Tuesday 30 November 2021

Digital Core REIT IPO- Exercise Some Caution If One is Venturing into This New Data Centre REIT Crusade.

Coming off the heels of the first REIT IPO (Daiwa House Logistics Trust) on the Singapore Stock Exchange is Digital Core REIT. From the many glorious reviews by many bloggers and cornerstone shareholders such as DBS lining up, we can foretell that Digital Core REIT seems to be on its way to a very smooth and successful listing.  Nevertheless, I am not really excited by it and will not be taking part in its IPO- the reasons I will explain towards the end of this post. Let me start by putting a summary background about this second 100% pure Data Centre REIT that will soon be listed on the SGX followed by some quick highlights of its positive traits. Last but not least, prospective investors should take some caution for this data centre investments instead of thinking that US data centres are one of the safest investments out there- I will elaborate more on this point towards the end of this post.  

The initial public offering (IPO) portfolio will comprise 10 freehold data centres in the US and Canada with a total net lettable area (NLA) of 1.2 million square feet (sq ft).

Four of the data centres are located in the Silicon Valley, with another 3 in Northern Virginia, 2 in Los Angeles and 1 in Toronto.

Portfolio occupancy is at 100 per cent with a tenant base comprising blue-chip companies including global cloud providers, global colocation and interconnection providers, social media platforms and IT solutions providers.

Weighted average lease expiry of the portfolio stood at 6.2 years based on base rental income for the month of June or 7.7 years by NLA as at end-June. Its distribution yield is expected to be 4.75% for 1st year and increase to 5.26% by second year.
2. Positive traits for Digital Core REIT IPO
The following are the good points I like about Digital Core REIT IPO:

(i). Sponsor is listed on the New York Stock Exchange and well known.
The sponsor Digital Realty is listed on the NYSE and is well known for its development and operation of data centres. Digital Realty was even involved with the sales of its data centres to Mapletree Industrial Trust in early January 2020. So in a way, we can see the footprints of Digital Realty in Mapletree Industrial Trust.

(ii). Alignment of Sponsor's interest with Digital Core REIT
Post-IPO, Digital Core REIT will have right of first refusal (ROFR) to a potential pipeline of over US$15 billion of data centres - both existing and under construction. Similar to the initial portfolio, the sponsor intends to co-invest in 10 per cent of each of Digital Core Reit's future acquisitions.

(iii). Significant debt headroom of US$596Mil for future acquisition
Digital Core REIT is expected to have an aggregate leverage of 27 per cent as at the listing date -significantly lower than its peers - giving it a debt headroom of up to US$596 million. This means room for taking on cheaper financing from bank borrowings to get a higher return for unit-holders. 
3. Points to exercise caution before diving into this IPO
Despite the positive traits as aforementioned, I do have some serious reservation about jumping into this IPO:

(a) Withholding tax regulatory risk-30% downside risk to distribution yield
The problem with holding SGX listed REITs with US properties portfolio is the ever present significant risk that the US favorable tax rules for overseas REIT may be changed overnight and withholding tax may be applied which will reduce distribution by a hefty 30%. Many years ago in 2018 (if I recalled correctly), there was a big hoo-ha with Keppel-KBS US REIT as well as Manulife US REIT where their unit price crashed overnight due to uncertainties over the tax holding structure while pending clarifications from the US IRS. I reckon that the current high yield factors in the risk premium from changes in regulatory tax risk.

Anyway, the current approved tax planning always structure a shareholder loan extended to the US entity holding on to the properties and then charging an interest as a form of tax shield. The main way to repatriate profits will thus be via capital distribution via the return of the loan. 

For those interested to understand more about the current tax structure to mitigate US withholding tax for US properties, please refer to my previous post on "Are The Distributions From Manulife US REIT (MUST) Sustainable? Clarifications from MUST's Investor Relation Team".

So, imagine if Digital Core REIT is caught in any such changes to tax regulation, its already low distribution yield of 4.75% will plunge to a miserable 3.33%. The low yield does not seemed worthwhile to undertake the risk especially with such a significant concentration of properties in the USA only.

(b) Worst market timing to choose for IPO- Pure bad luck to be caught with COVID Omicron variant
With stock markets dropping for the past 2 days in particularly with Moderna CEO scaring everyone with his comments that current vaccines will most likely be much less effective against Omicron variant, this is one of the worst possible time for Digital Core REIT to IPO. There are a lot of other alternative investments out there to exploit the sharp drop in stock prices. You can buy into banks or if you are into data centres can snap up Keppel DC REIT or Mapletree Industrial Trust to diversify away the over concentration risk with excessive properties holdings in the USA. 

Parting thoughts:
I have decided to give the Digital Core REIT IPO a miss given that I am really not comfortable with the US regulatory tax risk vs the low distribution yield on offer of only 4.75%. My personal preference would be to take advantage of the numerous opportunities that arises during the current stock markets sell-off. For those subscribing for the IPO of Digital Core REIT, please note that the public offer will end at 12pm on 2nd December 2021 (Thursday) and publicly commence trading at 2pm on 6th December 2021 (Monday)

Wednesday 24 November 2021

Keppel Corp And Cuscaden Peak Got Whacked by SIAS Over SPH Offer.

The Securities Investor Association ("SIAS") has again stood up for retail investors by questioning the big boys Keppel Corp and Cuscaden Peak over their offer for Singapore Press Holdings ("SPH"). Talking about SIAS means also talking about Mr David Gerald, the original founder and president of SIAS. I recalled meeting the man himself over a decade ago while doing my Final Year University Project on Corporate Governance and interviewed him. He is a good man who is passionate in his drive to help retail investors. I recalled his request to my project team members then to join the SIAS as he needs "younger blood" as he is worried about the continuity of SIAS. I have utmost respect for this man. Back to the Singapore Press Holdings epic drama. SIAS has raised questions to both Keppel Corp and Cuscaden after feedbacks from retail investors:

1. Letter to Keppel Corp Senior Management
(i) Mr Gerald's letter to Keppel Corp questioned why Keppel is making it so urgent for SPH shareholders to cast their votes. Keppel had mentioned that the sooner the scheme is approved, the better it is for SPH so as to reduce any further uncertainty and instability for its various stakeholders and preserve value. 

SIAS shot back at Keppel by asking what does Keppel mean by "Uncertainty and instability" and raised the points by some retail investors that it would be fairer and easier for them to make a decision if both offers could be considered at the same time.

(ii) Keppel Corp also got shot a second time when SIAS raised another query on why is it beneficial for existing shareholders to receive Keppel units that trade at a discount to net asset value and why are SPH shareholders asked to trade their exposure to the current SPH assets for commercial properties owned by Keppel REIT. 

Personally, I think that Keppel Corp is only thinking for itself on how it can conserve cash else they would have given a cash option like what Cuscaden is offering right? But they are caught in a predicament as Keppel cannot openly admit this else it will be tantamount to saying "screw" the current SPH shareholders, we just want to minimize our cash outlay for this deal.

2. Letter to Cuscaden Peak
Cuscaden Peak (consortium made up of hotelier Ong Beng Seng, Capitaland and Mapletree) were not spared the hard questions. I think it is funny, as a matter of fact, the way SIAS did not mince their words.

(i) Firstly, SIAS raised a very good question on if Cuscaden's bid were to succeed, what is its long term plan for SPH REIT? Well, Cuscaden has been very quiet on this aspect.

(ii) Secondly, SIAS questioned the strange chain offer for SPH REIT made by Cuscaden of S$0.964 per unit given the last trading price of S$1.01 per unit as at 22 Nov 2021. The chain offer becomes lower than the recent market price? Does not make sense right? Do "surface job" must also do better right?

Parting thoughts
Market pricing hovers mostly at S$2.34 per share (after Ex-Dividend) despite the Cuscaden offer of S$2.36 in full hard cash. Probably market is pricing in uncertainties over whether all the regulatory approvals for the deal will go through. For myself, I have sold off part of my SPH holdings to take some profit while waiting for further drama to unravel and settle down. Looking forward to the replies by Keppel and Cuscaden to SIAS.

Tuesday 23 November 2021

Daiwa House Logistics Trust IPO- 3 Reasons Why I Am Staying Away From It.

The talk of the town recently is on the IPO of Daiwa House Logistics Trust ("DHLT"). Although I see a number of good reviews on it, personally, I will neither be taking part in its IPO nor buying any units post IPO (unless its price plummet to justify a higher distribution yield of at least 7.5%). I will do a quick background introduction of this new SGX REIT and then state the 3 reasons on why I am staying away from it.  

Some background on this new IPO on SGX this year
DHLT is a Singapore REIT established with the investment strategy of principally investing in a portfolio of income-producing logistics and industrial real estate assets located across Asia. The initial portfolio of DHLT (the “IPO Portfolio”) will comprise 14 high quality modern logistics properties in Japan with an appraised value of approximately JPY 80,570.0 million or S$952.9 million and an aggregate net lettable area (“NLA”) of approximately 423,920 square metres (“sq m”).

Three reasons why I am staying away from DHLT:
There are some points that I do not feel comfortable when it comes to DHLT. 

(1) DHLT is supposedly from a renowned sponsor Daiwa House Industry Co Ltd which is one of the largest construction and real estate development companies in Japan.
It is stated that the sponsor Daiwa House Industry Co Ltd is one of the largest real estate developer in Japan. In addition, it is also listed on the Tokyo Stock Exchange. Unfortunately, I am not familiar at all with Daiwa House. This is different from property groups like Lendlease listed on the Australian Stock Exchange. I will prefer to monitor its financial performance  for some time first before taking up a small stake in it for diversification. 

(2)  Some reviews reported that DHLT is a Japan-focused logistics REIT. This is not true.
DHLT is not a pure Japan-focused REIT. The sponsor intend to recycle its Indonesian, Malaysian and Vietnamese properties via DHLT in the near future. I do have personal doubts on the quality of such overseas assets. It gets very tricky when we deal with such overseas market properties. Not every REIT has the expertise of long standing groups like Mapletree. Will unit-holders end up with the shorter end of the stick?

(3) Will the REIT do well in rental collection in the face of deflation challenges in Japan's economy
The current property bubble and debt crisis in China reminds me of the same for Japan back in 1990s. Japan's "Lost Decade" was a period that lasted from about 1991 to 2001 that saw a significant slowdown in Japan's previously bustling economy. The Japanese's battle with deflation and the liquidity trap is a long drawn one that unfortunately still affects Japan even today. 

Parting thoughts on this IPO
For now, I think I will be staying away from DHLT as alluded to my discomfort over the 3 points listed above. Note that DHLT public tranche subscription will end by 24 November 2021 (Wed) 12pm. The REIT will commence trading on 26 November 2021 (Friday) 2am. Will this IPO flopped upon 1st day of trading or will it rise sharply? 

Monday 15 November 2021

Cuscaden Peak's Superior Counter Offer For Singapore Press Holdings at S$2.40 Per Share- Goodbye Keppel Corp!

Good riddance to Keppel Corp's previous offers. Cuscaden Peak (the consortium making up of Ong Beng Seng, Capitaland and Mapletree) made a superior counter offer for Singapore Press Holdings ("SPH") today. During my last post, I mentioned that Cuscaden Peak may just trump Keppel's offer of S$2.351 per share (mixture of cash and Keppel & SPH REITs in specie) by 0.1 cent only and shareholders should not be too surprised- well, it turned out to be  way above expectation afterall as the current counter offer price on the table is S$2.360 per share (all cash) which is almost +1 cent more. I had enough of Keppel Corp's offers which were always a "hybrid" consideration of cash and REITs units. The market price of SPH, after every one of Keppel's offer, fell way below the fair value consideration.  

Moreover, Cuscaden Peak is extremely generous and provides another option for shareholders who preferred some SPH REITs to be distributed as part of the offered consideration so that they can participate through SPH REIT units in recovery upside of the retail real estate sector while receiving a significantly higher cash component than has been offered in the Keppel Scheme. 
Cuscaden's offer of 2 options to SPH Shareholders are vastly superior to Keppel Scheme.
1. Strategic mistake by Keppel Corp in their bid for SPH.
First and foremost, I think that Keppel Corp management should not have made it clear upfront that their offer of S$2.351 per share is the last and final offer. Keppel Corp may have underestimated Cuscaden Peak's deep pockets. By making a statement that they have already made a final offer, it motivated Cuscaden to just tip the bar over a little to easily trump their bid. Anyway, this is water under the bridge. 

Ultimately, Keppel Corp will walk away with S$35Mil breaking fees from SPH. After paying off legal and financial advisory fees, I expect Keppel Corp to retain a substantial part of the fees for future working capital or for special distribution to shareholders. Keppel Corp share price should shoot up once the trading halt is removed. My sense is that most of Keppel Corp retail shareholders frown upon the SPH deal in the first place. 

2. What does SPH senior management have to say about the current 2 offers on the table?
Subject to the IFA opinion and in the absence of a superior competing offer, the preliminary recommendation by the SPH Independent Directors is that SPH shareholders should vote down the Keppel Scheme and vote in FAVOUR of the Cuscaden Scheme.
Vote down Keppel Scheme first and vote for Cuscaden Scheme later
Also, SPH shareholders should take note that unlike the Keppel Scheme which is still subject to its shareholders' approval, the Cuscaden Scheme does not require the approval of Cuscaden's shareholders. All regulatory applications have been made the deal is expected to be fully completed in February 2022.

3. Other points for SPH shareholders to take note 
Shareholders who need cash and want to cash out immediately should take note that the ex-dividend date for the SPH S$0.03 per share dividend is on 22 November 2021 (Monday). 

So, if trading halt is removed and the price of SPH hits at least S$2.39 (S$2.36 offer + S$0.03 dividend) per share, then SPH shareholders can consider selling off.

On 22 November 2021, if the price of SPH is at least S$2.36 per share, then SPH shareholders can consider selling them off.

From 16th November 2021 to 21st November 2021, I expect the trading price to range between S$2.39 per share to S$2.43 per share. The worst case scenario would be that the price per share lingers way below S$2.36 per share but shareholders just have to hang on and wait till February 2022 for the deal completion to realize the full S$2.36 per share.
SPH's investment property-Seletar Mall at Sengkang Fernvale
Parting thoughts
I do not think that there will be a 3rd competing bidder at this stage since the price per share of SPH has seen such a huge jump over the past few weeks. With the transfer out of its Media business, SPH remaining property business has also come to a quick end. I think that shareholders should take this opportunity to cash out of SPH and let professional property management veterans take over the business. Alternatively, the only other option left is to vote down everything and let SPH continue its business under its current CEO....not exactly an ideal or rational case are my personal thoughts.

P.S: Fellow SPH shareholders, please share your views and thoughts on the Cuscaden Peak's new offer. Will you sell off immediately after trading halt is lifted to reduce further market risk or wait it out for a "counter-counter" offer albeit low probability? 

Please also see my previous posts on this:

Wednesday 10 November 2021

Keppel Raises Counter-Offer Bid of SPH to S$2.351- Three Things Shareholders Need To Watch Out For And Not Drawn By Clever Marketing

Good news indeed! On  the early morning of 10th November 2021, Keppel Corp has finally announced its counter offer of S$2.351 per share to shareholders of Singapore Press Holdings ("SPH"). This represented an +11.95% improvement in its offer price relative to the offer of S$2.10 by the Cuscaden consortium. While I see many retail investors jumping with joy and popping the champagne happily proclaiming even more upsides from another potential counter-counter offer from Cuscaden, this S$2.351 per share deal is actually not that great an offer by Keppel Corp. The essence of the deal remains similar to the initial crafting, that is, SPH shareholders are still being paid with a combination hybrid of cash and stocks. 3 things which shareholders need to watch out for:

1. Disappointing that Keppel Corp did not offer an all-cash deal which means deal subject to market risk
The counter offer does seems great at first. However, I still can't help but feel disappointed that the deal still involves the distribution of units in Keppel REIT and SPH REIT. When the initial offer was announced, SPH REIT and Keppel REIT dropped in price but Keppel Corp did not make any comments about the decline. 

However, right now, the S$2.351 per share is worked out by Keppel Corp taking into account the latest trading price of SPH REIT of S$1.02 per unit on 9th November 2021 and they make a big hoo-ha out of it. Once market opens, the price of SPH REIT and Keppel REIT will fluctuate again and what is there to stop their prices from dropping?

Bear in mind that the consideration will only be given to shareholders of SPH only in mid-January 2022. Hence there is plenty of time for downside surprises.

2. Fallacy to think that the bidding war is still on- it has ended on the contrary
Keppel Corp has already declared that the revised offer is final and will not be further increased. Given that Keppel has show-hand and released all their buffer in the counter-offer, the counter-counter offered price (assuming there is even one) by Cuscaden consortium will only be slightly above Keppel Corp's of S$2.351-maybe even S$2.352 per share. So don't be too surprised to just a 0.1 more cent counter-counter offer from Cuscaden consortium even if they decided to make one. 

Basically, unless a 3rd bidder joins in, the so called bidding war has effectively ended already. 

Note that the worst scenario here is that Cuscaden gave up on making a revised offer and shareholders will be left with the current best offer from Keppel Corp. Share price of SPH on 16 November 2021 (the last allowed day by Keppel Corp legal team for SPH to enter into another competing offer) may drop in such instance.

3. The Keppel revised deal may not go through SPH EGM and Keppel's own EGM.
One will need >50% of headcount of SPH shareholders voting by proxy at the EGM and also >75% of the total number of votes cast by SPH Shareholders voting by proxy in order to go through. Same for Keppel Corp's side. So this is the uncertain portion. If any of these EGM failed, the current pricing of SPH might drop immediately back to below S$2 per share. Back to square one. 

Parting thoughts- What now for SPH shareholders?
I reckon that once the trading halt is lifted, the price of SPH will shoot up to S$2.381 (including 3 cents for the dividends that is not ex-dividend yet) per share or even more as many investors may speculate that Cuscaden will make an even better offer. 

However, share price most likely will drop after the last allowed date of 16th November 2021 if no competing counter offer from Cuscaden is received by SPH. Keppel Corp's offer is plagued by the distribution in specie of units in SPH REIT and Keppel Office REIT which are subject to potential market downside risk.

P.S: Fellow SPH shareholders, please share your views and thoughts on the new counter-offer. Will you sell off immediately after trading halt is lifted to reduce further market risk? Or will you wait for another potential counter-offer from Cuscaden on 16th November 2021?

Monday 8 November 2021

Strange Chain Offer for SPH REIT By Cuscaden For S$0.964 Per Unit And Possible Leakage of Keppel Corp Counter Offer?

The Cuscaden consortium making up of Capitaland, Mapletree and Ong Beng Seng made a potential chain offer for SPH REIT on top of Singapore Press Holdings ("SPH") for S$0.964 per unit. However, current market price has surged to S$1.02 per unit. Moreover, SPH REIT was at S$1.10 and S$1.20 at one period before the COVID-19 madness. The chain offer is obviously just for show to comply with the takeover code.  Anyway, I hope that Keppel Corp will make a good counter offer for SPH. Since the news was released on 29th October 2021, the 10 days consideration period (if we assume it refers to working days), will mean an announcement soon by or before 12th Nov 2021. 

From the market price of SPH at S$2.170 per share suddenly today (8th Nov 2021), there maybe market speculation of internal news that Keppel Corp most likely will make a counter offer. Keeping my fingers crossed that there is indeed a better offer from Keppel Corp.