PRIME US REIT - Maiden Distribution, Placement, DPU and NAV Accretive Acquisition

On 12 February 2020, PRIME US REIT requested for trading halt to announce the following:

• Announcement of 4Q19 and FY19 results
• Sale of new units at USD0.957 via private placement to raise USD 120m (inclusive of 20m upsize option exercised)
• Acquisition of Park Tower in Downtown Sacramento, California for USD165.5m
• Estimated maiden distribution of 4.11 US cent consisting of FY19 distribution and advance distribution for period 1 Jan 2020 - 20 Feb 2020 in relation to the private placement

See following announcement on SGX:

• Full Yearly Result for FY2019
• Launch of Private Placement to Raise Proceeds of not less than USD 100m
• Acquisition of Park Tower
• Capital Distribution - Mandatory

PSA - Please do not forget to send your W8-BEN to avoid the 30% withholding tax for your distribution!

Performance for 4Q19 and FY19
In my opinion, the REIT did fantastic in beating the forecast. It will be interesting to see where PRIME goes from here.

Source: FY19Results Presentation Slide, Page 6

• 4Q2019
• DPU of 1.77 US cents (9% above forecast of 1.63 US cents)
• Gross Revenue of USD33.5m (Above forecast of USD32.9m due to higher rental income and recoveries income)
  
• NPI of USD22.3m for the quarter (3% above forecast of USD21.3m)
• Income available for distribution was USD16.4m (8.8% above forecast of USD15m)

• FY2019
• DPU of 3.15 US cents (7.5% above forecast of 2.93 US cents)
• Income available for distribution at USD29.2m (7.3% above forecast of  US$27.2m)
• Gross Revenue of USD60.7m (2.2% above forecast of USD59.4m)
• NPI of USD40.2m (2.9% above forecast of USD39m)

FY2019's DPU of 3.15 US cents is for the period between 19 July 2019 - 31 Dec 2019. If we annualise this figure, we get 7.09 US cents. At today's closing price of USD1.040, this works out to an annualised yield of 6.8%.

Trivia: If you are a Singapore unitholder and you subscribed to the public tranche, your annualised yield on cost for your IPO units works out to be about 8.2% - the increasing forex rate has played a part in slightly raising this too.

Also do note the management is currently opting to receive 80% of their base fee in units and DPU will be lower if they opt to receive more or all of the base fee in cash.

Usage of Placement Proceeds

• ~USD115m to partially fund acquisition of Park Tower, with remainder funded by debt.
• ~USD5m to pay for fees and expenses in connection with private placement and acquisition.
• Balance of gross proceeds (if any) to be used for general corporate and/or working capital purposes.

Acquisition of Park Tower
The property in question is Park Tower in Downtown Sacramento, California. The acquisition will be USD165.5m, representing a discount of  2.7% over its valuation of USD170.1m (given as at January 2020).

Source: Acquisition Presentation Slide, Page 8

This will expand their portfolio to include a new market, and the enlarged portfolio also adds government into the tenant mix.

Source: Acquisition Presentation Slide, Page 12 and 13

They touted Downtown Sacramento as "One of US's Strongest Real Estate Market".

Source: Acquisition Presentation Slide, Page 9

Collier's 4Q2019 report for Sacramento seems to support this:

• 4Q2019 Average Asking Market Rates for Downtown Class A increased by 9.1% to USD3.35/SF y-o-y.
• It was also mentioned in the last page of report that "Space constraints Downtown remains an issue with no sign of letting up any time soon".

Sere: Collier - 4Q2019 Office Report - Sacramento

Gearing after Acquisition and Placement
The aggregate gearing as at 31 December 2019 is indicated at 33.7% (Source: 4Q19 Financial Report, page 9 and FY19 Results Presentation Slide, page). Working out some calculations, the gearing should work out to 30% 33% - 33.1% after the placement and acquisition. (please correct me if I'm wrong - I'm happy to make any necessary corrections) (2020-02-17 - Made corrections to my calculation, my bad)

Source: FY19 Results Presentation Slide, Page 7

DPU and NAV Accretive Purchase
Taking a look at the 4Q19 Results and the Acquisition Presentation Slides, they have announced the private placement to fund the acquisition will be accretive to DPU, and to a much lesser degree, to NAV as well. I do wish there was a rights issue to participate in instead but understand their rationale behind the private placement.

Anyway, onto the main topic:

Source: Acquisition Presentation Slide, Page 15

So based on the presentation slides for the Acquisition, they are running the numbers with the following:

• Assuming 106,045,000 new units are issued at illustrative price of USD0.943
• Assuming raising only USD100m. The figure for overallotment being exercised is given in the footnotes.
• Units to be issued for Management Base Fees on 31 Dec 2019 is excluded.

(a) Units to be issued for Management Base Fees Excluded
Based on the 4Q19 Financial Report (page 14), 1,374,720 units are to be issued for Management Base Fees. This is what they were referring to when they mention in the footnotes "Excludes units to be issued at 31 Dec 2019." While these units will not be entitled to FY2019 distribution, they will be entitled from 1 Jan 2020 onwards - that includes the advance distribution before the placement shares are issued. The changes are not meaningful and do not impact the numbers shown.

(b) Price and Number of new units
Illustrative Price of USD0.943 is the mean value of USD0.928 and 0.957 and rounded up from 0.9425. With 125,392,000 new units to be issued out at USD0.957, the numbers remains unchanged.

However, since over-allotment is exercised, the Pro-forma DPU and NAV is actually 3.20 US cents (after round up from 3.196) and USD0.894 respectively, remaining unchanged to what is mentioned in the footnotes.

Closing thoughts
I am happy with the outperformance from forecast and the acqusition being DPU-accretive. I am only finding it a pity I was not able to try and get more units during IPO and the early days since launch.

With the current USD/SGD exchange rate and my tiny shareholding of 1000 units, I should be getting about SGD55-56 for the distribution to be paid on 30 March 2020.

Still keeping fingers crossed for opportunity to participate in rights issue.

New Feature - Introducing Stock Database
While still in its infancy, I am excited to try out starting this project to maintain a database of stocks and personally tracking major announcement of shares.

You can check it up by accessing the the Database here! On the desktop website, you can also access the Database page via the tab on top, while you can also select the page from the dropdown box

PRIME US REIT and Lendlease Global Commercial REIT represents my initial entries to the database (yes I just started out and not done with past events yet, haha!) - feel free to check it out too!

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Elite Commercial REIT IPO - Now Open!

The IPO for Elite Commercial REIT ('Elite CREIT') is finally open for application!

The REIT looking to raise gross proceeds of 130.9m by offering 114,686,200 units at £0.68 (SGD 1.21) each, of which 5,734,300 units available for the public offering. The timeline of the IPO is set out as below:

Timeline
28 Jan 2020 @ 9pm - IPO open for application
4 Feb 2020 @ 12pm - IPO application closure
5 Feb 2020 - Balloting of application for IPO
6 Feb 2020 @ 2pm - Trading commences on SGX market

You may access the prospectus from MAS OPERA via the link below.

Elite Commercial REIT - Final Prospectus/Product Highlights

I will do a recap based on my previous post, then expand on it in this article based on new info available.

Previous post: Elite Commercial REIT IPO - Early Look

Updated Summary / Recap

• Pure-play UK-focused REIT, focusing on office assets. 
• Market Cap of 230m at launch.
• Portfolio consists of 97 freehold properties all located in the UK, with 100% occupancy and >99% leased to the UK Government.
• Properties all let on co-terminus, fully repairing and insuring (triple net) leases.
• Projected Yield of 7.1% for FY2020 and 7.2% for FY2021.
• The yield of 7.1% for FY 2020 and 7.2% for FY 2021 is under assumption which the manager fees are in units instead of for FY2020 and FY2021. If manager fees are in 100% cash instead, the yield will be 6.3% and 6.4% respectively.
• Management fee:  

• Base fee of 10% of distributable income per annum.

• Performance fee of 25% difference in DPU between the present financial year and the preceding financial year, multiplied by weighted average numbers of issued units in the financial year. This is only payable if there is growth. 

• Sponsors will hold ~19% holdings collectively.

Pricing of IPO / Valuation
With the pricing out at £0.68 (SGD 1.21), this puts the P/B at ~1.03 based on the valuation of the portfolio at £319.1m. The P/B then compares favourably with commercial REITs such as CapitaCom Trust and Mapletree Commercial Trust. But do note those are Blue-Chip REITs -  the market seems happy to pay premium for stable large-cap and blue-chip REITs.

Of note is when the portfolio was initially acquired on Nov 2018, it was then valued at £282.15m due to the ongoing Brexit situation, which would have given it a P/B of ~1.16.

See:
Elite Partners Capital Acquires 97 Freehold Commercial Properties in U.K. Worth £282.15 Million
Growth
The leases to the UK Goverment has a built-in rental escalation every 5 years based on UK Consumer Price Index (CPI). This is subject to an increase between 1% - 5% annually, giving predictable growth to distributable income.

Beyond this? I see a need for the REIT to make property acquisition.

Gearing / Likelihood of Rights Issue and Placement
The gearing ratio is at 33.7% on launch. Given the small size of this REIT and the gearing limit of 45%, it does not leave much room to make acquisition by taking up more debt alone.

As such, I see high likelihood of rights issue and/or placement in the future.

Forex
The public offering price of SGD1.21 puts the forex rate at 1.7794.

Previously I mentioned Forex opportunity and risk playing a big part in evaluating whether it will be a good idea for one to participate.

My personal opinion remain that forex is still a big uncertainty, but once again, different investors may see otherwise.

Articles by fellow financial blogs
Other financial bloggers have also written articles on this IPO and you can check them out here:

• Seedly - "Elite Commercial REIT: What Investors Need to Know about this IPO"
• Financial Horse - "Elite Commercial REIT IPO Review: 7.1% yield backed by the UK Government – too good to pass up?"
• InvestmentMoats - "Some Info I looked into on Elite Commercial REIT"
• Probutterfly - "First Impressions of Elite Commercial REIT"
• Dr Wealth - "Elite REIT IPO: Do not buy yet!"
• The Smart Investor - "3 Important Aspects of Elite Commercial REIT You Should Know"
• Singapore IPOs - "Elite Commercial REIT"

What I like about this REIT

• The management fee is aligned to the performance and hence the interest of the REIT unitholders
• Responsibility for repairs is transferred to the tenants.
• Solid tenancy - Tenancy virtually taken up by almost 100% UK Government.
• Built-in rental escalations which will offer 
• Some safety factor exercised into tenant break options scenario to bring up the yield.
• Based on P/B of 1.03, the IPO is actually reasonably priced.
• The initial yield is decent regardless if the manager opt to receive their fees in units or cash.

Some of my concerns:

• Forex - My opinion remain unchanged that forex is too much of an uncertainty. This is my biggest concern of the lot by miles. Investors who are bullish on GBP/SGD will be well-rewarded if this currency pairing goes up.

Will I buy it?

Given that the Forex uncertainty is a dealbreaker for me in spite of the positives. I will have to give it a miss at IPO. However, if market pessimism has reduced the price adequately, I may very well take another look at it.

Cromwell European REIT - Property Acquisition and Private Placement 21-06-2019

Property Acquisition and Private Placement
Cromwell European REIT (CEREIT) went on a trading halt and announced their intent to acquire 6 new properties in France and Poland for a total of 247m EUR, which is expected to increase net initial yield by 7.4%. To that end, they have raised fund of 150m EUR for the acquisition via a private placement at 0.46 EUR per unit.

Post-placement, the share base is enlarged by 326,086,000 units (about 15%). Consequently, one can expect the distribution down the road to also drop by about 13.1% before accounting for the increase in DPU from the new properties.

You can read more about the acquisition here and here, and the private placement here and here.

Distribution for existing shareholders
To ensure fairness to existing shareholders, the distribution for period 1 Jan 2019 - 1 Jul 2019 will be paid out prior to the issuance of new shares. The stock will go ex-dividend (XD) when the market opens on 28 Jun 2019, with the distribution for the half-year is currently estimated to be 0.0205 EUR per unit (the amount is to be confirmed later on). Payment of distribution is expected on 28 Jul 2019. Comparatively, CEREIT usually gives distribution about 3 months after they have gone XD.

The next distribution will comprise of period 2 Jul 2019 - 31 Dec 2019 after issuance of new shares. Thereafter, the distribution period will continue to be semi-annual as per its usual practice.


My thoughts

• I think that it is interesting the private placement was oversubscribed, suggesting confidence from institutional investors.
• I have slight concern that my DPU will be diluted, but nothing major other than that - there is room for growth without further dilution.
• Personally I wished a second rights issue was done instead (I would definitely have subscribed again), but maybe that will not be as well-received comparing given the previous 38-for-100 rights issue - even the result came in as a surprise for me. I have previously blogged about the rights issue below:
• Cromwell European REIT - Recent Price performance and 38-for-100 Rights Issue
• Cromwell European REIT - 38-for-100 Rights Issue (Part 2)
• Cromwell European REIT - Got all the rights unit I applied for!
• In the short term, I suspect share price will experience some weakness, but not fall below the private placement price

Thanks for reading.

What to take note of when investing in REITs - Part 2

This is a continuation of sharing what to look out for when investing in REIT from my previous article which you can access here.

Readers of my blog will know that I am generally fond of REITs for their distribution payouts and preference for an income investing strategy, making them a popular component (and in some cases, predominantly so) of one's portfolio.

Previously I have discussed about the Property Sector, Gearing and Financing. In this article, I will talk about Weight Average Lease Expiry and Management.

Weighted Average Lease Expiry (WALE)
One of the key risk REITs face is vacancy of their properties. When properties remains vacant for too long, income and hence distribution gets cut as well. This is where WALE comes in as a metric to evaluate the REIT.

WALE is measured across all tenants’ remaining lease in years and is weighted with either:

• The tenant’s occupied area against the total combined area or;
• The tenant’s income or against the total income of the other tenants

For the purpose of this article - longer WALE will refer to those with  5+ years, while shorter WALE will be those of < 4 years.

Properties with long WALE face less risk of vacancy and major tenants (anchor tenants) in properties can greatly affect the WALE so they tend to get the best rental rates.. Take for example properties with WALE of 5 years - they usually have been commitment of leases from large organisation such as MNCs and hence offers stability in income and has an inherently defensive nature. This stability comes at the cost of opportunities to negotiate rent hikes in comparison to smaller tenants however.

In spite of the consensus that longer WALE = better, shorter WALE may not be all bad. Properties with shorter WALE usually has smaller businesses, which usually does not commit to longer lease term in comparison to the larger businesses such as MNCs. Although there is higher vacancy risk and possibly processing/advertising fees involved in properties with shorter WALE, this offers opportunities for rent hikes and hence avenue for growth in income.

Even among properties with shorter WALE, however, there may be scenarios where WALE is questionably short. Properties with WALE which is too short may be a concern to investors - see my post regarding the planned acquisition of properties by Cromwell European REIT here. Some of the properties to be acquired has WALE of < 1 year.

Management
Management most definitely plays a vital role in the REIT in that the quality of decisions they make can either create or erode value, such as:

• What value are they acquiring new properties or divesting existing properties, its benefit or reason, and whether that aligns to the management's vision.
• What strategy does the management have to drive growth in its portfolio / distributable income. For example, Fraser Logistic and Industrial Trust intends to achieve organic growth through increase in properties rental and inorganic growth through expanding its portfolio.
• In a softer market, what strategy does the management have to ensure resilience in the REIT's performance. For example, Cache Logistic Trust has divested Jinshan Chemical Warehouse as part of their portfolio rebalancing strategy (which has been ongoing since the acquisition of Australian properties).
• How is the management fee in comparison to the other REITs. It's also desirable to find REITs which has the management fee tied to how well it has performed as compared to a fixed management fee.

While the saying "past records are not indicative of future performances" will always need to be kept in mind, they do offer an area which one can evaluate the quality of management.

Thanks for reading!

What to take note of when investing in REITs - Part 1

This is part 1 of a series that shares about what to look out for when investing in REITs.

Readers of my blog will know that I am generally fond of REITs for their distribution payouts and preference for an income investing strategy, making them a popular component (and in some cases, predominantly so) of one's portfolio. Here are some areas to look into when studying REITs to invest in.

Property Portfolio / Sector
REITs holds properties that could be industrial, logistic, hospitality, commercial and/or retail in nature. Some of the sector could be defensive in nature (Retail). Some of these sector could be cyclical in nature, affecting the performance of the share, both in distribution and in capital gain. And among the properties in the portfolio, they vary in their performance; some of the properties in the portfolio could generate more value than others and the REIT will monitor these and make changes from time to time (as we do for stock portfolio reviews).

Debt Financing
Part of how REITs finance their operation are done by loan facilities. This leads to the need to pay attention to Interest Coverage Ratio and the debt maturity profile. Examples from Cache Logistic Trust is shown just below:

Source: Cache Logistic Trust

With the interest rate hikes, investors who are looking at REIT will want to take note how the interest may be hedged (how much of the financing is on fixed rate) or how much change is there in the interest rate during refinancing. Here is also an example from Cache Logistic Trust which shows the projected change in Pro Forma DPU after refinancing.

Source: Cache Logistic Trust

Gearing Ratio
SGX-listed REITs can only have gearing ratio up to 45%. Past this, financing by debt is no longer an option; the REIT will have to look into other means of fundraising such as divesting assets, issuance of new shares (rights issue, placements, etc), causing dilution (usually).

Having said that, high gearing may not be a bad thing so long as that is able to create value to their shareholders and shareholders should evaluate if this matches their risk profile.

Part 2 of the series will be coming soon!

ShareInvestor presents: Investing Strategies for REITs and Business Trusts with Business Outlook 2018

Just thought I'll share this for those who may be interested: there is an upcoming event by ShareInvestor, you may find more details in the pdf by clicking here for full event details.

Date: 10 March 2018
Time: 9am - 12.30pm
Cost (early bird)* : $8 (ShareInvestor member) / $12 (non-member)
Cost: $15 (ShareInvestor member) / $18 (non-member)

There's some cool freebies thrown in as well, so could be worth the time.

* Early bird offers ends at 2nd March 2018.

I'll be going to this myself. :D