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AIMS AMP Capital Industrial REIT: Optus Centre.

Saturday, December 28, 2013

I know I said in my last blog post that the next one will be on my other investments going into 2014 but I received a circular from AIMS AMP Capital Industrial REIT last night and I thought I should blog about this first. Change, the only constant in life.

Optus Centre in New South Wales, Australia, will be the REIT's first property outside Singapore. The proposed acquisition is for a 49% interest in the property.

The purchase will be fully funded by debt and, post acquisition, we will see leverage at 37.4%. This is comfortably under 40% and unless the REIT intends to have further acquisitions, I do not see a need for any fund raising in the near future.

As an investor for income, I am, of course, interested in how the acquisition might affect my income. Looking at the pro forma numbers, I am quite pleased with the whole deal.

The REIT's existing portfolio brings in S$59.75m in NPI annually while the property will bring in S$16.78m in NPI. The NPI yield of the REIT's existing portfolio is 6.2% while the NPI yield of the property to be purchased is 8.1%. I am happy to see that the acquisition is NPI yield accretive.

Sometimes, we see acquisitions which are DPU accretive and DPU yield accretive but are actually not NPI yield accretive. These are less desirable as it means that funds are being used to buy properties which will add to gross income but at a lower rate of return.

My confidence in the management of AIMS AMP Capital Industrial REIT's has strengthened with this acquisition. They have demonstrated their competence in all that they have done so far.

Although AIMS AMP Capital Industrial REIT has proven itself to be a well run REIT, with its NAV at approximately $1.48 per unit, post acquisition, to buy at a 10% discount to valuation would mean buying at $1.33 a unit. Yes, we all love margins of safety, I am sure, especially with the spectre of rising interest rates over the next few years.

At the current price level, I will not be adding to my long position in AIMS AMP Capital Industrial REIT. However, I see no reason to divest either because it has proven to be a good investment and is likely to continue delivering the goods.

As my single largest investment in the S-REITs universe, AIMS AMP Capital Industrial REIT will probably be making a slightly more significant contribution to income generated by my portfolio of S-REITs in 2014.

Related post:
1. Made and still making money.
2. 2013 full year income from S-REITs.


The Sun said...

Another advantage of the acquisition is that it helps diversify its property portfolio, in terms of geographical spread, as currently all the properties it owns are in Singapore. What's more, unlike all existing properties which are leasehold, this new property will be freehold. This will also invariably lead to an increase in the trust's portfolio overall weighted average land lease.

I remember reading an article published in The Edge earlier this year indicating that the trust's CEO Nick McGrath long term aim for the trust was to expand into Austrialia, especially considering the fact that there are only that many redevelopment opportunities it can embark on its existing properties. Looks like Nick's long term aim is starting to be realized...

AK71 said...

Hi Sun,

I am also very impressed with George Wang whom I am sure is the guiding beacon for the REIT. He is also, personally, a substantial unit holder and we can be sure that he will not want to hurt his investment. Of course, we know that he has been a persistent buyer as well. :)

Chan Yan Han said...

Hi AK, I am just curious. Now that we all know that tapering is going to happen, how will reits be affected? Or is the tapering effect already priced into the current value of reits? I am looking at investing in some reits currently for the yield, but I am worried about how the market will take to the actually tapering in jan 14

Chan Yan Han said...

Hi AK, I am just wondering. How will the market react to the tapering in jan 14? Or has the current price levels already factored in the tapering effect. I am looking to enter into some reits for yield curently. But not too sure whether it's a good idea. Any advice or recommendations?

AK71 said...

Hi Yan Han,

With rising risk free rate, REITs will have to offer higher distribution yields in order to stay attractive. I think there is no doubt about this.

10 year US Treasury yield is at 3% or so. Let us say it goes to 4% over the next 12 months. Then, REITs must offer 1% higher in distribution yield to keep up.

It is either they improve DPU to do this or their unit prices will have to fall.

REITs are still relevant tools when it comes to investing for income. If prices should fall enough to give a big discount to NAV while offering a relatively high yield going forward, it would be an obvious buy for me. :)

How will things turn out in 2014? I am afraid I don't have a working crystal ball. I can only make sure I am able to benefit from both up and down markets. ;)

Go through my blog posts on the right sidebar and I hope you will get some idea of what I am talking about. :)

Fli Fli said...

Hi AK.
Need some advice. I can't make sense of their figures.
Page 23 of the circular.
It's NPI is 16.7M.
giving 8.1% yield which is great. But pro forma yield increase is only 0.65c per annum. With 450M units in issue, that's a distribution increase of 3M per annum.
Existing NPI is 59M and distribution is already 46M. This property yields 16M NPI yet it only adds 3M to distribution??!

Am I missing something?

AK71 said...

Hi Fli Fli,

The property has an NPI yield of 8.1%. However, the REIT will be funding the purchase with debt attracting interest rates of 4.9% to 5.1%. So, we don't see all the NPI this property generates going to distributable income. A big chunk gets paid to the lenders.

Then, there are one time costs involved in making the purchase which includes a fee to the managers of the REIT.

This is my understanding. :)

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