02/2020
SMART AND SHAREHOLDER-FRIENDLY ACQUISITIONS WILL DRIVE S-REITS GROWTH IN YEAR 2020
Acquisitions have been increasingly used by S-REITs to grow their asset size, earnings base and extend their geographical presence. S-REITs have taken advantage of low interest rates and recorded new records on asset acquisitions of $9.056 billion in 2018 followed by $10.237 billion in 2019. The staggering total amount of asset acquisitions of $19.293 billion in just 2 years is the highest ever recorded by SREITs in any 2 years, since the REIT market started in 2002.
Thus, it is very important for the smart REIT investor to fully understand the nature and quality of the assets being acquired, the domicile of such assets and the way the REIT finances such asset acquisitions. REIT managers seek to justify every acquisition as “yield-accretive”, but in essence, is these sufficient criteria to assess an acquisition?
There is a big difference between acquiring an asset at market price, which you and I can do, and getting a raw good deal for investors. Unfortunately, many REITs have done more the former than the latter, with serious consequences to their REIT price.
This month’s article and our upcoming Quarterly REITs investment class on 14 Mar 2020 is designed to provide investors with an understanding of the nature of assets being acquired, the domicile of such assets and the way the REIT finances such asset acquisitions.
Again, I have gained various inputs in my personal encounters with the CEOs of REITs or their respective Head of Investor Relations in going through some of their deals as we meet these REITs every other month before we present them to our student investors at our Quarterly REITs class.
When used in good combination and a sufficient market knowledge and experience, the investor will be able to unearth significant insights that separate the goat from the sheep among the REITs. The smart investor will get a good perspective of profitability, financial flexibility, dividend safety, management capabilities, and long-term prospects of the REITs.
Acquisitions by REITS in 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 was 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!
SREITS went on a rampage last year with $10.293 billion worth of acquisitions. This was indeed an astounding new record! Coupled with $6.022 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 necessarily 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 the emanated in 2018 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.
LESSON LEARNED
Growth via overseas acquisitions do not necessarily 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.
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 underperformed, in part due to an overhang of funds raised to finance such acquisitions as well as smart investors skepticism of such acquisitions. On the contrary, the REITs that have executed good or even great acquisitions, have been the ones that have performed well. These are the kind of REITs we unearth for our investors.
For instance, throughout our investment classes, we have advised our students to have a strong positioning in Keppel DC REIT, Singapore’s 1st ever Data Centre REIT. Keppel DC REIT listed on 12 Dec 2014 at $0.93 with 8 assets in 6 countries.
We have always advocated that S-REITs that can consistently make DPU-accretive acquisitions and undertake shareholder-friendly financing structures to finance such acquisitions will be winners in the REIT sector. We help to look out for REITs acquisitions that enhance total return to Unitholders and increase the potential for future growth.
Keppel DC REIT made its 2nd acquisition after its IPO on 12 Aug 2016 with the acquisition of the shell and core Milan Data Centre, its first Italian investment for Euro37.3 million. The acquisition enhanced the REIT’s income stream stability with a 12-year double net-lease that included rental escalations and a six-year renewal option. The Milan Data Centre was fully-leased to one of the world’s largest telecommunication companies and that acquisition extended portfolio WALE from 8.7 years then to 9.3 years.
We told our students who attended our Sat 13 Aug 2016 REITs class that this acquisition could mark a turning point for Keppel DC REIT (was then at $1.14) since its IPO as the structure of the lease, the lengthened WALE, the price paid and the quality of asset were the kind that would propel share price and DPU growth.
Data Centre demand growth was forecasted to take off, far outpacing supply growth as governments globally were planning to speed up broadband roll-out and boost e-commerce. Moreover, many of the technology majors were increasing IT outsourcing, cloud adoption and data sovereignty regulations to drive data centre requirements.
Then barely less than 2 months on 6 Oct 2016, Keppel DC REIT made another acquisition of the shell and core in Cardiff which was again fully leased to one of the largest global cloud service providers on a 15-year triple-net lease basis for GBP34.0 million. The new acquisition extended WALE further to 9.5 years.
This was another great acquisition as data centre users were looking to increase domestic presence or distribute data centres throughout the UK for broader coverage in the run-up to Brexit. Demand growth was forecasted to take off, far outpacing supply growth as the Internet of Things in the UK will drive strong potential with significant investments in new technologies.
Furthermore, the divergence of UK and EU data residency and compliance requirements following Brexit could increase the onshoring of data in both UK and Wales.
Keppel DC REIT then went on to acquire another $300 million worth of assets in 2017, followed by another $500 million in 2018 and top-up 2019 with another record of $600 million new acquisitions, thereby driving up the AUM to $2.58 billion, comprising 17 assets across 8 countries.
Notably the latest acquisitions of Keppel DC Singapore 4 at $384.9 million and 1-Net North DC at $200.2 million on 16 Sep 2019 continued to ascertain the good acquisitions that Keppel DC had been embarking on since its IPO.
Its presentation slide (see below) showed the DPU enhancing impact of the acquisitions – they will boost DPU from 7.32 cents up to 8.01 cents, yes up a whopping 12.4%, not the kind of acquisitions that other REITs have been achieving for their acquisitions in 2018 and 2019, in the less than 3% DPU impact range. This proposed impact is 400% or 4x more than the industry average!
Moreover, the clever use of the financing structure to fund the acquisitions, comprising of: -
1. A Private Placement for 135 million shares @ $1.744 to raise $235.44 million at a mere 2.5% discount (compared to Cromwell REIT’s private placement at €0.46 cents which was a huge 8.1% discount to the VWAP of €50.04 cents on 21st Jun 2019) to the VWAP of $1,7882 and
2. A Preferential Placement of 141.989 million shares @ $1.70 to raise $242.8 million, again at only a small discount of only 4.4% discount to the VWAP of $1.7882
Enabled Keppel DC REIT to raise sufficient funds such that –
1. Existing shareholders, like myself, are not diluted in a big way. The private placement discount of 2.5% was actually the 3rd best private placement done for 2019 at the least discount. The best was the 1.5% discount to VWAP of $2.4189 done by Frasers Centrepoint Trust on 16th May 2019 at $2.382 and the second best was the 2.5% discount to $1.539 done by Ascendas India Trust on 19TH Nov 2019 at $1.508.
2. Existing shareholders, like myself, had a chance to participate in the preferential offer at $1.71 and to apply for excess rights shares. Of course, getting the excess rights was like striking lottery as the lowest prevailing price after 16 Sep 2019 was $1.80 and Keppel DC REIT went on to close at $2.08, a rare feat for S-REITs.
3. This is a highly DPU-accretive acquisition that will enhance DPU by a whopping 12.4% or 400% or 4x the industrial average. The smart and sharp REIT investor should compare this to Soilbuild Business REIT acquisition of 25 Grenfell Street in Adelaide just a month earlier on 21 Aug 2019. Soilbuild REIT went ahead with that acquisition despite the fact that the pro-forma DPU impact would be negative – its Slide 23 of the presentation deck clearly stated that the acquisition would erode and corrode DPU by an astounding 3.3% from 4.986 to 4.82. Not surprisingly, Soilbuild REIT share price went into a tailspin, falling from 58 cents on the date of announcement to as low as 48 cents in Nov 2019. It ended 2019 as the 2nd Worst Performing REIT, down 11.538% on a year when all REITs that have listed for more than a year, all ended up.
4. The financing structure helped raised more than sufficient funds such that the REIT’s gearing actually decreased from 31.9% down to 30.3% after the acquisitions. This again, is another rare feat, among REITs.
In fact, the above are some of the attributes to judge whether REITs will perform well as acquisitions become in vogue going forward.
Do join us for our upcoming class on 14 Mar 2020 to understand and get an advance foothold of the acquisitions to come for 2020, and most importantly, to make your millions from it.
GCP Global recent videos with > 2,000 FB Reached, Engagements and Views –
1. Making Your Millions in REITs
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