Goola Warden Mon, Jul 04, 2022
Covid and the pandemic of 2020– 2022 wasn’t the first global disaster CapitaLand Integrated Commercial Trust (CICT) journeyed through. As CapitaLand Mall Trust (CMT), and barely a year after its IPO, Sars kept people away from shopping centres and malls. Sars was, however, short-lived, and controlled within months.
The next major disaster was the global financial crisis (GFC). As the GFC was taking hold, in Aug 2008, CMT, at the time under different management, acquired The Atrium@Orchard for $839.8 million from Singapore Land Authority.
Because of its fall in valuation, CMT announced a dilutive rights issue in Feb 2009, at 82 cents per unit compared to its last done price at the time of $1.45. The rights issue price was at a 50% discount to the pro forma net asset value and the theoretical ex-rights price or TERP was at a 30% discount to NAV.
Some 14 years later, the valuation Orchard @ Atrium has yet to surpass the purchase price. As at Dec 31, 2021, The Atrium@Orchard was valued at $756.2 million.
“In retrospect, the acquisition was quite strategic, but the building was not in the best shape. It was a good opportunity to own Atrium and integrate it with Plaza Singapura. We look at it in totality and both have come along very well. I would not want to isolate the value of Atrium on its own,” Tony Tan, CEO of CICT’s manager, explains.
Other recent dilutive rights issues
Since the GFC, CMT has grown its assets, NAV and DPU, overcoming the negative impact of its 2009 rights issue.
In September 2020, IREIT Global announced the purchase of the remaining stake of 60% in four Spanish office buildings it did not own from Tikehau Capital for EUR47.8 million. Tikehau Capital is one of IREIT Global’s two sponsors, the other being City Developments.
The manager then announced on Sept 18, 2020, that it would raise $142.8 million or EUR88.7 million through the issuance of 291.4 million new units with a ratio of 454 units for 1,000 units at 49 cents apiece. This would result in a theoretical ex-price (TERP) of 65.5 cents. IREIT Global last traded at 61 cents as at July 4.
Based on pro forma net property income and distributable income for 1HFY2020, and FY2019, the transaction was dilutive, diluting DPU by as much as 21%. DPU in FY2021 fell to EUR0.293 from EUR0.321 in FY2020.
ARA LOGOS Logistics Trust (ALOG), which is now ESR-LOGOS REIT following the completion of a merger with ESR-REIT, also had to contend with a dilutive equity fundraising (EFR) exercise. In 2020, ALOG announced it planned to acquire five properties in Australia and stakes in two Australian-based property funds. The EFR was dilutive, according to ALOG’s 2020 circular, with its pro forma DPU falling by 3.2% to 5.347 cents compared to the reported DPU of 5.523 cents in FY2019.
In FY2021, ALOG reported a DPU of 5.034 cents, a decline of more than 3.2%. However, ALOG’s unit price rose to above its NAV, while DPU yield compressed to the extent that when its turn to merge with ESR-REIT came round, proxy advisors to institutional investors said that the merger terms were not fair to ALOG’s unitholders.
Elsewhere, the two Riady REITs announced dilutive rights issues in 2020, from which they have yet to recover. Lippo Mall Indonesia Retail Trust (LMIRT) announced in September 2020 that it would raise $280 million by issuing more than 4.68 billion units at 6 cents per unit, which was 160% more than the 2.93 billion units in issue. Hence LMIRT’s rights issue was in the ratio of 160-for-100 units and it was clearly dilutive despite the acquisition of the iconic Lippo Mall Puri with the rights monies.
In December 2020, First REIT announced a 98-for-100 rights issue at 20 cents a unit, to raise $158 million to refinance a loan from Oversea-Chinese Banking Corp and CIMB Bank.
First REIT’s hospitals in Indonesia were master leased to Lippo Karawaci, which is related to its current sponsors OUE and OUE Lippo Healthcare. Lippo Karawaci and its subsidiaries had been paying the rent in Singapore dollars from IPO in 2006 to 2020 but this became untenable following the weakening of the Indonesian rupiah against the Singapore dollar in that period.
When Lippo Karawaci unilaterally changed the conditions for the master lease agreements, First REIT’s manager had no choice but to lean on unitholders for cash, or First REIT would experience a default.
First REIT’s structure is a case where the companies related to the sponsor are the main tenants, the manager is owned by the sponsor, and the reliance on the sponsor creates a risk.
Earlier this year, First REIT attempted to diversify away from Indonesia by acquiring Japanese nursing homes, albeit from its OUE Lippo Healthcare.
Lessons not learnt
As we approach CICT’s 20th anniversary, lessons have not been learnt from the past 20 years. A major risk to a REIT is if the tenant, the sponsor and the manager are all owned by the same entity.
REIT investors went through a dramatic shift in 2017 when Vibrant Group, the former major tenant of Sabana Industrial REIT through master leases, tried to stuff Sabana REIT with overpriced properties. It attempted to do this after a dilutive rights issue announced in December 2016, by boosting valuations of three proposed acquisition properties by either higher rents than market and master leases. Eventually, the scheme fell through.
In 2019, with the Vibrant incident still fresh in mind, Eagle Hospitality Trust (EHT) was offered to local and Asian investors and listed in May 2019 at 78 US cents. Here, as with other financially engineered REITs, hotels were valued based on long master leases, including the Queen Mary Long Beach, a ship.
Unlike say EC World REIT, which gave valuations excluding the master leases during its IPO in 2016, Eagle Hospitality Trust’s prospectus did no such thing.
The Queen Mary was unusual in that the sponsors were paying US$300,000 a year for the land rent. Yet, the sponsors capitalised on Queen Mary’s cash flow for 20 years, albeit at a discount rate of 12%, and sold it into the trust for US$139 million, paid for by unsuspecting local and other Asian investors.
Barely a year later, EHT defaulted on a loan because its sponsor was not able to meet the master lease agreements. EHT’s subsidiaries filed for Chapter 11 protection. Through the US bankruptcy courts, secured lenders managed to get back a significant amount of their loans, but equity holders were left with nothing.
Most recently, EC World REIT announced it too, could experience cross defaults. Unlike Eagle, though, EC World REIT has paid out generous DPU since its IPO of more than 30 cents compared to its IPO price of 81 cents in 2016.
Unfortunately, EC World REIT’s sponsor, Forchn Holdings is also the REIT’s major tenant, and it owns the manager. While this shows alignment, it also gives rise to “key man risk” as there is no diversification of risk.
On June 29, EC World REIT’s manager acknowledged that the REIT had challenges with its refinancing. “If at least 25% of the aggregate principal amount of the outstanding offshore facilities is not repaid by 31 December 2022, EC World REIT faces an event of default which will trigger mandatory prepayment of the offshore facilities,” says EC World REIT’s manager.
The manager confirmed that the event of default will trigger cross defaults across EC World REIT’s other existing facilities such as the onshore facilities and revolving loan facilities.
A lot more disclosure than Eagle
Unlike EHT, EC World REIT’s initial valuation of the properties did not take into account the master lease rents but instead used underlying rental rates. In its FY2021 annual report, the REIT has been very transparent. The gross revenue of the portfolio was $125.5 million and the DPU for the full year was 6.263 Singapore cents. The projected revenue derived from market rent would have been $116.8 million and the corresponding DPU would have been 5.662 Singapore cents.
In FY2021, related party rents totalled $105.87 million, or 84% of revenue. This percentage is marginally lower than the FY2020’s related party rents of $93.92 million versus revenue of $109.72 million.
Based on disclosures and answers to questions posed by SGX, EC World REIT’s manager is making every effort to solve its refinancing woes. It is racing against time, and unitholders may want it to win this race. Stay tuned.