley Investment Management, Newton Investment Management and Norges Bank, the manager of the Norwegian sovereign wealth fund.
The 5.8% yield that is implied by the IPO price for the fiscal year to August 2014 is at a slight premium to some of the other large Singapore retail Reits. For instance, CapitaMall is currently trading at a 2013 yield of 5.16% and a 2014 yield of 5.5% and Fortune Reit is offering a 2013 yield of 5% and a 2014 yield of 5.35%, according to Bloomberg data.
Mapletree Commercial Trust, whose combined office and retail portfolio includes Singapore’s largest shopping mall, VivoCity, trades at a 5.5% yield for the fiscal year to March 2014.
SPH Reit’s yield includes a small level of income support from the vendor of the Clementi Mall to compensate for the fact that the mall only opened for business in 2011. Without that support, the fiscal 2014 yield would have been 5.6% instead of 5.8%.
The deal comes with a 10% overallotment option, made up of secondary units, which could increase the total proceeds to $432 million if exercised in full.
Singapore Press Holdings will own 72.2% at the time of listing, while two cooperatives under the Singapore Federation of trade unions, NTUC, will each own 2.7%. The cornerstone investors will together hold 10% and other public investors 12.4%.
Credit Suisse was the sole global coordinator and a joint bookrunner together with DBS and OCBC.
OUE Hospitality, further details
The trust is sponsored by United Overseas Enterprises, a real estate company controlled by Stephen Riady. It is listing in the form of a stapled security that contains a Reit as well as a business trust. The latter will be dormant at the time of the listing, however, and the units will be traded as one single entity.
The Reit has two assets in its initial portfolio: the Mandarin Orchard Singapore, an upscale hotel with 1,051 rooms that is located just across from the Paragon Mall on Orchard Road; and the Mandarin Gallery, a retail mall next to the Mandarin Orchard that features four levels of high-end boutiques, shops and restaurants.
OUE Hospitality offered 52.1% of its total number of units to public investors, while the rest was issued to the sponsor as part payment for the two assets. The 681.8 million units were marketed in a narrow range between S$0.88 and S$90 and sources said the price is expected to be fixed at S$0.88 this morning.
Like SPH Reit, there was hardly any price sensitivity, but in light of the continued volatility in the secondary market and the fact that the range was so tight to begin with, the sponsor was said to have chosen to leave the extra two cents for investors.
OUE Hospitality had less demand lined up before launch than SPH Reit did — one source said the combined cornerstone and anchor orders covered just over 50% of the deal — but even so the deal did see good momentum from the start primarily from companies and high-net-worth individuals. One source said the deal was about 90% covered on day one, which encouraged other investors to participate as well.
The bookrunners went out with a “fully covered” message on the second day.
The institutional appetite was said to have been quite selective, but that was compensated to some degree by orders from existing OUE shareholders as well as corporate money from various entities associated with the Riady group. However, there was also decent interest from regional insurance companies and institutions based in Hong Kong and Singapore, the source said.
The five cornerstones — Credit Suisse, Goldhill, Lucille Holdings, Splendid Asia Macro Fund and individual investor Gordon Tang — took up 247.22 million units, or 36.2% of the base deal.
It too has a 10% overallotment option, which could increase the total proceeds to as much as $517 million.
Credit Suisse, Goldman Sachs and Standard Chartered were joint global coordinators for the offering, as well as joint bookrunners together with Bank of America Merrill Lynch, Deutsche Bank and OCBC.
