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Prosperity REIT is a listed Real Estate Investment Trust in Hong Kong. It is managed by Singapore listed asset managed firm ARA Asset Management. ARA Asset management also manages Suntec REIT (5.8% dividend yield), Fortune REIT (5.3%), AMFirst REIT, Cache Logistic Trust (9%), Huixian REIT (8.4%).
The REIT entered into a sale and purchase agreement to acquire a 24-storey office tower at 410 Kwun Tong Road in Kowloon, Hong Kong, for HKD1.875 billion (USD241 million). The property is acquired from Ultra Champion Holdings Limited (Champion name!). The purchase is at a discount of 5% from what the valuers think the property is worth.
Yield Accretive Acquisition
The net property income yield is 3%. It looks low, but if you checked Singapore Listed Hong Kong Land’s average yield on their investment property, is not far from that.
The Cap Rate for the recently acquired CapitaGreen by Capitaland Commercial Trust (5.6%) is 3.2% to 3.9% and Frasers Commercial Trust (6.9%)’s B Grade Cap Rate is around 3.75%.
The whole acquisition is funded by debt, so it will be accretive. This means that it improves the dividend per unit for the shareholder.
61% of Shareholders Vote Not to Purchase
Most of the Asian REITs have shareholding where the main sponsor owns a sizable chunk of the REIT.
When it comes to key decisions, decisions always go through because when the sponsor votes for it, its hard for minority shareholders to do anything.
61% of Prosperity REIT shareholders voted not to purchase. One of the big shareholder is CK Property, a property arm of Li Karshing. CK Property was previously known as Cheung Kong Properties. CK Property owns almost 19% of the REIT. In 2012, Li Kar Shing appointed his elder son, Victor Li to head up the company.
While not technically a sponsor, ARA Asset Management, with John Lim grew out from Li Kar Shing’s empire.
In this case, CK Property was against the deal.
The main reason cited:
- The property was purchased at a high price
- Majority of the leases will expire in 2019
- The 26% leverage will go up to 37%, not good in the face of a rising interest rate environment.
ARA’s relationship with Li
It is puzzling why this deal ever got to this state considering if you are ARA’s management, you would have get some sensing from your biggest shareholder.
To make things more confusing, Justin Chui Kwok-hung chairs ARA Asset Management AND is an executive director at CK Property.
The inference here is a confirmation that ARA Asset Management did not have a close relationship with Cheung Kong for a long time.
Cheung Kong do not see ARA as strategic, and asset management firm they needed a pipeline of assets, but also seed capital. The REIT management game, while very lucrative (ARA charges some of the highest REIT management fees around), is intense and competitive and to grow their AUM they need a partner. Hence their relationship with Straits Trading.
Is Oversea REITs more conservative?
The surprising thing to me as an investor was the conservative stance of the investors over there.
The net asset to debt of Prosperity REIT is 25%. Compared to the Singapore commercial REITs, they average 31%-37%. Capitaland Commercial is the lowest at 31%, while IREIT, Keppel and OUE is at 37%.
If these REITs are listed in Hong Kong, the Hong Kong shareholders would make so much noise.
The closest case study that came to my mind was Keppel REIT forcing their shareholders to swallow Ocean Financial Centre in 2011:
“They should have left some meat on the table for both parties. Otherwise, what is the point of a Reit if the trusts are stuffed with assets at high prices,” said one analyst.
A second analyst said: “Given the economic uncertainty, the deal is overpriced. The crux of the matter is that the deal was done when the office market is at an inflexion point.”
Another analyst noted that after stripping out the income support, the yield of about 3 per cent is not attractive. “The price is at the top of the market. Granted that it’s a Grade A office building but why now? Why acquire at a time when the macro-economic situation is deteriorating?” he said. “The deal is skewed towards the parent.”
He also criticised the 17-for-20 rights issue that would raise about $976 million used to foot the bill, arguing that it is dilutive to existing shareholders. “It’s a good idea if it is being used to purchase depressed assets,” he said.
Looking back this deal worked out, but if we put this deal in the Hong Kong context, what are the chances it will go through? It will go through because the sponsors are bent on spinning out the asset to recycle cash, and they own a large enough stake in the REIT to push the deal through.
I think as Singapore investors, we are conditioned to think 35% net debt to asset is normal, and far from the 45% guidance by MAS. In the case of Hong Kong and Australia, asset prices have risen, but their gearing have always maintained low, perhaps learning from the lesson of the Great Financial Crisis.
If you read my article on how do REITs grow, you will know good managers leverage on debt capital and the REIT’s expensive equity as currency for growth.
The downside is that, there comes a point when things get too expensive, and those who subscribe to the placements are purchasing an expensive REIT. They have a poor deal versus the investor who invest in the same REIT at an earlier time. The latest investors are feeding the old timer investors.
This case study is a reminder to REIT investors that things might not always go the way its planned.
And on a side note, if the major smart money CK Property here, do not think this deal is within their best interests, then perhaps we need to sit up and take notice of the valuations now.
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