An unidentified institutional shareholder has raised HK$1.87 billion ($240 million) from the sale of units in Link Real Estate Investment Trust, the first block trade in Asia in two weeks. The deal, which was launched at about 7.15pm on Wednesday, took the market by surprise as it came on a day when the Hang Seng Index fell 3.2% — its worst session in six months — and as investors were mostly focused on taking risk off their books.
As a reflection of that, the units was offered at a fairly generous price and some observers said the final discount of 6.5% was significantly wider than would have been needed in a stable market. The deal was arranged by Goldman Sachs, which underwrote the transaction in full.
The Hong Kong market made a slight rebound on Tuesday when it finished 0.8% higher, but when the Link Reit block hit the market, the benchmark index had fallen on nine of the past 10 trading days, losing a combined 9.6%. In the US, the S&P 500 index had given back more than half of this year’s gains and while there were signs of a rebound both in Europe and the US on Wednesday, most markets fell into the close and once again finished lower on the day.
So, it wasn’t an ultimate time to try to convince investors to buy more than $200 million worth of stock — unless of course you are Facebook (the social networking site early this morning priced its hyped-up IPO at the top of an increased range at $38 per share, valuing the company at $104 billion, after attracting a huge number of investors).
Link Reit clearly isn’t Facebook, but it is Asia’s biggest Reit with a portfolio of more than 180 shopping malls, other retail properties and car parks that it bought mainly from the Hong Kong government ahead of its listing in December 2005. The trust has been growing steadily since then, driven by assets refurbishments and a few acquisitions, and now has a market cap of about $8.5 billion. In the six months to September 2011, the value of its portfolio grew 7.1% to approximately HK$72.1 billion ($9.3 billion) and its net asset value per unit grew 6.1% to HK$26.14.
On April 30, Link Reit’s unit price hit a record high of HK$32.30 and even though it has fallen on most days since then, it finished Wednesday’s trading at HK$30.70 — just 5% below the all-time high and representing a year-to-date gain of 7.3%. That compares with a 4.5% gain in the Hang Seng Index.
The outperformance is partly due to the defensive nature of Link Reit’s business model, which includes a commitment to distribute most of its free cash-flow to unit holders in the form of dividends. And if there is anything investors can be talked into buying in bulk right now, it is perhaps defensive stocks. Link Reit is also quite liquid, which is something investors appreciate at times when they may have to get out fast.
The deal comprised 65 million units, which accounted for 2.9% of the share capital and about 11 days of trading volume. The units were offered at a price between HK$28.55 and HK$29.17, which translated into a discount of 5% to 7% versus Wednesday’s close.
Some investors were intrigued by the discount while others made it clear there was no way they were going to buy anything in this market and slammed down the phone, which suggests that the interest in this block was very much a reflection of individual investors’ short-term view of the market.
According to one source, the deal was covered after about one hour and when the order books closed at 9.30pm, it was more than three times covered. The order amount was said to have grown significantly shortly before the close after the bookrunners went out with guidance that indicated that the price would be fixed only slightly above the bottom of the range. There was also some late demand from the US.
The final price was set at HK$28.70 for a 6.5% discount to the close, which was viewed to be quite generous for 11 days of trading volumes. Based on the level of demand, the source said it might have been possible to price slightly higher, but in the current market environment it was probably the right call not to be too pushy. The timing of the sale also suggests that the seller was keen to reduce its position, and the certainty of being able to do so was probably worth more than to pocket a few extra cents per share.
Link Reit’s unit price fell 4.4% to HK$29.35 yesterday after the sale, but the price never dipped below HK$29 and finished the session 2.3% above the placement price. The Hang Seng Index traded higher for most of the day, but dipped in the late afternoon after European markets opened lower on renewed fears about Greece. It finished down 0.3%.
Not too surprisingly, the demand for the block was skewed towards hedge funds, but there was enough demand from fundamental investors, including real estate specialists and other long-only funds, to skew the allocation towards them, the source said. Overall, more than 60 investors participated in the transaction, which is notable in the current market environment.
As noted, the seller wasn’t disclosed but, according to the source, it will still own shares in Link Reit after this transaction.
