Investors may need deeper pockets as Reits raise cash for expansion

IT IS not an easy time to be a real estate investment trust (Reit) manager. It could soon become just as difficult for Reit investors, particularly those without cash to spare.

Last year was one of the worst years for Singapore-listed Reits (S-Reits), as interest rate fears and geopolitical uncertainty fuelled a sell-off.

But with signs of an easing pace of interest rate hikes and buoyancy over China’s reopening post-Covid, S-Reits raced to a stellar start in 2023.

In January, the iEdge S-Reit Index posted 7.1 per cent in total returns – outpacing the 3.5 per cent total returns of the Straits Times Index.

That optimism might have lulled S-Reit managers and investors to believe that the worst is over – and that it is time to ramp up efforts to capture growth.

Here, however, the interests of Reit managers and investors diverge. For managers, this is the time to raise money and stuff the war chests for potential acquisitions ahead. For investors, however, now may not be the best of times to cough up extra cash.

The apprehension is understandable, given that stubbornly high US inflation data continues to feed interest rate jitters.

A case in point is ESR-Logos Reit , which last week became the first S-Reit to launch an equity fundraising in 2023.

The Reit manager on Feb 16 proposed to raise S$300 million – through both a private placement and preferential offering that will raise S$150 million each – to fund future acquisitions, redevelopments and asset enhancement initiatives (AEIs).

The private placement to new and existing institutional investors was three times subscribed at S$0.33 apiece – at the bottom of the issue price range.

The issue price represents a 5.8 per cent discount to the volume-weighted average price (VWAP) of S$0.3502 for all trades in units of ESR-Logos Reit on the Singapore Exchange on the day before it announced the equity fundraising.

The price for its preferential offering to all existing investors has been fixed at S$0.325 apiece – at a S$0.005 discount to the private placement price – and will be launched if the resolution passes through at the next extraordinary general meeting. The price also represents a 7.2 per cent discount to its VWAP.

On the face of it, ESR-Logos Reit’s equity fundraising is a good move. The infusion of cash should de-risk its balance sheet and position it for potential accretive acquisitions.

Post-equity fundraising, ESR-Logos Reit’s gearing will fall to 38 per cent – from 41.8 per cent as at end-December 2022.

The Reit manager has also earmarked S$450 million of non-core assets to be divested over the next 12 months, which will mean its gearing could drop further to 32.3 per cent. If all goes according to plan, ESR-Reit will have a debt headroom of S$1.1 billion (based on the gearing limit of 45 per cent).

Aggregate leverage of its industrial S-Reit peers such as Mapletree Industrial Trust , CapitaLand Ascendas Reit , Mapletree Logistics Trust and Aims Apac Reit stood at between 36.3 per cent and 37.4 per cent.

Investors in ESR-Logos Reit haven’t taken so well to the news, though.

After it announced the close of the private placement exercise on Feb 17, units of ESR-Logos Reit fell 5.7 per cent or S$0.02 to close at S$0.33 – the same as the private placement issue price.

Investors reacted similarly to the fundraising exercise of Hong Kong-listed Link Reit, the largest Reit in Asia by market value.

Link Reit units tumbled 12.8 per cent on Feb 13 after the Reit manager announced a HK$19.3 billion (S$3.3 billion) rights offering to bankroll expansions.

This fall came after Link Reit on Feb 10 said it will issue as many as 437.7 million units on the basis of one for every five existing units.

The Reit, which in December 2022 bought Jurong Point and Swing By @ Thomson Plaza from NTUC unit Mercatus Co-operative for S$2.16 billion, said it will use the proceeds to repay existing debts and pursue investment opportunities.

The manager expects its net gearing ratio to decrease to below 20 per cent with the rights offering.

Both ESR-Logos Reit and Link Reit may have given themselves a first-mover advantage that could be critical ahead of a potential upturn in the market. And more Reits may now want to follow in their footsteps.

For investors who like a particular Reit, fundraising is an opportunity to amass more units at a discount.

But some investors may now begin to approach the Reit sector with some caution, for fear that more Reits may call upon them for cash.