Perennial launches S’pore IPO to raise up to S$843m

SINGAPORE – Perennial China Retail Trust, which owns shopping mall assets in China, on Thursday launched an initial public offering to raise as much as S$843 million (US$679.6 million).

The trust, managed by a firm controlled by former CapitaLand retail chief Pua Seck Guan, is selling 563.6-577.8 million units at S$0.70-S$0.76 apiece, according to a prospectus filed with the Monetary Authority of Singapore.

The trust has already signed agreements to sell 504.7 million to 516.7 million units to a group of cornerstone investors including AEW Capital, Henderson Global Investors and Prudential Asset Management.

Perennial said the units will start trading on June 8 but did not indicate when it will price the IPO.

DBS, Goldman Sachs, Standard Chartered and Citigroup are joint global coordinators and bookrunners.

Perennial originally planned to raise about S$1.1 billion from the IPO but reduced the offer size due to weak market conditions.

According to a note from one of the bookrunners, Perennial has priced its units at a 46-50 per cent discount to net asset value. — REUTERS

Perennial China play should take Reit route

Malls slated for acquisition can be injected into a private fund for time being

PERENNIAL Real Estate’s recent decision to defer the initial public offering of its Perennial China Retail Trust (PCRT) following international roadshows last week is reminiscent of the time in November 2001 when CapitaLand had to scrap the IPO for its SingMall Property Trust (SPT) because of poor demand.

Coincidentally, the CEO of the manager of SPT and the CEO of PCRT’s trustee-manager Perennial China Retail Trust Management are the same person – Pua Seck Guan.

Mr Pua said recently that Perennial plans to tweak the PCRT deal to current market conditions and bring it to market ‘soonest possible’.

First, let’s recap the offer that has been shelved. The business trust was to have offered 1.09 billion units comprising an international placement of 610.2 million units, a public tranche of 50 million units and cornerstone units of 432 million units. Priced at $1 per unit, the offer would have raised about $1.1 billion in gross proceeds to be used mostly for the acquisition of four properties in China costing about $1.1 billion.

Only one of the four assets – a mall in Shenyang – is completed and leased out while the rest are in pre-leasing stage or under development and due for completion between 2012 and 2014. The trust’s distribution yield was to be 3.02 per cent for financial year 2011, rising to 3.08 per cent for FY2012. Post-listing, gearing was to be around 1.8 per cent.

PCRT had pledged to pay at least 90 per cent of distributable income to unitholders for the first two years and pegged its leverage limit at 60 per cent of the value of its properties.

Perennial is now expected to raise less equity, reduce the offer price of its units to below $1 apiece and assume some gearing.

Discount sought

Talk in the market is that investors indicated during the roadshows that they would like a discount of 5-10 per cent on the purchase price of the assets. The equity to be raised is also expected to fall to $700-800 million, assuming the cornerstone investors stay on.

Cutting the assets’ purchase price, floating a smaller equity portion and raising more debt should boost yields to investors. However, it makes sense for the trust to increase borrowings only if the cost of debt is lower than the property yield. The problem is, borrowing costs in China are high, at 6-7 per cent or more; even if PCRT were to borrow in Singapore, costs could be 4-6 per cent. So raising debt may reduce the yield to investors .

Mr Pua is in a hurry to finetune his offer and relaunch PCRT’s IPO ‘soonest possible’, understood to mean in 4-6 weeks’ time. That’s not surprising as the sellers of the assets would not want to be locked into an arrangement with PCRT for too long. They would want to be free to sell their respective assets to other potential buyers. After all, the vendors are not the sponsors of PCRT, unlike the arrangement between many real estate investment trusts (Reits) and their sponsors who are committed to providing an acquisition pipeline. Also, some cornerstone investors may lose interest in PCRT if a relaunch of the IPO takes too long.

But even if PCRT tweaks some financials of its offer, nagging concerns which are said to have been highlighted during the roadshows may remain. One is the strength of the trustee-manager’s management team; other than Mr Pua, who built a name for himself in the local mall management business.

There is also the question of whether Mr Pua has too much on his plate. In addition to PCRT, he is involved with Katong Mall, Chinatown Point and the landmark Capitol redevelopment site in Singapore, each with different sets of investors.

Some observers also wonder what PCRT’s niche as an investment product is. It’s not a Reit, which must hold at least 90 per cent of the value of its properties in completed, income-generating assets. So, in some ways, PCRT can be seen as more of a property developer.

But there are already so many China property developers for investors to choose from. There may be more interest for another Reit, given the steady income they distribute to unitholders.

Perhaps Perennial could take a leaf from the SPT episode when in late 2001, after SPT’s listing was shelved, CapitaLand kept it on its balance sheet while it enhanced the assets.

Then, in July 2002, the trust was rebranded CapitaMall Trust (CMT) and launched successfully, with a more attractive price and yield, improved asset performance, leaner management fee structure and with sponsor CapitaLand retaining a bigger stake. CMT arguably remains Singapore’s most successful Reit.

Maybe Perennial could consider a similar approach and inject the malls slated for acquisition by PCRT into a private fund. It could persuade the cornerstone investors secured for PCRT as well as other parties to invest in this fund, which will hold the assets until their development is completed and they are leased and their earnings stabilised and any asset enhancement done. At that point, Perennial could consider floating a China mall Reit.

Local touch

Some think that Mr Pua’s track record is more applicable to Singapore, where he built up CMT, rather than China. Investors may be more enthused if he were to float, for instance, a vehicle containing the three Singapore properties that he’s involved in. Then there’s also the IPO of Mapletree Commercial Trust, holding Vivocity mall, Merrill Lynch Harbourfront, and PSA Building – valued at $2.7-2.8 billion in total – expected to be launched soon. Slightly over $1 billion equity may be raised, analysts estimate. Some investors may be more keen on parking their monies in that vehicle, for now.

Perennial trust may cut IPO size in deferred listing

It cites volatile market, HPH Trust offering as reasons for shelving IPO

PERENNIAL China Retail Trust (PCRT), which on Saturday announced the deferment of its proposed initial public offering, is looking to cut the amount of equity to raise.

‘We are tweaking the deal to adapt to the current market conditions and hope to bring the deal to the market soonest possible,’ said Pua Seck Guan, CEO of the trustee-manager Perennial China Retail Trust Management, which is a wholly-owned subsidiary of Perennial Real Estate.

Mr Pua spoke to BT yesterday, a day after PCRT said it was shelving plans for an IPO. The business trust was expected to raise some $1.1 billion in gross proceeds, by issuing units at an indicative price of $1 each.

PCRT cited volatile global market conditions as a reason behind the move. The local stock market has been on shaky ground of late, pressured by political crisis in the Middle East and a reversal of funds from emerging to developed markets.

‘We started to plan the offering at the end of last year, but the market in the last two months has changed so much,’ Mr Pua said. ‘We have also bumped into the big offering of Hutchison Port Holdings Trust (HPH Trust).’

HPH Trust could raise as much as US$4.91 billion to US$5.83 billion in its proposed listing, potentially setting a new IPO record in Singapore. It issued its preliminary prospectus just days after PCRT did so.

PCRT had attracted a fair amount of interest, and managed to secure a cornerstone tranche amounting to 39.2 per cent of the proposed size of the IPO. CB Richard Ellis Global Real Estate Securities, Henderson Global Investors and Lion Global Investors were some of the participants.

The trust secured ‘strong cornerstones’ which ‘indicated that they will stay in the deal for the re-launch’, Mr Pua said.

Nevertheless, PCRT could be making some changes to its listing to draw more demand. It might raise less equity, meaning that the offer price could be less than $1 per unit.

‘At the moment for example, we have close to nil leverage. We can therefore explore taking on a bit of leverage to make the size of the equity fund-raising smaller,’ Mr Pua said.

PCRT’s aggregate leverage was to be 1.8 per cent post-listing, after paying down part of a loan. According to its preliminary prospectus, it has voluntarily adopted an aggregate leverage limit of 60 per cent.

PCRT was to start off with an initial portfolio size of $1.1 billion with four properties in China, and there was to be another $3 billion worth of assets in the pipeline. ‘We want to assure that our stock will do well post-listing,’ Mr Pua said.

A number of market watchers BT spoke to were surprised by news of PCRT’s deferred listing. But a banker reckoned that the trust’s projected distribution yields – lower than HPH Trust’s – could have affected investors’ interest.

‘We are a growth story, we are not a yield story,’ Mr Pua said in response to this suggestion. ‘We offer good total returns to investors.’

Perennial trust units at $1 each

Business trust expected to raise $1.1b in gross proceeds

PERENNIAl Real Estate, led by former CapitaLand Retail chief Pua Seck Guan, has set an indicative price of $1 per unit for the listing of its business trust that is estimated to raise $1.1 billion in gross proceeds.

It is offering 1.09 billion units comprising an international placement of 610.2 million units, a public tranche of 50 million units, and cornerstone units of 432 million units for Perennial China Retail Trust (PCRT).

The cornerstone investors, which will snap up about 40 per cent of the offering, are Nan Fung Group, AEW Capital Management, AIA, CBRE, Henderson Global Investors, Lion Global, and Prudential.

According to a term sheet seen by BT, the IPO price represents a 22 per cent discount to analysts' consensus net asset value (NAV) per unit of $1.29, based on three banks' pre-deal research reports.

Perennial is wholly owned by Pua Seck Guan, the former CEO of the manager of CapitaMall Trust, Singapore's first real estate investment trust (Reit).

With a projected market cap of $1.11 billion at listing, PCRT will have an initial portfolio size of $1.1 billion covering four properties in China. The IPO proceeds will be mainly used to finance the acquisition of these properties.

One is a 50 per cent stake in retail mall Shenyang Red Star Macalline Furniture Mall and the other is a 50 per cent stake in Shenyang Longemont, a retail cum office development.

Perennial also has the contractual rights to acquire a 100 per cent stake in two other retail malls – Foshan Yicui Shijia Shopping Mall and Chengdu Qingyang Guanghua Shopping Mall.

The business trust is projected to have a distribution yield of 3.02 per cent for fiscal 2011 and 3.08 per cent for fiscal 2012, according to the prospectus lodged with the Monetary Authority of Singapore.

Perennial said in a term sheet to potential investors that PCRT offers attractive total returns (yield plus NAV growth) and hence 'it should not be compared with the pure yield-play vehicles'.

It explained that the estimated yields are lower than comparable Reits' or business trusts', primarily because Red Star Macalline Furniture Mall is the only completed and leased-out property at IPO, while the rest are in pre-leasing stage or under development and due for completion between 2012 to 2014.

'The property yields of the underlying properties are expected to increase to approximately 6.5 per cent as rents stabilise,' it said. 'Accordingly, the DPU yield is expected to potentially increase. Valuer CBRE expects NPI (net property income) yield on purchase price at full maturity to be at approximately 7.8 per cent.'

While a business trust typically has no restrictions on distribution payout or leverage, Perennial has pledged, in the prospectus, to distribute at least 90 per cent of PCRT's distributable income to unitholders and pegged its leverage limit at up to 60 per cent of the value of PCRT's properties as set out in the trust deed.

Separate from the offering, the sponsor will subscribe to 10 million units in PCRT and has agreed to a lock-up period of six months for all the units and a 12-month lock-up for 50 per cent of those units.

DBS is the sole financial adviser for the IPO. It and Goldman Sachs and Standard Chartered are the joint global coordinators, bookrunners, issue managers and underwriters for the IPO.

Bookbuilding for the IPO has begun. The roadshow started on Thursday and will end on March 4. The public offer is expected to open on March 8 and close on March 14 and trading of the business units is expected to begin on March 16.