Reits, business trusts should avoid raising new equity to fund acquisitions

PUBLIC-LISTED entities face onerous disclosure and compliance requirements. But a listed entity can fairly easily issue securities to raise funds.

Many property development and investment companies hardly make use of their listed status to raise equity in the secondary market.

Some listed property-related trusts, on the other hand, tap the equities market periodically to raise funds.

Many listed real estate investment trusts (Reits) and business trusts are hungry to grow their asset size via new acquisitions. But as these trusts generally distribute most taxable income, they may have little retained earnings to fund new property purchases.

Said trusts would need to raise debt or equity funding. While borrowing more can be considered, trust managers may be keen to maintain a conservative gearing level, and debt is costly when interest rates are high.

Invariably, some trusts issue new equity to help fund acquisitions. 

However, raising equity is tricky in a high interest rate environment. Some trusts may issue new equity at below book value. Prices of trusts often react negatively to news of equity fund-raising exercises.

Add to that the fact that many investors who participated in equity fund-raising exercises by listed trusts may not be making any capital gains, and it’s little wonder that the market doesn’t take well to an equity raise.

In early June, Mapletree Industrial Trust (MIT) completed a private placement of 92.6 million new units that raised around S$205 million. Funds raised are largely for use in the partial funding of the purchase of a data centre in Osaka, Japan, which is expected to boost net asset value and distribution per unit (DPU).

MIT is a constituent of the benchmark Straits Times Index and has a solid track record, as well as a strong sponsor in Temasek’s Mapletree Investments.

Under the placement, new units were issued at a discount to the then prevailing market price. Investors took up new MIT units at S$2.212. The trust’s unit price closed at S$2.20 on Aug 21. 

For the latest quarter ended June, MIT’s DPU rose quarter on quarter but fell year on year. The trust enjoyed positive rental revisions across most property segments.

CapitaLand Ascott Trust

In the latest round of results announcements, some hospitality trusts shone. Helped by robust growth in lodging demand, CapitaLand Ascott Trust (Clas) posted a 19 per cent year on year rise in distribution per stapled security (DPS) for H1. 

Prospects for Clas, which focuses on serviced residences, rental housing properties, student accommodation and other hospitality assets, look rosy. In its latest results presentation, Clas’ managers said the trust is poised for continued growth and that notwithstanding macroeconomic uncertainties, the demand for accommodation remains robust.

However, Clas’ latest raising of equity funding is hurting investors who held stapled securities of Clas prior to the fund-raising, including myself. 

On Aug 2, Clas announced the launch of an equity fund-raising to raise at least S$300 million in gross proceeds through a private placement and a preferential offering of new stapled securities. 

Funds raised are to be largely used to partially fund the proposed purchase of three assets for an agreed property value of S$530.8 million: The Cavendish London hotel in the UK, the Temple Bar Hotel in Dublin, Ireland, and the Ascott Kuningan Jakarta serviced residence in Indonesia, as well as to help fund proposed asset enhancement initiatives at Novotel Sydney Central, Australia and Citadines Holborn-Covent Garden London.

The private placement was completed, with new stapled securities issued on Aug 14 at S$1.043 apiece. The preferential offering is open for acceptance between Aug 16 and Aug 24. In the preferential offering, eligible investors can get 29 new stapled securities for every 1,000 existing stapled securities at S$1.025 per new stapled security.

Investors who held Clas’ stapled securities prior to the launch of the equity fund-raising exercise are not sitting pretty. 

Take an investor who held 10,000 units of Clas. Prior to the launch of the equity fund-raising exercise, Clas traded at S$1.12 per stapled security. As at Aug 21, Clas traded at S$1.01 per stapled security. 

Said investor can receive a DPS of S$0.02778 for H1 2023 and around S$0.00694 for the period Jul 1 to Aug 13. After including the receipt of the above distributions, said investor is worse off by about S$750. 

Should the investor participate in the preferential offering, he could be looking at a loss as the issue price of the new stapled securities exceeds Clas’ last traded price on Aug 21.

The proposed purchase of the three assets by Clas from The Ascott Limited, a wholly-owned subsidiary of Clas’ sponsor CapitaLand Investment (CLI), might boost Clas’ DPS. But any marginal future uplift to Clas’ DPS may not be worth the pain for investors who have seen Clas’ stapled security price fall post the announcement of the equity fund-raising exercise.

As a major shareholder of Clas, CLI suffers when Clas’ stapled security price falls. But, CLI can draw comfort that it is making progress on asset divestments by selling the three assets. Also, CLI owns the managers of Clas, who will collect an acquisition fee payable in stapled securities of Clas of approximately S$5.3 million. Moreover, the managers of Clas can see their management fees grow as the trust scales up.

Recently, unitholders of Sabana Industrial Reit voted to internalise the management of the Reit. Sponsors, including CLI and Mapletree, and external managers of listed trusts should be mindful that more investors may push for internal management arrangements, where trust investors own the manager, in efforts to achieve cost savings. External managers of listed trusts must up the ante to show that they add value to investors.

The equities market is jittery. Managers of Reits and business trusts should focus on selling assets first and recycling capital raised to fund new property buys, without tapping equity investors for funding.

Singapore’s listed trust sector has come far over the past two decades. Let’s not lose investors’ faith in the sector because of corporate actions which potentially harm investors and change these trusts from being boring, defensive investment instruments.