REITs, trusts resume EFR as CapitaLand Ascendas REIT upsizes placement

The next announced EFR is likely to be from Manulife US REIT (MUST). Its manager has indicated plans to place 9.8% of new units to Mirae Assets Global Investment.

In April, Keppel Infrastructure Trust raised $183 million with a private placement, and $116.6 million via a preferential EFR. The funds are being used to acquire $721 million of assets including a wind farm.

On May 16, CLAR announced a capital raising of $450 million at a price of S2.713–$2.769. The immediate reaction from CLAR’s unitholders was dismay as CLAR’s price fell following a trading halt. It also begs the question — should REITs continue with growth of assets under management (AUM) at any cost?

“If blue-chip REITs are increasing AUM at all costs, what more can we expect from the lesser REITs?” a CLAR unitholder asks. “They are getting bolder, raising money for acquisitions to raise AUMs and their fees, which is not exactly good for us,” he gripes, citing MUST as a REIT that went overboard with AUM growth.

See also: Changes in ICR, leverage to come into effect immediately, with additional disclosures in March

Following problems faced by MUST in the fourth quarter of last year, the unitholder divested the S-REITs with US office assets. As at May 17, Keppel Pacific Oak US REIT and Prime US REIT are pummelling new lows. Some market watchers are wondering if they, too, need EFRs.

Still, although CLAR’s unit price fell by as much as 10 cents, both E-LOG and MLT are above their respective EFR and placement prices of 32.5 cents and $1.649 cents respectively.

The biggest EFR to-date was a HK$18.8 billion ($3.2 billion) rights issue by Link REIT. The rights price was HK$44.20 and Link REIT is comfortably above its rights price.

See also: IREIT signs 20-year lease contract with UK hotel chain, Premier Inn, in Berlin Campus

Despite high borrowing costs — for CLAR’s latest acquisitions, cost of debt could be above 4% for Singapore and more than 5% for its potential European acquisition — S-REITs believe there is value to be had from acquisitions. Of the $500 million raised by CLAR, $139.5 million will be used to partly fund the proposed acquisition of a six-storey building in one-north from Seagate, The Shugart. The acquisition price is $218 million, or $232 million including expenses. The net property income (NPI) yield works out to 7.8% including expenses.

CLAR’s manager also announced a potential acquisition of a European property that is currently undergoing due diligence. The property is in a key gateway European city in which it has a presence. UOB Kay Hian believes this property is in the UK. CLAR has earmarked $129.9 million from the placement for this European property. In an SGX filing, the manager announced that the accretion of the two acquisitions to pro forma DPU is 1.2% to 1.3%, while DPU accretion from The Shugart alone is 0.7%. In FY2022, CLAR’s DPU was 15.88 cents. However, if the advanced distribution is annualised, it works out to 15.56 cents.

Separately, $64.4 million will be spent on the redevelopment of a logistics property, and $160 million (32.1% of placement proceeds) will be used to pare debt. The SGX filing indicated that aggregate leverage will drop to 35.6% from 38.2% (as at end-March) with the purchase of The Shugart; but will rebound to 37.2% if CLAR acquires the European property, and move up marginally to 37.6% if CLAR acquires The Shugart, the European property and redevelops the warehouse.

During a briefing, William Tay, CEO of CLAR’s manager says: “[Seagate] is a good-quality tenant with 10 years of lease, plus the option to extend for another 10 years with 2.5% rental escalation. That builds a lot of stability for our income in the portfolio. We have been quite focused looking at assets with less risk and higher probability of land extension.”

Short land leases, higher yields

The land tenure for The Shugart is only 20 years. But since one-north is a designated R&D hub for life sciences, medtech and tech, Tay believes a land tenure extension is possible. “There’s no application from us or anyone to request for a land extension. But [as one-north is] one of the key innovation hubs of the Singapore government, we expect that we have a good chance for the land extension. It always goes back down to the quality of the tenant, the quality of the investment. If Seagate continues, it puts us in a good position for extension on the land tenure,” Tay elaborates.

Since the land tenure is 20 years, the NPI yield (excluding interest expense and management fee) is relatively high. According to Tay, the valuers used a capitalisation rate of 5% for the building and adjusted it for the low land lease. Although land values will fall, Tay points out that rentals, the quality of the tenants and the building can also support valuation.

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Two other acquisitions last year — Philips APAC Center, and a cold storage at 1 Buroh Lane — had land leases of around 21 years, but CLAR was compensated by higher NPI yields. For instance, the NPI yield of Philips APAC Centre, bought for $104.5 million, is 6.8% post-transaction costs. DPU accretion based on pro forma FY2021 numbers would be 0.29%. While these yields enable CLAR to recoup its capital over the 20 years of land tenure if it keeps the property 95% occupied, market observers reckon that HDB and URA are unlikely to extend the land lease for the property.

Meanwhile, the 1 Buroh Lane property could have its land lease extended as it is in Jalan Buroh Food Zone. This cold storage facility cost $191.9 million and had an initial NPI yield of 6.9% including transaction costs.

Tenant concerns

Tay reveals that Seagate will provide 12 months of rent as security deposit. This may not allay concerns about Seagate’s financial health. An analyst asked during the briefing: What if Seagate is unable to continue as a tenant for the full 10 years?

While there is no break clause, Tay points out that “a lot of Seagate’s R&D goes through Singapore”. Hence, The Shugart is critical infrastructure for Seagate. He adds that the building is not “specialised” or built-to-suit, and believes that it could easily be rented out should Seagate not be in a position to fulfil the 10-year lease.

There were also some concerns among the analysts on Seagate’s financials, as it had made a net loss in 3QFY2023 (the three months to March 31). Seagate is undergoing a restructuring exercise which would probably see it making a net loss of 20 US cents (27 Singapore cents) in 4QFY2023. Part of the loss was attributed to a US$300 million fine by the US Department of Commerce for shipping parts to Huawei. Seagate guided for 4Q2023 revenue to fall by 35.3% y-o-y, taking full-year 2023 revenue down by 35.8%.

Some CLAR unitholders are also concerned about The Shugart acquisition. One of them asked: “Isn’t Seagate in trouble?” On April 20, Seagate’s CEO and Director William David Mosley said: “We are taking aggressive actions to further reduce cost and right-size the business to navigate this downturn.” Part of the aggressive actions include a salary reduction for himself: Seagate announced that its CEO and CFO would take temporary salary reductions of 100%.

However, Tay indicates he is comfortable with Seagate’s restructuring despite the company indicating that it is unlikely to turn around this calendar year.

Separately, CLAR is in the process of obtaining planning permission to redevelop a warehouse with a cargo lift, into a ramp-up warehouse. Tay reveals that the redevelopment would likely double the net lettable area of the property. The redevelopment is expected to cost $107 million.

“It’s a very good premium location and in the right node. We are undertaking the conversion of a cargo lift warehouse into a modern-ramp up facility and unlock plot ratio, leading to a rental uplift. We can build up to six storeys and the rental rates would move up quite a lot,” Tay says.

Large buffers from stress tests

According to Tay, valuation for its logistics and data centre properties in the UK and Europe fell because cap rates expanded. He also says that there is no stress in CLAR’s portfolio.

“The buffer is so big, based on some of the stress tests we have done for dire scenarios. We are in a very good place; 60% of our assets are in Singapore. Australia, the UK and Europe are still strong. In the US, despite news of stresses, our leasing is holding up very well. We are still able to find leases with positive rental reversions. During Covid, our ebitda was very resilient,” Tay says.

In its business update in 1QFY2023 (the three months to March 31), the US portfolio’s occupancy dipped to 92.5% compared to 94% in 4QFY2022 and 1QFY2022. The occupancy excludes 6055 Lusk Boulevard in San Diego, which was decommissioned for convert-to-suit for Life Sciences tenant in September 2022. Rental reversions recorded in 1QFY2023 were 11.1% for multi-tenanted properties in the US portfolio.

In 1Q2023, CLAR reported an interest coverage ratio (ICR) of 4.7 times. While ICR is one of the bank covenants REITs (and banks) have to watch, CLAR’s ICR is way above its ICR covenant of 1.5x.

Among the larger REITs, MLT remains on an acquisition path. On March 30, MLT announced the proposed acquisitions of eight prime, modern and mostly new logistics assets in Japan, Australia and South Korea for a total acquisition price of $913.6 million and the potential acquisition of two modern logistics assets in China for $209.6 million. These acquisitions would be partly financed by the potential divestment of non-core property in Hong Kong for $100.3 million, placement proceeds of $200 million and debt. The accretion based on nine-month pro-forma DPU for FY2023 (MLT has a March year-end) is 2.2%, higher that CLAR’s DPU accretion.

E-LOG has not announced plans for its EFR except to say that part of the monies is to pare debt. However, market watchers believe E-LOG could redevelop its Cold Centre, which has 43 years of lease left.

The interesting part of the recent capital raisings is how steady the unit prices of the S-REITs are following their EFR. Meanwhile, analysts remain vaguely positive on CLAR, with CGS-CIMB recommending “add”, and UOB Kay Hian has a “buy” recommendation. All this should augur well for CLAR; its unhappy unitholder is unlikely to be too damaged from the placement despite the various nuances of its recent acquisitions.