Bookrunners DBS, JPMorgan and Salomon Smith Barney began pre-marketing a potentially S$240 million ($133 million) offering for Ascendas Real Estate Investment Trust (A-REIT) yesterday (Wednesday). The trust is a joint venture between Singapore's Ascendas Land, held by government-owned JTC Corp and Macquarie Goodman Industrial Management, Australia's largest industrial REIT manager.
On a like-for-like basis, A-REIT is being pitched in line with Singapore's first REIT, CapitaMall, which raised S$235 million in late July. The chief difference between the two is that while CapitaMall is structured around shopping malls, A-REIT holds eight industrial property assets.
At S$0.96 per unit, CapitaMall was sold on a dividend yield of 7.06% and closed yesterday at S$1.03 to yield 6.5%. A-REIT has set an indicative price range of S$0,83 to S$0.88 for a 272.5 million unit deal, equating to a dividend yield of 8% to 8.5%. However, observers say that international investors would normally expect a 1% to 1.5% premium for a REIT with industrial assets because the underlying yields from the properties tend to be lower than the retail sector.
A REIT is a pure property play, in which investors buy a trust that holds various buildings - in this case eight. Investors are paid an annual yield based on rental incomes and the underlying assets are revalued each year, making a REIT the most transparent property vehicle an investor can own. The trust undertakes no development activities, but returns all earnings back to shareholders through dividend payments. Growth is, therefore, derived from being able to increase the underlying rental yields and REITs are typically structured to incentivize the REIT manager (Macquarie Goodman) to do so.
One key issue is the valuation at which assets are injected into the trust. As retail rental yields are the highest in the property sector, CapitaMall was able to get away with a relatively slim 4% discount to its properties' NAV (Net Asset Value). A-REIT, on the other hand, needed to inject the assets at a steeper discount in order to achieve a high yield. Subject to final pricing it has, therefore, injected the assets at a 9.9% to 5.6% prospective discount to an NAV of S$607 million.
A second key issue for investors is how dividends will be grown through an increase in the underlying rental yields. In this instance, Macquarie Goodman will receive a 0.5% base fee of A-REIT's gross assets, of which 50% will be paid in more units rather than cash. It then receives an initial performance fee of 0.1% if it can grow dividends per unit by 2.5% per annum. It will receive a second 0.1% fee if it can grow dividends by more than 5%. In its filing to the MAS (Monetary Authority of Singapore), the company said it expects the dividend yield to grow by 2.4% through to the end of the Financial Year March 2004.
The REIT manager is thus incentivized through its partial ownership of the REIT. Of the total 545 million units available pre greenshoe, the sponsors (Ascendas and Macquarie) will own 35.5% and four cornerstone investors have been secured for a further 15% stake (80 million units). These comprise BT Funds Management, Lian He Investment, NTUC and Super Vista. The remaining 272.5 million units will be sold to the public and institutions following the completion of pre-marketing in two weeks time.
Specialsts believe the Reg S offering has a number of factors in its favour. Firstly, they argue that the underlying assets are diversified in terms of type of assets, type of tenant and number of tenants. Therefore, although all eight properties come from the industrial sector, they range from a business park including a science park to a light industrial and built-to-suit properties.
There are also currently over 300 local and international companies ranging from biotech to high-tech. No one tenant accounts for more than 6% of total rental incomes and average occupancy stands at 84.6%.
Future dividend growth will be generated through expanding some of the properties and acquisitions. For a five-year period, the company has first right of refusal to purchase properties from Ascendas, which has S$1.8 billion in property assets across Singapore, China, India and the Philippines.
But in a current market environment of low interest rates, high volatility and depressed equity markets, the deal's greatest selling point is its defensive yield. The sector has historically had an inverse relationship to broader indices and will always outperform in a bear market.
In a domestic context, CapitaMall has outperformed the Straits Times Index by 17% since it began trading in early August. The deal is now up 7% on issue price, while the index is down 11.367% year-to-date. In an international context, Macquarie Goodman's Industrial Trust is up 3.47% on the year in Australia, while the ASX is down 12.235%.
A-REIT may be as well, if not better, received than CapitaMall as it combines local expertise with international trust management. The deal also has one further advantage over its predecessor in that it has already secured permission for CPF account holders to buy units, up to 35% of their total holdings. By contrast, observers say that CapitaMall did not get clearance until the deal had already begun to trade.
