08/2019
Acquisitions by REITS in the first 7 months of 2019 have continued to be fast and furious, building on the momentum from 2018. April 2018 has gone down in the history of SREITS as the month with the largest amount of acquisitions announced. 5 REITs, namely Manulife, Mapletree Logistics Trust (MLT), Frasers Logistics Trust (FLT), Mapletree Industrial Trust (MIT) and SPH REIT all announced acquisitions totaling a whopping $1,368.36 million in a single month!
This record has been NOW been broken in July 2019 with 3 REITs, namely Suntec REIT, Frasers Logistics Trust and Capitaland Commercial Trust making acquisitions that totaled $1,424.04 million!
Along with record-setting acquisitions, 3 REITS, namely Capitaland Commercial Trust, Frasers Logistics Trust and Capitaland Retail China raised a record $520.926 million through private placements and preferential placements. Despite many analysts warning of SREITS being expensive and time to Sell, SREITS posted another record month in new funds raised.
SREITS went on a rampage last year with $9.056 billion worth of acquisitions. This was indeed an astounding new record. Coupled with $4.386 billion of new funds raised to finance the acquisitions, this record has taken on a new spin.
Understandably, due to limited investible local assets, SREITS have been increasingly looking overseas for growth via acquisitions. However, growth via overseas acquisitions do not equate to growth in REIT prices for REIT holders as overseas acquisitions should be analyzed with greater scrutiny due to limited information and lack of independent grounds for verification of certain trends and facts in relation to reversionary rentals, occupancies and tenants’ veracity. In addition, the scare that emanated from last year on the tax transparency for REITS with US assets are real factors that smart REIT investors should take into account.
Most analysts buy reports are based on the presentation materials dished out by the REITS, which naturally, will have to dispense out positive information to justify their acquisitions. The smart investor should always question if indeed some of the information dished out to justify the acquisitions are indeed verifiable to justify the price paid.
For me, acquisitions done in the past 2 years are indeed illuminating as SREITS who have become too adventurous in their foreign acquisitions have seen their share prices under performed, in part due to an overhang of funds raised to finance such acquisitions as well as investors skepticism of such acquisitions.
Not all REITS Acquisitions have benefited minority shareholders
Cache Logistics
For instance, Cache Logistics announced on 31 Jan 2018 its foray into Australia with the acquisition of 9 logistics warehouses in various parts of Australia worth A$188.26 million. Its share price then was 86 cents.
I had then highlighted to our participants of our Quarterly REIT class that for the high price that Cache Logistics paid, the timing (entering Australia at such late-stage of the property cycle) and the fact that Cache has had to sell off a good Singapore asset located at 40 Alps Avenue known as Hi-Speed Logistics Centre to help finance the acquisitions, Cache Logistics share price will definitely suffer.
18 months hence, Cache Logistics closed at 69.5 cents in for the year 2018, down a phenomenal 19.2%. 18 months later, the price is down at 80 cents, representing a loss of % as at 31 Jul 2019. Cache Logistics has had to issue Perpetual securities costing 5.5% per annum to help finance the acquisition, which to my mind, was certainly very costly which would negate whatever little positive-carry from the Australian acquisitions and leave very little buffer for the shareholder in terms of margin of safety.
Cache Logistics price closed at 77 cents on 31 Jul 2019 - The share price speaks.
Frasers Logistics Trust, FLT
Then on 20th Apr 2018, Australian-focus Frasers Logistics Trust, FLT announced a whopping Euro 596.8 million acquisition of 21 logistics and industrial properties in Germany and Netherlands. Its share price then was $1.08.
Not surprisingly, FLT subsequently announced a humongous private placement of 331.2 million shares at $0.987 and a rights issue 1:10 at $0.967 to raise a combined total of $476 million to help finance the acquisitions.
8 months hence, FLT closed down at $1.07 at end-Sep. Notably, its share price has just gone sideways, hardly breaking above $1.08 since the acquisitions of the 21 European assets were made.
FLT had acquired the European assets with a lower sub-par 5+% NPI yield as compared to its 50+ Australian asset with close to 7% NPI yield. How does the former add value to the latter other than geographical expansion? Is this a case of expanding for expansion purposes?
It was not until 1st Feb 2019, almost 10 months later that FLT share price convincingly crossed $1.08, certainly a big laggard compared to the other 3 bigger Industrial REITs like Ascendas REIT, Mapletree Logistics Trust and Mapletree Industrial Trust which all registered outstanding performances of between 17.28 – 26.19 % gains in 1H2019.
FLT share price closed at $1.20 at end-Jul 2019 - The share price speaks.
Cromwell REIT
On 21st Jun 2019, Cromwell REIT announced its plans to acquire 6 properties for €246.9 million (S$380.6 million). 3 of the properties are located in Grand Paris, 2 in Krakow and 1 in Pozna. The intra-day high share price before the announcement was €0.53.
Cromwell had previously failed to list in 2017 as its then proposed portfolio consisted of several Polish assets that were considered more risky than its blended portfolio which included offices and warehouses in Germany, Netherlands, Denmark, Finland and Italy.
Cromwell then subsequently did not include the Polish assets in the subsequent re-submission for its IPO which enabled them to list on Nov 2017 at €0.55.
Post-IPO, this latest acquisition will edge its Polish exposure up to 11.8% comprising of 6 assets.
I am always wary of REITS that announce acquisitions as a package of assets as the overall blended figure may actually overshadow some of the underlying key parameters.
For instance, Cromwell proudly boosted that its latest acquisitions came with a very attractive net initial yield of 7.4% which is substantially higher than the 5.8% enjoyed by its existing office portfolio. A closer analysis will reveal that Cromwell’s 2 Krakow assets boost initial yield of 7.5% while the Poznan freehold property boast an even more impressive initial yield of 8.0%. Is this over shadowing the 3 Paris assets?
The Cap Mermoz property actually only yields 6.1% while the 2 others in Paryseine and Lenine yield 6.8%. The latter 2 are actually not your typical Grade A office properties, but are 3-level warehouses which obviously are of higher risk. Thus, not surprisingly, investors should be demanding higher yields.
Cromwell undertook a massive 328.086 million private placement of shares to raise €150 million to fund these acquisitions. Minority shareholders who were not offered the private placement at €0.46 would have been diluted as the private placement price was at a large discount of 8.1% (by far close to the largest discount for private placements YTD) to its VWAP of €0.5004.
Cromwell’s share price has wallowed below €0.53 ever since.
This latest acquisition and fund raising is Cromwell’s 4th and 2nd respectively after its listing in November 2017. Hardly has the dust settled from the last purchase before another begins.
We have always taught in our REITS classes that it is vital to assess each acquisition to see if indeed the various acquisition enhances DPU as what the pre-acquisition presentation deck suggest and to what extend do they enhance DPU. In Cromwell’s case, finding the answer is like searching for a needle in a haystack.
Cromwell’s share price has not gone above €53 cents since last November while the Top-10 Performing SREITS has surged by between in 21.89 – 31.87 % in 1H2019.
Cromwell closed at €0.51 on 31st Jul 2019. As always, let the share price speaks.
UPCOMING EVENT IN AUGUST 2019
INVEST FAIR AT SUNTEC SINGAPORE CONVENTION CENTRE HALL 401-402
ON 18 AUGUST 2019 (FREE ADMISSION)
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