Thursday, 20 September 2018

All REIT now

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Turkey’s REIT market has produced a number of deals in the last six months that show how good things can be in Turkey’s capital markets, and how bad. Getting the right listing strategy is key, as is having good underlying assets and a viable pipeline. Nick Lord reports.

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Turkey’s growing pains in the international capital markets are exemplified by its REIT sector. Known by the Turkish acronym of GYO, this sector has been around for a long time. Indeed the first deals were done in the early 1990s. But interest in REITs soon went into abeyance.

A combination of issuer greed and international disdain caused the sector to calcify. The structure came to be seen by many of Turkey’s largest companies as a way to off load unwanted real estate, at high valuations, without losing control. Construction companies in particular used REITs to place stagnant, low yielding projects that they no longer wanted but did not want to sell outright.

A few years ago, that started to change. According to Can Yucaoglu, a director at Turkven Real Estate, a private equity real estate company, this change in attitude had a lot to do with falling inflation and interest rates. “A lot of companies that used to invest in real estate as a hedge against inflation are now investing in their core business and are looking to offload their real estate holdings,” he said.

This change in attitude has provided a steady stream of real estate assets - residential compounds, hotels, offices and logistics centres – that have found their way into the Turkish REIT market. At present there are 25 listed REITs worth some US$9bn. A further 13 REITs have applied for permission to list on the stock exchange, according to the Turkish Association of Real Estate Investment Companies (GYODER).

A tale of two REITs

Two deals that have come to market in the last six months show the importance of marrying a sensible capital markets strategy with productive underlying assets. In October Torunlar REIT came to market in a deal that had to be cut in size in order to achieve the pricing that the sponsors of the deal desired.

The deal was initially marketed to both local and international investors through local securities house Is Securities and international bank JPMorgan. The price range was set at TL5.5 to TL7.5 a share. But after three days of book building it became clear that in order to get international investors in to the deal, it would need to price at the bottom of the range. The sponsors – two brothers named Mehmet and Aziz Torun - said no and JPMorgan walked away.

In the end it was sold 95% to local investors at TL7.3 a share, a relatively expensive 28% discount to NAV. Some 27% of the deal had to be sold to an affiliate of the company called Torunlar Gida. This allowed it to keep its notional free float above 25%. At the beginning of April the stock was down 6% to TL6.86 a share, but up 25% in a month from its all time low of TL5.5 a share.

Sources suggest that the desire to maximise proceeds from the IPO was the main stumbling block to its successful completion. Indeed the deal did have two very positive elements whose absence had derailed other REITs in the past. Firstly it was of a sufficient size to be potentially attractive to international investors. The IPO price gave it proceeds of TL411m (US$290m), well above the US$100m threshold for international attention.

Secondly the assets that were going into the REIT were focused on shopping malls and mixed use residential and office developments. While investors tend to prefer single strategy REITs, analysts said the asset mix in Torunlar is good. “The more focused a REIT is the less the discount to NAV they can get,” said Yucaoglu. “And if you actually are a focused REIT with a strong team, established track record and good pipeline, you should be able to get a premium.”

Taking all these lessons into account, the next IPO to come to market has redefined the sector, giving it the credibility that it was lacking before. Emlak REIT combined a perfect IPO strategy with a compelling underlying story to complete what many consider to be the best deal in Turkey in 2010.

The company raised TL1.06bn in a deal that was sold 75% to international investors. It priced at TL1.7 a share, the bottom end of the range of TL1.6 to TL2.15 a share. The deal was lead internationally by UniCredit and locally by TSKB. It was the only sizeable IPO to come out in Turkey in 2010 - in any sector – that did not need to cut size or allocate shares back to the seller to achieve completion.

This is testament to both a strategy of not trying to maximise returns at the IPO. But it also helps that the underlying business of Emlak is in a class of its own.

It is an affiliate of the Turkish state land agency called TOKI. This owns all the public land in Turkey and as such Emlak is understood to have the very best pipeline that any REIT could have. The combination of tight international distribution at the bottom of the range and strong underlying story caused the deal to surge 12% on its first day of trading, an almost unique event in Turkey’s equity capital markets.

Too successful?

The stock now trades at around TL2.8 a share, up 65% since its December listing. In the process it now accounts for almost 50% of the total NAV of Turkish REITs and is not only the dominant stock in the sector but also a stock that international investors see as a proxy for Turkey as a whole. “Emlak is one of a very few select companies that is on the shortlist of anyone who wants to invest in Turkey,” said Yucaoglu. “As a result, the real estate sector in Turkey has become much more represented on the Istanbul Stock Exchange and has much more visibility for international investors.”

Others however caution that the sheer size of Emlak and the perception that it has access to the best deals in the market could actually crowd out other potential listings. “Emlak is not necessarily indicative of the status of REIT sector as a whole because it is the largest Turkish REIT in terms of portfolio value and is a subsidiary of the Housing Development Administration of Turkey” said Haluk Bilgic, a partner with affiliate law firm of Gide Loyrette Nouel in Istanbul. Bilgic acted for the underwriters of the July 2010 TL65m IPO of Reysas REIT. “However it was by far the most important IPO of last year.”

The lessons learnt from recent experience will be put to the test with upcoming deals. The first of which is likely to be the IPO of Kiler REIT. This trust contains the Istanbul Sapphire, a mixed used residential, office and shopping complex, which is the tallest building in Istanbul. In early April, the regulators approved the IPO with a range of TL5.1-TL6.1 a share for a total potential size of TL160m.

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