In this post, let’s think about the need for cash by Reits in recent times.
Starting with Mapletree Logistics Trust and the fundraiser it launched in Nov 2021.
Mapletree Logistics Trust (SGX: M44U)
In Nov 2021, Mapletree Logistics Trust (MLT) launched a S$700 million fundraiser for 17 assets acquisition.
The Reit announced late on 22 November 2021 that it was acquiring 13 assets in China and three properties in Vietnam from subsidiaries of its sponsor for about S$1 billion. Separately, MLT was also acquiring a logistics asset in Japan from an unrelated third party for S$416 million.
New units were offered on the basis of 37 new units for every 1,000 existing units at a unit price of S$1.84, which was a 5.6% discount to the volume-weighted average price (VWAP) of S$1.9485 per unit.
Key acquisition rationales:
1) Deepen Presence in Attractive Logistics Markets 1 of China and Vietnam
2) Capture Opportunities from Structural Trends Accelerated by the COVID-19 Pandemic
3) Strengthen MLT’s Network Connectivity across Key Logistics Nodes
4) High-Quality Portfolio with a Strong and Diversified Tenant Base
5) Attractive Value Proposition
During the announcement, the intention is that after the acquisition, aggregate leverage remains the same (at 39%), while NLA, AUM, and NAV increase, but WALE and occupancy rate drop. See below.
However, the question on many people’s minds is, whether has it been fruitful or profitable for the unit-holders.
Post-late Nov 2021 till today, the share price of MLT has been generally trending down, and it seldom (or did not) go above $1.84. See below. In hindsight (which is always one hundred percent clear), you could have waited a few months later to purchase the new units at a much lower price.
Nevertheless, MLT’s dividend performance has been respectable. See below.
The year 2022
In 2022, unlike in previous years, Singapore Real Estate Investment Trusts (S-Reits) did not acquire assets and raise capital regularly. Against a background of rising interest rates and rising costs of capital, Reits scaled down their acquisitions. It is likely that the acquisitions may have been unlikely to help the distributions per unit (DPU) of the Reits to outpace the rise in their interest cost.
Apart from a placement, preferential equity fundraising, and perpetual securities issuance by Lendlease Global Commercial Reit (LREIT) for the acquisition of Jem which cost around $2 billion in total, S-Reits were doing the opposite instead, divesting properties to raise funds.
ESR-Logos Reit (SGX: J91U.SI)
Another Logistic Reit listed in the Singapore Stock market is ESR-Logos Reit.
On 16 Feb 2023, ESR-Logos Reit’s manager announced a S$300 million equity fund-raising exercise to fund future acquisitions, redevelopments, and asset enhancement initiatives (AEIs). This will be accomplished through a private placement and a preferential offering, which will raise $150 million each.
The manager will use around S$293 million in gross proceeds from the fundraising to fund any future potential acquisitions and finance any redevelopment or AEIs of ESR-Logos Reit’s properties. The remaining S$7 million will be used to pay any fees and expenses incurred by the Reit in connection with the fund-raising exercise.
The rationale for the fundraising as stated by the manager is that as logistics continues to form the backbone of consumption (be it in traditional forms of physical stores or in e-commerce supply chains), portfolio rejuvenation remains a key focus of the Reit to tap into the growth of “in-demand” sectors such as logistics, high-specs, and cold storage. The Equity Fund Raising enables E-LOG to continue executing its growth strategy focused on:
(i) Rejuvenating the Asset Portfolio, (eg. AEIs)
(ii) Recycling of Capital, (eg. Divestments of non-core assets unlock value and allow E-LOG to recycle its capital towards rejuvenating its portfolio)
(iii) Recapitalising for Growth and (eg. Lower aggregate leverage from 41.8% to 38.0%; Increase debt headroom to S$1.1 billion)
(iv) Reinforcing the Sponsor’s Commitment (eg. e Preferential Offering is fully backstopped by the Sponsor)
Note: On May 5 2022, ESR-Logos Reit (E-LOG) started trading on the Singapore Exchange, replacing ESR-REIT. E-LOG was formed from the merger of ESR-REIT with ARA-LOGOS Logistics Trust following the merger between ESR Group and ARA Asset Management.
Existing unitholders of ESR-Logos (or rather unitholders of ESR-Reit and ARA-LOGOS Logistics Trust), should not be surprised by such an announcement. After all, from 2018 till Feb 2023, excluding 2022, there has been a yearly announcement on Preferential Offering. See below.
Note: A Preferential offering is an exclusive invitation for existing shareholders to purchase new shares at a discounted pricing. If the shareholders are unwilling to purchase new shares, they are unable to sell away that invitation to another party and would have to let the invitation expire.
Perhaps the pandemic has accelerated the need for logistics and prompted the need for expansions and AEI, hence further cash injection.
However, again, the question on many people’s minds is, whether has it been fruitful or profitable for the unit-holders. Was it really a ‘discount’.
A quick glance at the dividend per share over the years (see below), shows that since 2015, the dividend per share has been trending down. For unit-holders who have managed to cough out the cash by avoiding dilution of their shareholding, the payout has in fact (and unfortunately) decreased over the years.
Similarly (as per MLT), ESR-Logos Reit share price has been trending down over the years. After the March 2020 crash, price rose to around $0.485 in Nov 2021 and then trended down thereafter.
In July 2021, ESR-Logos Reit launched a $50 mil Preferential Offering. The issue price is S$0.400 for each Preferential Offering New Unit. 32 Preferential Offering New Units for every 1,000 existing Units, fractional entitlements to be disregarded.
The Preferential Offering closed on 10 Aug 2022.
For example, if you own 5,000 units of ESR Reit, you will be entitled to subscribe for 5 x 32 = 160 new units of the Reit at S$0.400 per unit.
This means that you have to cough up S$64 (S$0.4 x 160 units) for your entitlement.
Now, again, in hindsight, you could have waited a few months later to purchase the 160 new units (or rather 200 new units to avoid odd lots) at a much lower price. Since, after late August 2022, the share price of ESR-Logos did not trade higher than $0.4. See below.
So in terms of share price and dividend payout (absolute amount), I do not see how has it been a profitable investment for existing unitholders.
Link Real Estate Investment Trust (0823.HK)
Link Reit is technically not a Singapore-listed Reit (but a Hong Kong-listed Reit). Perhaps the most surprising announcement is from Link Reit (Asia’s largest real estate trust).
There have been a couple of ‘firsts’ for this Reit in recent months.
On 28 December 2022, it said it will enter Singapore’s market for the first time by acquiring Jurong Point and Swing By @ Thomson Plaza for S$2.16 billion from NTUC Enterprise.
Subsequently, Link Reit announced on 10 Feb 2023 (read here) that it is raising a whopping HK$18.8bn to pay down debt and to fund its next phase of growth, which will include the formation of partnerships with global capital partners. This is Link Reit’s first-ever rights issue.
Link REIT plans HK$19bn rights issue to help reduce debt and fund growth (read here)
Link Reit seeks US$2.39 billion in fresh funds via rights issue as it looks to pay debts, acquire new investments (read here)
The rights units will be issued at HK$44.20 each, representing a surprising 29.6% discount to Thursday’s close (9 Feb 2023) of HK$62.80 per unit before a trading halt.
The rights issue will lead to the unitholding base expanding by 20% and diluting its dividend per unit for the fiscal year ending March 2024 by about 14 percent.
As stated by the management, the fundraising is to strengthen Link REIT’s capital base and position it for the next phase of growth:
1) Immediately strengthen Link REIT’s capital base with net gearing ratio decreasing to below 20%
2) Position Link REIT to capture accretive investment opportunities amid real estate markets’ repricing
3) Facilitate Link REIT’s next phase of growth under the Link 3.0 strategy to grow its AUM together with capital partners
4) Solidify Link REIT’s position as a leading Asia Pacific real estate investor and manager
5) Allow Qualifying Unitholders to participate in Link REIT’s new growth journey on a pro-rata basis and to apply for excess Rights Units at the Subscription Price of HK$44.20 per Rights Unit
Some have questioned the move. To quote this article:
“It is a bit awful,” said Sam Chi-yung, chief strategist at Patrons Securities, who said he personally has held Link’s shares since its IPO. “Purely from a financial perspective, debt financing generally has a lower cost than equity finance. But this time it unexpectedly used the rights issue.”
“Their explanation is about first raising the capital without concrete projects for acquisition. The impression to people is quite strange. Is the market so good?”
Personally, this is quite unexpected.
Beyond the surprising rights units price (29.6% discount), what is perhaps strange is that relative to many S-Reits, Link Reit’s gearing is relatively low. Even upon completion of the acquisition, Link’s ratio of debt to total assets will change from 23.2% to only 27.1%, based on its consolidated financial position as of 30 September 2022. Approximately 40% to 50% of the net proceeds will be used to repay HK$7-8 billion of existing debt and around HK$1-2 billion will be used to rest revolving credit facilities.
Post fundraising the net gearing will go down to below 20%. Unheard of among S-Reits for the longest time.
As per Link Reit’s presentation in Feb 2023 (see below), for the 1H2022/2023 results, there is nothing alarming about their Capital Structure: Fixed-rate debt ratio is 56.1%, average borrowing costs are at only 2.5%, and the average debt maturity is at 3.4 years.
Nevertheless, I do recall that some of the better S-Reits have higher fixed-rate debt ratios and longer average debt maturity. In addition, for Link Reit, HK$9 billion (US$1.15 billion) in bank loans are maturing in 2023/2024, and another HK$9 billion in medium-term notes, convertible bonds, and bank loans are maturing in 2024/2025.
For example, in the case of CapitaLand Integrated Commercial Trust (CICT), about 81% of the Trust’s total borrowings were on fixed rate borrowings, with an average term to maturity of 3.9 years. CICT’s average cost of debt as of 31 December 2022 was 2.7% per annum.
Looks like the fundraising is to strengthen what looks alright currently.
To quote the notice issued on 13 Feb 2023: “Approximately 40% to 50% of the net proceeds from the Rights Issue will be used (a) to repay existing debt of (i) a total of approximately HK$7 billion to HK$8 billion existing bank loans falling due in 2023; and (ii) approximately HK$1 billion to HK$2 billion revolving bank facilities maturing beyond 1 January 2024; and (b) for general working capital.”
As to the next phase of growth, I can only guess what they have in mind (after the mega acquisition in Dec 2022), which to quote: “The balance will be deployed for pursuing future investment opportunities, with a focus on retail, car park, office, and logistics sectors across Asia Pacific.” That’s a very broad stroke or casting a wide net: encompassing a lot of assets in Asia.
Link REIT’s share prices plummeted by as much as 16%– the biggest one-day loss since 2008 – after it resumed trading following the rights-offering announcement to seek fresh funds. The Reits’ share price ended the day down 12.8%, the most since 2008.
Perhaps the Reit management felt that the real estate market in Hong Kong is at a bottom now and that there may be some opportunities for global real estate.
The rights unit price of HK$44.20 does look tempting, although from a valuation aspect, it is not a big discount. In addition, with the unitholding base expanding by 20%, the dilution is considerably big, if unitholders do not subscribe to the rights issue.
In gist
Post pandemic with global economies normalizing, buoyancy over China re-opening, construction industry gradually recovering to pre-pandemic levels, as with signs of an easing pace of interest rates, Reit managers may be looking at raising cash to give themselves a first mover advantage that could be critical ahead of a potential upturn in the market.
On the other hand, for retail investors, currently, there is no lack of places to park their spare cash given the high yields offered by fixed deposits, Treasury bills, and Singapore Saving Bonds (SSB). In addition with less disposable cash due to rising inflation (rising cost of living) and higher mortgage repayment as a result of rising interest rates, they may now approach the Reit sector with more wariness and perhaps with more cash buffer, for fear of the call from them for more cash input, after a hiatus in 2022. Post-pandemic, we have ‘revenge travel’, and ‘revenge spending’… for Reits, will they have ‘revenge fundraising’?
This is perhaps contrary with what some expected. Some retail investors may be expecting more passive income (dividend payout) from their Reits holdings post-pandemic, given that many Reits have cut their dividend payout during the past 2 to 3 years; and people can now travel and spending has increased. In short, more income instead of more outflow.
The Big Read: With inflation putting the squeeze on families, some give up the frills while others cut back on basics (read here)
The Big Read: Singapore households, businesses not spared from global inflation storm as GST increase looms (read here)
For seniors/retirees dependent on the dividend payouts from their Reit portfolio, it might be a difficult time to cough out more cash for the new units (via rights issue or preferential offers, etc).
Some seniors bear brunt of inflation as children give them less money (read here)
Commentary: Inflation is a silent killer of retirement planning. Here’s what you can do (read here)
Think about it, if a well-capitalized and low-gearing Reit such as Link Reit is seeking fresh funds (to the tune of US$2.39 billion or S$3.21 billion) via a rights issue, what about the other much smaller S-Reits with much higher gearing (see below), lower fixed loan rates, and perhaps with more dated assets in need of urgent renovations and AEIs?
Some of these Reits are perhaps fighting for survival rather than growth. During and after the pandemic, work culture has changed (hybrid work arrangements became prevalent), logistic assets require resilience measures against supply chain disruptions, e-commence adoption has accelerated, etc. Buildings need to adapt or become obsolete.
Comparing the 2H2022 financial results of Prime US REIT, Keppel Pacific Oak US REIT (KORE) & Manulife US REIT (MUST) (read here)
Prime US REIT – current yield is at 18.11%. Value trap or value buy? 4 things you need to know now. (read here)
Link Reit’s announced rights issue is at around S$3.21 billion. For context, the biggest market capitalization Singapore-listed Reit is Capitaland Integrated Commercial Trust at S$13.52 billion. S$3.21 billion (Link Reit’s fresh fund) is approximately one-quarter of S$13.52 billion (CICT’s market cap).
Moreover, with the share prices of Reits still relatively depressed and volatile (with the relatively high-interest rates and high inflation environment we are in), and from the examples of ESR Logos and MLT, investors might be better off waiting for lower share prices after the fundraising ended. Well, then again, nobody can predict short-term price fluctuations and interest rate movement.
It is ultimately dependent on the individual Reits’ fundamentals and overall narratives as well as the value derived from the new unit price. Price is what you pay, and value is what you get. No two Reits are the same.
Shall leave you with this cute little song. We are always learning and moving forward in our investing journey…. we will trip and fall. Investing in Reits, feel like taking 2 steps forward, and 3 steps backward at some time, doesn’t it?
Note: I am currently vested in Mapletree Logistics Trust and Link Real Estate Investment Trust.
Thank you for reading.
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A Pen Quotes 
Link Reit is trying to become a REIM like Capitaland Investment. They want to switch to a more asset light model where the AUM greatly exceeds the NAV and the Gross Profit margin per property goes up. CEO George Hongchoy has said as much. However, I still can’t agree with them raising equity at such a low price, without even bothering to provide a detailed rationale/presentation on why.
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Thanks for sharing.
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