S-Reits pursuing growth as Iran war escalates risk poorly timed equity raising exercises

[SINGAPORE] Market watchers who had been closely monitoring Lendlease Global Commercial Reit’s (L-Reit’s) preferential offering of new units might not have been all that surprised by the significant undersubscription rate that was announced last week.

The S$196.6 million equity raising exercise to fund the purchase of a 30 per cent stake in PLQ Mall was announced on Feb 25 – only three days before the US and Israel launched military strikes on Iran, which triggered a broad sell-off in Singapore-listed real estate investment trusts (S-Reits).

In the wake of the turmoil, L-Reit’s market price struggled to stay above the preferential offer price of S$0.558 per unit. The 119-for-1,000 offer of nearly 352.4 million new units ended up receiving valid acceptances for only 186.9 million units, and excess applications for 32.2 million units.

The 219.1 million units that were taken up in total represented an acceptance rate of less than 62.2 per cent.

This meant the underwriters of the deal – DBS, OCBC and UOB – would have stumped up more than S$74.3 million for the unwanted 133.2 million units.

L-Reit closed on Friday (Mar 27) at S$0.54 – more than 3.2 per cent below the preferential offering price.

This week, CapitaLand Ascendas Reit (Clar) is likely to be under the spotlight as it seeks the support of potentially skittish investors for the purchase of S$1.4 billion worth of assets.

On Mar 25, the manager of Clar said S$600 million had been raised through the placement of 249.4 million new units at S$2.406 each, and that a further S$303.5 million would be raised through a 28-for-1,000 preferential offering of 129.1 million new units at S$2.35 each.

Clar closed on Friday at S$2.50.

Should investors be wary of participating in Clar’s preferential offering? Should they steer clear of S-Reits in general? What can managers of S-Reits do to maintain the confidence of the market?

DPU-accretive deals

To be sure, Clar is a far larger entity than L-Reit, and it is likely to appeal to a broader pool of global investors.

With the latest clutch of assets it is acquiring, its portfolio will swell from S$18.5 billion to S$19.9 billion. The most significant of these new properties is a 49 per cent stake in a hyperscale data centre in Japan, for which Clar will pay S$620.7 million.

Clar is also acquiring a 100 per cent interest in a cluster of logistics and industrial buildings at 25 Loyang Crescent for S$504.2 million, and a 50 per cent stake in a premium business space property at 2 Science Park Drive for S$245 million.

In its Mar 24 announcement, the manager of Clar said the acquisitions would be 2.1 per cent accretive to its distribution per unit (DPU), based on proforma estimates for 2025.

Yet, L-Reit’s acquisition of a 30 per cent stake in PLQ Mall was not much less attractive from the perspective of its unitholders.

The deal – which expanded the size of L-Reit’s portfolio from S$3.9 billion to S$4.2 billion – was based on an agreed property value of S$885 million. This was a 2.2 per cent discount to the average of two independent valuations.

The per square foot valuation of the property was also 21 per cent below the average transacted value of four other suburban retail properties over the past couple of years. It reflected a net property income yield that was 17 basis points higher than those four precedent deals.

The acquisition of the 30 per cent interest in PLQ Mall is expected to be 0.2 per cent accretive to L-Reit’s DPU, based on pro forma estimates for its financial year to Jun 30, 2025 (FY2025).

Combined with the 70 per cent interest in PLQ Mall that L-Reit acquired in November last year, its DPU would get a 2.1 per cent boost, based on pro forma estimates for its FY2025.

Escalating tensions, rising risks

Clar’s preferential offering may turn out to be as poorly timed as L-Reit’s, in my view.

When the manager of Clar announced its acquisitions and capital raising plans last week, US President Donald Trump had just pulled back from his threat to bomb Iran’s power plants and told the world that negotiations were underway to end the hostilities.

As the week progressed, however, it became increasingly clear that there was very little chance of an immediate end to the conflict. Iran has maintained a stubbornly defiant stance, and the US has reportedly deployed thousands more troops to the region.

Meanwhile, Yemen’s Houthis entered the fray over the weekend by launching missiles at Israel.

Reflecting the growing pessimism, the price of Brent crude oil rebounded strongly after dipping last Monday. It traded at above US$114 per barrel on Friday, up more than 7 per cent for the week.

Clearly, a prolonged elevation of oil prices could eventually result in higher inflation and interest rates, which would be bad news for yield-oriented investments such S-Reits.

If a souring of investor sentiment pushes the market price of Clar’s units below its preferential offering price of S$2.35 per unit, many of its unitholders may well decide to forgo their entitlements.

Pursuing growth, unlocking value

Against the uncertain outlook for inflation and interest rates, some analysts are turning less bullish on S-Reits, and recommending that investors focus on the largest and most Singapore-centric ones.

No doubt, Singapore’s commercial real estate sector has proven to be relatively resilient through economic cycles. The largest S-Reits in this space are also backed by well-resourced sponsor groups, and will probably continue thriving in spite of the tougher operating backdrop.

Yet, these big, blue-chip S-Reits are also most likely to keep raising funds for acquisitions in the face of uncertainty – potentially testing the limits of investor appetite. The equity raising exercise Clar is currently pursuing is arguably an example of this tendency.

In another example, Keppel Reit seized the opportunity to acquire an additional one-third stake in Marina Bay Financial Centre Tower 3 late last year, despite the deal being immediately dilutive to its DPU. Its preferential offering of new units at S$0.96 each received valid acceptances of just 76.9 per cent. Even with excess applications for 20.1 per cent of the units, the total subscription rate came up to only 97 per cent.

Keppel Reit closed on Friday at S$0.88.

On the other hand, the less benign market conditions might be a catalyst for value unlocking moves by some less well-known S-Reits.

Earlier this month, Hongkong Land acquired a nearly 10.8 per cent interest in Suntec Reit for S$541 million. This came after the Tang Organization completed the purchase of Suntec Reit’s manager from ESR Group, and announced plans to conduct a strategic review.

Hongkong Land said in a statement on Mar 19 that it had invested in Suntec Reit at a discount to its NAV of S$2.03 per unit, and that it recognised the S-Reit’s potential to unlock value across its portfolio as well as its commitment to drive sustainable long-term growth.

Suntec Reit closed on Friday at S$1.49.

The way I see it, a greater focus on value unlocking moves versus acquisitions funded by equity raising exercises across the whole S-Reit market could go a long way in sustaining investor enthusiasm through the uncertain period ahead.