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Dynasty REIT: At what price would I bite?

Tuesday, October 23, 2012

Recently, I received quite a few emails regarding Dynasty REIT.

With full page ads taken out in the newspapers, few could have missed the promise of an approximate 7% distribution yield. It seems that the REIT is generating quite a bit of interest in the current low interest rate environment.

I have not subscribed to any IPOs in many years, believing that they are on terms which are more in favour of the issuers. Of course, there are cases in which IPOs have done quite well because Mr. Market's sentiment towards them was favourable.

So, for people interested in IPOs, they should develop the ability to read Mr. Market's mind! Personally, I already have great difficulty reading Mr. Market's mind with the help of charts. Without any trading history (i.e. no charts), it is a tall order indeed for me to read Mr. Market's mind towards IPOs.

For example, some people were saying that the unit price of Religare Health Trust would probably do very well because the public tranche was 13.5x over subscribed. On the first day of trading, it tanked 10%. It is still trading below its IPO price today.

What about Dynasty REIT? Could its unit price tank 10% on the first day of trading too? Who knows? I have said before that as an investor for income, I am more concerned with the distribution yield and that any capital gain is a bonus. Of course, we want to avoid any loss of capital at the same time. How do we do this? Buy when things are inexpensive. So, is Dynasty REIT's IPO price inexpensive?

Shanghai International Capital Plaza:
29 floors office and retail building plus a basement.
Committed occupancy rate: 86.8%

The promised distribution yield of about 7% per annum is largely achieved through a waiver of entitlement to income distributions by sponsor units. Now, the sponsor is not being altruistic or generous. It has to do this in order to make the IPO attractive. Without the sponsor waiver, the distribution yield would approximate 4% only. A big difference.

Of course, there are many assumptions that could be made for a possibly higher income distribution over time which could make up for the loss of the sponsor waiver by December 2017. However, we would be counting the chickens before they are hatched and in this case, we are not even sure we have the eggs for counting.

This IPO is heavily engineered and, in my opinion, at 85c to 91c a unit, it is not a good value proposition. I could be interested in initiating a long position if its unit price were to be closer to 55c a unit.

You might also be interested in these blog posts:
1. Religare Health Trust: 8.5 to 9% yield.
2. Perennial China Retail Trust: A weak debut?

24 comments:

AK71 said...

SINGAPORE - Dynasty Real Estate Investment Trust (REIT) opens its yuan-denominated initial public offering today in Singapore's first flotation to be sold in the Chinese currency, seeking to raise up to 5.4 billion yuan or S$1 billion in what is set to be the largest new share sale here this year.

Units in the trust, backed by Hong Kong billionaire Li Ka-shing and sponsored by ARA Asset Management, will be tradeable in both yuan and Singapore dollars.

It is offering between 893.2 million and 900.8 million units to public and institutional investors at an indicative price range of 4.40 to 4.70 yuan apiece, or S$0.855 to S$0.915, it said in a statement yesterday. At least 53.9 million units will be set aside for retail investors in Singapore, it added.

The trust has also secured two cornerstone investors: Credit Suisse and Amundi, an asset management joint venture between Credit Agricole and Societe Generale. Together they will subscribe to between 246.9 million and 254.6 million units, the final number depending on the IPO price.

Including the sponsor's investment of between 109.3 million and 117 million units, the total number of issued units is expected to be 1.15 billion units upon completion of the offering.

Dynasty REIT intends to distribute 100 per cent of its distributable income to unit holders from the date of listing to the end of next year. This translates to a yield of between 7 and 7.3 per cent for next year. The Dynasty REIT IPO will be the second denominated in yuan outside mainland China.

Mr Li, Asia's richest man, and real estate fund manager ARA were also involved in the first - last year's US$1.6 billion (S$1.9 billion) offering in Hong Kong of Hui Xian REIT, which has stakes in Beijing office properties.

If successful, Dynasty REIT's IPO will surpass the S$717.6 million flotation by Far East Hospitality Trust in August to become the largest in Singapore in the year to date.

The proceeds will be used for the acquisition of the special purpose vehicle owning the properties including debt repayment, working capital and other transaction costs.

Dynasty REIT's initial portfolio comprises Nanjing International Finance Center, Dalian Tianxing Roosevelt Center, and Shanghai International Capital Plaza - three commercial properties valued at about 7.7 billion yuan. Dynasty REIT will close its IPO on Oct 24 ahead of an Oct 30 listing on SGX.


TODAY, 19 Oct 2012.

AK71 said...

Dynasty REIT’s initial portfolio comprises of:

1.Nanjing International Finance Center, which has 51 stories of mixed-use office and retail building with two basement levels with a 95.5% committed occupancy rate as of 31 May 2012.

2.Dalian Tianxing Roosevelt Center, a retail mall with 5 stories and 2 basement levels and a 93.2% occupancy rate as of 31 May 2012.

3.Shanghai International Capital Plaza, which includes 29 stories of a mixed-use office and retail building with one basement level and a committed occupancy rate of 86.8%.

Annualised, the forecast distribution yield of Dynasty REIT is 6.8% to 7.1% for 2012. This is based on the maximum and minimum offering prices. Based on these prices, the forecast distribution yield for the next year, 2013, is 7.0% to 7.3%. In the absence of an undertaking of a waived distribution of sponsor entitlements, the distribution yields would have been 3.2% for 2012 and 4.1% to 4.2% for 2013.


SGX, 22 Oct 2012.

opal said...

I agree. The fact that if we don't consider the waiver of sponsor entitlements, the yield is pretty low.

AK71 said...

Hi opal,

Also, I think anyone buying in now must have a high level of confidence in the REIT's ability to have continually heightened positive rental reversions over the next five years; he should also have a high level of confidence that property prices in China will be much higher year after year in the same period in order for the REIT to be able to grow its portfolio using leverage.

Although I am positive on the longer term health of the Chinese economy as well as Dynasty REIT's viability, I am less positive that investing in Dynasty REIT at its IPO is going to be a money maker for retail investors.

rustydoodle said...

Hi AK,

The information on waived distribution for sponsors is definitely useful for the evaluation.

Thanks for pointing it out.

AK71 said...

Hi rustydoodle,

Also, the REIT is going to use about 10% of the funds raised at IPO to support the forecast DPU.

This reminds me of some structured deposit from years ago offered by DBS. That promised a 10% return within 3 months of investing. When we looked carefully, the NAV was expected to reduce by 10% after that. In effect, we would be taking back our own money.

Dynasty REIT's sponsor says that the three properties in question have yet to see their income stabilised. Why then in such a hurry to be public listed? This reminds me of Perennial China Retail Trust when it went public middle of last year.

Yihhtan said...

Hi AK,

Why not buy ARA instead? Current price on ARA is on the high side but buy for its growth potential.

What are your thought on ARA?

Cheers,
YH Tan

AK71 said...

Hi YH Tan,

I was vested in ARA and sold, on hindsight, too soon. I am reluctant to buy in now and will wait for possible pull back before buying in again. :)

SnOOpy168 said...

The 4% post-waiver yield and the claw back to support the DPU are somewhere in the super fine print. I just feel that the backers of ARA and Dynasty somewhat are the HK equivalent of Capitamalls and it's name sake other listed company. Big name and size with bullying small yield.

Perhaps Mr. HK market are used to the CKH or Li's tactics, whereas we are newbies to their high handedness.

AK71 said...

Hi SnOOpy168,

Fine print, indeed. Well, investors will talk with their money and it would be interesting to see how the IPO fares.

The CEO of ARA says he does not think there is any downside. Bold words to go with the fine print. ;)

Yihhtan said...

http://info.sgx.com/webcoranncatth.nsf/VwAttachments/Att_22EF16CB1F8909C448257AA10030E4AC/%24file/PressRelease-DynastyREIT-241012.PDF?openelement. IPO suspended.

AK71 said...

Hi YH Tan,

This is certainly an embarrassment for ARA after all the fanfare.

Dynasty Real Estate Investment Trust, Singapore's first yuan-denominated initial public offering, was suspended on Wednesday as the sponsor for the $866 million IPO said the deal was hit by weak markets.

The sponsor, ARA Asset Management, part-owned by Hong Kong tycoon Li Ka-shing's Cheung Kong (Holdings) Ltd , said there had been "a marked change in investor sentiment given the recent after-market performance of several IPOs and a gradual worsening of the overall market conditions".

"We looked at the book at the end of the day. The demand was there but the demand was not such that we could allocate a transaction which we were comfortable to say would trade strongly in the aftermarket," said Cheun Hon Ho, head of equity capital markets for Southeast Asia at Macquarie, one of the book-runners on the deal.


Blame it on market sentiments. Why not?

Yihhtan said...

Hi AK,

Do you believe what they said. I have my doubt. If there was substantial support why would ARA be worried about "weak global markets"?

Anyway ARA share price should drop tomorrow.

YHTan

AK71 said...

Hi YH Tan,

Indeed, they seem to be trying to save face more than anything else. ;)

It is just an overpriced IPO, imo. If they had been more realistic (read "less greedy"), I am sure things would turn out nicely.

Anyway, it is only reasonable to expect ARA's share price to plunge tomorrow. :)

opal said...

If it does plunge, it will be an opportunity for us to get in :)

JCK said...

What they are saying is this:

With the weak market sentiments i can SUCKer investors that easily..... :)

SnOOpy168 said...

:-( for this action, ARA dropped almost 4.5c on opening. :=(

I think this company and it's backer aren't really my friends afterall.

AK71 said...

Hi opal,

Indeed, it would be. :)

However, I am sure many investors are waiting to get in too. So, I expect that there would be some support in the event of a decline in share price.

AK71 said...

Hi JCK,

When sentiments are bullish, it is the best time to have IPOs, for sure. People are all willing to pay higher prices expecting prices to go higher then. ;p

AK71 said...

Hi SnOOpy168,

I guess you are vested in ARA?

Well, I don't even know these people personally. So, I am sure they are no friends of mine. ;p

Technically, there is some support for ARA's share price at $1.50. Let us see if the support holds.

SnOOpy168 said...

Yes AK. I liked the REITs and it's managers. Both in a sure to make $ group. Just that for ARA, still in $ now, I didn't know when to let go. Still missed the S$1.80....

AK71 said...

Hi SnOOpy168,

Well, if we are vested in good businesses, there is little to worry really. Share prices are transient. Value is what you want. ;)

Ah John said...

ARA, the return of asset (ROA) maintains at ~30%, very good. I think it's good target to watch.

AK71 said...

Hi Ah John,

I am convinced ARA has a good business model and its numbers are impressive. I would re-initiate a long position on possible weakness.

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