Trusts Down Under moving to reduce bank exposures with longer-term debt

(SYDNEY) CFS Retail Property Trust, a real estate trust that invests in shopping centres, sold A$450 million (S$573 million) of bonds in the biggest domestic debt issue by an Australian property company in more than four years.

The trust priced A$160 million of floating-rate notes due in May 2014 to yield 160 basis points more than the bank bill swap rate, according to a statement from Australia & New Zealand Banking Group Ltd, which helped manage the sale with Commonwealth Bank of Australia.

It also priced A$290 million of fixed-rate notes due in May 2016 to yield 185 basis points more than the swap rate, the statement said.

‘Property trusts are trying to reduce their bank exposures and arrange longer-term debt, which is more likely to be obtained from the bond market,’ John Sorrell, who helps manage about A$14 billion of fixed-income assets as Sydney-based head of credit at Tyndall Investment Management Australia Ltd, said. ‘There’s still pent-up issuance demand, so the strong primary sales volume is set to continue.’

Most Australian real estate trusts have returned to profit after exiting money-losing overseas investments and raising capital following a period of surging debt costs and plunging property values. Reit balance sheets are now ‘historically strong’ after they raised more than A$18 billion of capital in 2008 and 2009, Moody’s Investors Service said in August.

CFS Retail’s sale is the biggest since GPT Group, the country’s third-largest property group by market value, sold A$700 million of fixed- and floating-rate bonds in March 2006, according to data compiled by Bloomberg. Australian real estate investment trusts have issued A$1.1 billion of domestic bonds this year, the data show.

Stockland, Australia’s biggest diversified property group that’s rated A- by Standard & Poor’s, one notch lower than CFS Retail, sold A$300 million of five-year notes in December. The 8.5 per cent bonds were priced to yield 270 basis points more than the benchmark swap rate, according to data compiled by Bloomberg.

CFS Retail, which reported net income of A$315 million in the year to June 30, said last month it’s planning to buy four shopping malls owned by Direct Factory Outlet in Australia. The trust will fund the purchase through a A$540 million share sale. The company will use funds from the bond sale to refinance debt. — Bloomberg

Source: Business Times, 21 Oct 2010

ASCENDAS Real Estate Investment Trust (A-Reit) will be investing an estimated $97 million to enhance three properties in its portfolio.

The business space and industrial Reit said this yesterday as it released results for the second quarter ended Sept 30.

A-Reit’s net property income in Q2 was $83.9 million, up 3.5 per cent from a year ago. Acquisitions and the completion of development projects contributed to the improvement.

Distributable income rose 0.4 per cent to $61.8 million. Distribution per unit (DPU) was 3.3 cents – 5.2 per cent lower than the 3.48 cents a year ago.

Adjusting for units issued for a placement exercise and for the payment of a base management fee and an acquisition fee, the proforma DPU last year would have been 3.29 cents – leading to a 0.3 per cent growth this year.

Tan Ser Ping, CEO and executive director of A-Reit’s manager, said that the manager has identified three asset enhancement opportunities ‘to capitalise on under-utilised plot ratio or to enhance the attractiveness of the properties’.

One of the largest projects involves the redevelopment of 1 Senoko Avenue for $59 million. A-Reit is raising the site’s plot ratio to 2.5 from 0.6, creating an additional 34,519 sq metres of gross floor area. The property will be positioned as a ‘food hub’ for the food and beverage industry when works are completed in Q4 FY2011/12.

A-Reit is also seeking regulatory approval for a $33.7 million enhancement of 10 Toh Guan Road. Plans include the creation of more parking facilities and the improvement of the building’s exterior facade.

In addition, A-Reit will be spending $4.3 million to create a courtyard on the upper floors of Techview at Kaki Bukit.

A-Reit expects these projects to deliver a weighted average yield exceeding 8.5 per cent.

Portfolio occupancy slipped in Q2 to 95.3 per cent from 96.8 per cent a year ago. But on the bright side, A-Reit managed to secure a larger lease commitment from Citibank for a facility in Changi Business Park – the bank will be leasing the entire building, up from 50 per cent of it.

For the half year, A-Reit’s net property income rose 5.8 per cent year on year to $171.3 million. Distributable income inched up 1.9 per cent to $124.9 million.

A-Reit closed one cent up yesterday at $2.11.

Source: Business Times, 19 Oct 2010

No fear of oversupply, say Credit Suisse analysts who see office Reits as a good buy

CREDIT Suisse has dismissed fears of an oversupply in the office sector and is tipping that rents will rise as demand picks up.

The bank’s analysts said new space is being taken up, while old supply is being removed from the market and converted into residential use.

‘We think rents are on the rise and could hit $12 per sq ft (psf) by 2012 for Super Prime A. Meanwhile, we expect Grade A rents to trend up to $10.50 to $11.50 psf, and prime buildings such as Bugis Junction Towers and Suntec to hit the $9 psf level in 2012.’

There is no official grading system for office space, but Grade A typically refers to the most premium category. For CB

Richard Ellis, offices that lie within the Raffles Place, Marina Bay and Marina Centre area are classified as prime. Credit Suisse splits Grade A into two categories – normal Grade A and Super Prime A.

Falling under Super Prime A are new or soon-to-be-completed buildings such as One Raffles Quay, Marina Bay Financial Centre, Ocean Financial Centre and 50 Collyer Quay.

Normal Grade A refers to older but strategically located buildings such as 6 Battery Road, Capital Tower and Prudential Tower.

Suntec City, Keppel Tower, GE Tower and Bugis Junction Tower have been categorised under Prime, which refers to older buildings that fall inside the central business district.

The Credit Suisse report noted that rents for Super Prime A hit a peak of $18.40 psf a month in the third quarter of 2008.

Analysts from across the sector say the rental outlook is favourable as office demand is expected to grow in step with the economy.

‘With rental values on the rebound, larger occupiers are anxious to lock in rents for prime office space. This has led to strong pre-commitment rates for uncompleted office buildings like Ocean Financial Centre,’ said Ms Cheng Siow Ying, DTZ Debenham Tie Leung’s executive director for business space.

DTZ Research said the office market has rebounded, with rents rising in all districts in the third quarter.

It added that prime rents in Raffles Place rose 6.3 per cent quarter-on-quarter to an average of $8.40 psf.

Investors keen on the sector should look at office real estate investment trusts (Reits) because they have the greatest exposure to Grade A space, say Credit Suisse analysts.

When rents increase, so should the unit prices of these Reits.

The bank’s top pick in the office Reit sector is CapitaCommercial Trust (CCT). It has an ‘outperform’ rating on the Reit and a target price of $1.63.

‘We believe its $750 million war chest is likely to be reinvested into higher-yielding opportunities,’ said the bank.

CCT closed eight cents higher yesterday at $1.48.

Source: Straits Times, 24 Sep 2010

ASCOTT Residence Trust (Ascott Reit) is looking to raise up to $549.5 million by issuing 487.5 million new units.

It lodged its offer information statement with the Monetary Authority of Singapore yesterday, after getting unitholders’ approval for the equity fund-raising exercise early this month.

There are two parts to the exercise. Ascott Reit will issue 67.9 million new units at $1.07-$1.11 apiece through a non-renounceable preferential offering. Unitholders stand to receive one new unit for every 10 existing ones held.

The trust closed unchanged at $1.15 yesterday. Based on this price, the preferential offering issue price carries a discount of 3.5-7.0 per cent.

Ascott Reit will also issue 419.7 million new units at $1.07-1.13 each in a private placement to institutional and other investors.

Based on the range of issue prices indicated, Ascott Reit could raise $521.6 million to $549.5 million in total. Credit Suisse and DBS Bank, the joint lead managers, bookrunners and underwriters, will determine the final issue prices after a book-building process.

Ascott Reit is seeking funds to support the purchase of 28 properties in Europe and Asia from its sponsor, The Ascott Limited. The latter is CapitaLand’s service residence arm.

Apart from issuing new units, Ascott Reit also plans to take on more debt to fund the acquisition.

Source: Business Times, 14 Sep 2010

(TOKYO) Japan’s real estate investment trust (Reit) bond market is starting to thaw after two years as the economy rebounds, though property prices would need to rise for a full recovery, according to Fitch Ratings.

‘New bond sales are recovering to some extent,’ Toru Kobayashi, Tokyo- based director of structured finance at the risk assessor, said in an interview.

Some Reits still face risks, he said. These need to see ‘improvements in property performance’,

Sales of Reit bonds this year totalled 124.5 billion yen (S$1.96 billion), recovering from a single public sale of three billion yen in 2008 and none in 2009, according to data compiled by Bloomberg.

The Tokyo Stock Exchange Reit Index has gained 0.6 per cent this year, while the Topix index has dropped 9.1 per cent.

Land prices started falling in 2008 as the global crisis deepened with the collapse of Lehman Brothers Holdings Inc, previously a lender to property investors.

New lending for real estate by Japan’s banks fell to the lowest in a decade in 2009, according to the Bank of Japan.

‘Among some borrowers with a smaller size or inferior financial standings, we see extension of short loans or finance in the short term,’ Mr Kobayashi said. ‘Such Reits haven’t eased their finance risk.’

Japan’s Ministry of Land, Infrastructure, Transport and Tourism said in August 2009 that a 500-billion-yen fund would be formed to help Reits refinance their debt. – Bloomberg

Source: Business Times, 24 Aug 2010

The $969.6m purchase will boost assets by 1.8 times; analysts surprised by size of transaction
ASCOTT Residence Trust (ART) is buying 28 properties from its sponsor, The Ascott Limited, for $969.6 million, and selling one to the latter for $214 million.

With the purchase, ART’s asset size will grow 1.8 times and its reach will stretch past Asia to Europe. But it will be borrowing more and issuing new units – possibly more than half the existing number in issue – to raise over $560 million for the deal.

The sales proceeds will help Ascott, CapitaLand’s service residence arm, in further expansion. The divestment will bring it a net gain of about $52.1 million.

Analysts had mixed reactions to the announcements yesterday morning, made after CapitaLand and ART asked to halt trading in their counters. Many expected ART to buy assets from Ascott, but not so much at a go. ‘What came as a surprise to us was the size and scale of the transaction,’ said OCBC Investment Research analyst Meenal Kumar.

Several also felt that the acquisition, while good for raising ART’s profile, had little impact on its portfolio yield. The purchase is ‘marginally accretive’ but the equity fund-raising will raise ART’s market capitalisation and put it on the radar of more institutional investors, said CIMB analyst Janice Ding.

According to ART, the assets it is buying have an annualised earnings before interest, taxes, depreciation and amortisation yield of 5.7 per cent, exceeding its existing portfolio’s 5.5 per cent.

For CapitaLand, the sale of the assets could be ‘motivated more by desire to grow ART than maximising profit’, according to Standard Chartered’s Regina Lim and Wong Yan Ling in a note.

With the acquisition, ART’s portfolio will grow to $2.85 billion from $1.59 billion, with properties in 23 cities across 12 countries. The trust will gain exposure to Europe – the region will account for some 45 per cent of its total asset value, up from zero.

Of the 28 service residence properties it is buying, 26 are in Europe, across France, the UK, Germany, Belgium and Spain. Just two are in Asia – Somerset Hoa Binh in Vietnam and Citadines Singapore Mount Sophia. Ascott will continue to manage all these assets.

The performance of service residences in key European cities has been stable, said Chong Kee Hiong, CEO of ART’s manager, at a briefing. He noted that occupancy rates reached 95-97 per cent in the last few years even during the financial crisis.

It has been challenging finding a large chain of properties to buy and future purchases are likely to be piecemeal, he added.

ART will hold an extraordinary general meeting on Sept 9 to seek shareholders’ approval for the acquisition, divestment and issue of new units.

The equity fund-raising – comprising a non-renounceable preferential offering to existing unitholders and a private placement – should be completed by year-end. Ascott will subscribe for new units to maintain its 47.7 per cent stake in ART.

Details have not been firmed up but ART suggested that it might raise $560.6 million from placing out 487.5 million new units at an illustrative price of $1.15 apiece. As at Monday, 619.6 million units of ART were in issue.

The illustrative issue price is 4.2 per cent below ART’s closing price of $1.20 yesterday. The counter lost six cents after trading resumed in the afternoon.

ART will also take on more debt, estimated at $116.3 million. On the whole, it does not expect its gearing of 40.7 per cent as at June 30 to rise.

ART’s sale of Ascott Beijing in China to Ascott will provide another source of funds. Home prices in Beijing have been rising and the 310-unit property at Chaoyang would be worth more in a strata-title sale but such a repositioning is not part of ART’s core business, Mr Chong said.

Ascott will realise the best value for Ascott Beijing even if it means converting the property to another use, said the group’s CEO Lim Ming Yan. It is evaluating options, but is likely to refurbish the building before selling it.

The divestment of assets to ART is in line with Ascott’s strategy to recycle capital for investment. Ascott will receive net cash proceeds of some $332 million after the sale, the purchase of Ascott Beijing, and the new unit subscription. It will have a capacity of over $700 million to fund growth, Mr Lim said.

Ascott said early this month that it aims to grow the number of service residence apartments in its portfolio to 40,000 by 2015, up from some 26,000 now.

It no longer owns assets in Europe with the sale to ART but it still holds the title to around 5,200 units in Asia Pacific. These units, together with new ones it buys, will form ART’s acquisition pipeline.

CapitaLand closed unchanged at $4.05 yesterday.

Source: Business Times, 21 Aug 2010

ASCOTT Residence Trust (Ascott Reit) has agreed to sell Country Woods in Jakarta for $33.91 million. The sale price – the highest submitted in a bidding process – is 60 per cent above the property’s valuation of $21.2 million at June 30. Ascott Reit said that it expects a net gain of $5.7 million from the sale. The transaction is expected to be completed in the fourth quarter.

Ascott Residence Trust Management chairman Lim Jit Poh said: ‘The sale proceeds from the divestment will provide Ascott Reit with greater financial flexibility to maximise returns to unitholders. Proceeds from the sale will be used to pare the group’s debt or for funding future acquisitions.’

The sale is in line with Ascott Reit’s strategy to unlock the underlying value of property that has reached a stage that offers limited growth, and to redeploy proceeds to optimise the yield of its portfolio, the trust said. Country Woods would have required significant capital expenditure to compete with increased competition in South Jakarta. the Reit said. The implied exit yield of Country Woods is 2.9 per cent based on the sale price of $33.9 million.

Following the divestment, Ascott Reit will continue to have a presence in Indonesia through Ascott Jakarta and Somerset Grand Citra, both of which are in the heart of the city’s business and shopping district. Ascott Reit said that it would continue to seek yield-accretive acquisitions to expand its portfolio and look for opportunities to divest properties that have reached optimal yield.

Source: Business Times, 7 Aug 2010

HOT on the heels of two recent acquisitions, Parkway Life Reit has indicated it could take a more aggressive growth stance as the recovering property sector in the Asia-Pacific presents more acquisition opportunities.

‘The global economic recovery has driven improvements in the regional real estate and Reit markets, bringing about further growth opportunities for Parkway Life Reit,’ said Yong Yean Chau, CEO of the trust’s manager Parkway Trust Management. ‘With the improving economy, healthcare operators are looking to expand by going asset-light, thereby enlarging the pool of healthcare assets available in the market and availing of more options for Parkway Life Reit in our selection of good-quality acquisition targets.’

Without revealing where the targets are, Mr Yong said the Reit has ‘a strong acquisition pipeline’. He added his company had been approached by more healthcare asset owners looking to sell their properties. However, the trust will continue to target developed and mature markets that share similar legal frameworks and risk profiles as Singapore, such as Malaysia and Australia.

As for Japan – where the trust recently acquired six nursing care facilities in June and another five nursing homes in July – it will be looking to consolidate and derive greater synergy across its properties.

Meanwhile, its portfolio of properties in Japan already accounted for 28 per cent of its Q2 net property income of $17.3 million, according to financial results announced yesterday. The Reit posted a 10.9 per cent increase in Q2 income distributable to unitholders to $12.6 million.

For the three months ended June, gross revenue went up 16.4 per cent to $18.7 million, boosted by contributions from the Japan acquisitions and higher rent from existing properties in Singapore. Q2 distribution per unit (DPU) works out to 2.09 cents, up from 1.89 cents a year back.

Including DPU of 2.07 cents in Q1, DPU for the first half came to 4.16 cents. On an annualised basis, this is a yield of 6.11 per cent, based on the closing share price of $1.36 at end-June.

Property expenses in Q2 went up 27.2 per cent to $1.4 million, while non-property expenses rose 27.6 per cent to $4.7 million. The Reit is due to refinance its Japanese yen loan facilities, amounting to about $207 million, in H2 next year. But it plans to do so by the current quarter. As at June 30, its debt-to-asset ratio was 32.6 per cent.

Other than its 29 properties in Japan, Parkway Life Reit’s assets include the Mt Elizabeth, Gleneagles and Parkway East hospitals in Singapore. Its total asset value is about $1.3 billion.

Source: Business Times, 7 Aug 2010

THE Government of Singapore Investment Corporation (GIC) is one step closer to launching what could be the second largest public listing here.

People familiar with the deal said GIC has added three more financial institutions to its group of underwriters for the upcoming initial public offering (IPO) of its property and logistics unit.

The sources told Reuters yesterday that Singapore’s DBS Bank, Swiss bank UBS and China International Capital Corp will join JPMorgan and Citigroup as joint coordinators for the IPO of GIC’s Global Logistic Properties (GLP).

JPMorgan and Citi were said to have been appointed earlier this year.

According to Reuters, all five banks and GIC have declined to comment on the deal, which has yet to be announced by the Singapore sovereign wealth fund.

However, industry watchers said the IPO of GLP may raise as much as US$3 billion (S$4 billion) and if so, it would be the biggest in Singapore since SingTel raised US$4 billion in 1993.

The GLP listing would also exceed the US$2 billion raised in CapitaMalls’ listing last November.

Speculation that GIC may list its China and Japan assets in the form of a real estate investment trust (Reit) started in the first half of the year.

Reits typically comprise a portfolio of properties and generate rental income that eventually gets paid to investors like dividends.

As Asia’s third largest Reit market after Japan and Australia, Singapore is home to large industrial Reits such as Mapletree Logistics and Ascendas Reit.

The deal is likely to include assets GIC bought – via its real estate unit – from ProLogis for US$1.3 billion in 2008.

The sale at that time was a 4 per cent to 6 per cent loss for ProLogis, which was among the world’s largest warehouse owners and developers.

The Asian operations of ProLogis, which GIC acquired, were also subsequently rebranded as GLP last year.

Ms Meenal Kumar, a property analyst at OCBC Investment Research, told Reuters that there was still demand for property assets.

‘And it’s a good time as well to sell assets because capital value is still firm,’ she said. ‘We have kind of seen some earnings recovery in terms of rent and occupancy.’

According to its website, GLP is Asia’s largest industrial and logistics infrastructure provider with 60 logistics parks in 18 major Chinese cities.

The listing will allow GIC, the world’s fourth biggest sovereign fund with US$300 billion in assets, to raise cash for further investments.

Source: Straits Times, 6 Aug 2010

Cost efficiencies and incentives encouraging firms to domicile within city-state’s borders

THE story of Singapore as a resilient and fast-growing financial centre is not a new one. The new story, however, is that Singapore is quickly becoming Asia’s real estate investment trust (Reit) hub.

A Reit is a fund that allows individual investors to participate in large real estate ventures, such as acquiring and managing high-rise office buildings, and distributes most of its income to shareholders as dividends bypassing corporate fund-level taxes. Reits act as ‘liquid real estate’ because they can be traded as shares in public markets.

Given the battering the global real estate markets took in the depths of the downturn, many questioned the viability of the Reit model. However, just as the global Reit market led the world economy into the downturn, it is now guiding the global economy back out.

While the global Reit market is still returning, the Asian (ex-Japan) Reit market had a milder decline and has now recuperated to 2007 levels. The overall robustness of Asian Reits could be a signal that investors are bullish on the long-term prospects of Asia.

As the Asian Reit market expands, many Reit sponsors are turning to Singapore for answers.

One of the most significant institutional investors in this space, Lim Swe Guan, managing director and global head of GIC Real Estate’s corporate investment group, elaborates: ‘The focus on compliance and fiscal discipline has allowed Singapore to become a platform for cross-regional Reits and encourages foreign investment.’

He was speaking at the 2010 Asian Real Estate School & Symposium, organised by the Sim Kee Boon Institute for Financial Economics at the Singapore Management University and the Asian Public Real Estate Association.

The number of Reits in Singapore has almost doubled to 20 in the past four years – the fastest growth rate of any Asian country. The market also supports a capitalisation of around US$20 billion, second only to Japan in Asia.

In June, Moody’s raised its Singapore Reit outlook to stable and Mapletree, a real estate firm which owns or manages about S$13 billion of assets, unveiled plans to list two more Reits. This optimistic outlook on fundamentals has taken hold in the investment community as well, as evidenced by Mapletree CEO Hiew Yoon Khong’s stated goal to ‘launch more Reits and private real estate funds’.

Mr Hiew’s bullish market view is propelled by emerging Asia’s powerful economic rebound, with real gross domestic product growth of 5.7 per cent in 2009 and International Monetary Fund projections of 8.5 per cent annualised growth in 2010. Mr Hiew and other investment executives like him plan to use Singapore’s attractive regulatory environment as a platform to expand into the regional fund management business. Singapore’s current reputation as a hub for cross-border Reits did not emerge effortlessly. The first endeavour to start a Reit was made by CapitaLand with its SingMall Property Trust (SPT) in 2001, but the attempt fell short due to a lack of investor interest.

The next year, however, in mid-2002, SPT was restructured with the same three retail assets but under a new name. This time the initial public offering (IPO) was successful with a five-time subscription – it likely helped that the shares were priced more conservatively relative to net asset values.

Since then, many Reit sponsors have held significant control of S-Reit shares after IPOs and subsequently set up management companies designed to act as independent subsidiaries managing the assets within those Reits. Often, however, these Reit structures engendered agency problems including misaligned incentives which resulted in above-market property acquisitions from the sponsor’s affiliates.

Singapore has attempted to minimise such fiscally irresponsible behaviour and encourage financial discipline by implementing measures that include a 35 per cent maximum debt-to-equity capitalisation rate, third-party appraisals, required disclosure of self-dealing and an impartial board of directors.

Moreover, in 2005, the Monetary Authority of Singapore, after careful survey and analysis of the current Reit regulatory framework, further improved corporate governance by requiring more thorough disclosure of acquisition fees paid to Reit managers and certification of Reit managers.

Reit owners also benefit from a 10 per cent withholding tax on any distributions made to overseas corporate and institutional investors, as well as a stamp duty exemption when buying property in Singapore.

While the Asian Reit market is still in its infancy, Singapore is providing cost efficiencies and incentives that are encouraging companies to domicile within Singapore’s borders. Although the city-state may not convince all the regional Reits to list on the Singapore market, Singapore may eventually solidify its position as Asia’s centre for investing in public real estate if the government continues offering major tax incentives and a transparent, efficient marketplace that continues to satisfy investor demands.

Alok Chanani is the president of Chanani Real Estate Partners, a US-based real estate advisory and investment management firm with active interests in Asia. Susan Wachter is the Worley Professor of Financial Management at the Wharton School, University of Pennsylvania and co-director at the Centre for Asset Securitisation in Asia in the Sim Kee Boon Institute for Financial Economics, Singapore Management University

Source: Business Times, 6 Aug 2010