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AIMS AMP Capital Industrial REIT: 7 for 40 rights issue.

Friday, February 14, 2014

Regular readers know that I much prefer rights issues compared to share placements as long as the funds raised go towards increasing income for unit holders. Rights issues allow all unit holders to participate in the enlarged capital base of the entity and to share in the benefits, ideally.

The last time AIMS AMP Capital Industrial REIT had a rights issue was in 2010. At that time, it was a 7 for 20 rights issue at a price of 15.5c per unit (post consolidation would translate to 77.5c a unit today). It was a pretty straightforward proposal back then because the funds raised was for the purchase of a property.

We could compare the NPI yield of the property to be purchased and the existing NPI yield of the REIT's portfolio and decide if it was a good idea. If the NPI yield of the property to be purchased was higher than the NPI yield of the existing portfolio, which it was back then, quite simply, we have a green light.

However, there is always the question of price. Yes, the price has to be right, as always.


The 7 for 40 rights issue which is now being proposed by AIMS AMP Capital Industrial REIT is at a price of $1.08 per rights unit. At the closing price of $1.415 per unit today, a theoretical ex-rights price (TERP) of $1.365 has been calculated.

So, buying at $1.08 represents a discount to the TERP. This is more important than the discount to the closing price. Why? We want to be forward looking since we are investing for the future and not in the past.

Imagine that after the rights issue, given the increased number of units in issue, each unit should proportionally be trading at $1.365 if all else remain equal. If we were then offered to buy more units at $1.08 per unit, would we bite? Of course, we would. That represents a discount of about 20% from the future market price, in theory.

Now that we have resolved the issue of price, we come to another important consideration and that is one of value.

Value could be enhanced but value could also be destroyed. I said that the rights issue of 2010 was pretty straightforward. It was to buy a yield accretive property. The rights issue this time is not as straightforward.

80% of the funds raised will go towards:

1. AEIs which include re-developments to possibly max out plot ratios.

2. Development projects (or green field projects, I suppose).

3. Third party acquisitions (i.e. completed properties).

20% of the funds will go towards:

4. Paying down borrowings.

5. Working capital.

6. Payment of fees related to the rights issue.

This is where I see a bit of a problem. I like the fact that 80% of the funds raised will go towards measures which would possibly improve income and, ideally, distributions for unit holders. However, the lack of details make it impossible to calculate the benefits from the proposed rights issue. So, we really must have faith in the managers to do the right things.

In an earlier decision to add to my long position in Croesus Retail Trust, I decided to reduce my investment in Sabana REIT while keeping my investment in AIMS AMP Capital Industrial REIT intact because I felt that the latter was a better investment with a stronger management who have their interests more aligned with unit holders'. Following that line of reasoning, I will take up my allotment of rights units and also apply for excess rights.

When the nil paid rights start trading, unit holders have the option of selling them away if they do not wish to fork out money. A fair price for the nil-paid rights would be, assuming market price stays at $1.415 a unit, $1.365 - $1.08 = $0.285. This more than compensates for the 15% dilution which a unit holder who does not wish to subscribe to the rights issue would have to suffer.

If you have never encountered a rights issue before, it could be a good idea for you to read some of my older blog posts on past rights issues. See related posts below. Nice little activity for the weekend.

See presentation slides: here.


Related posts:
1. AIMS AMP Capital Industrial REIT: Rights issue.
2. First REIT: Rights issue.
3. LMIR: Proposed 1 for 1 rights issue.

Croesus Retail Trust: DPU above forecast at 5.24c.

Croesus Retail Trust did not disappoint as expectations that DPU would come in above forecast has materialised. A DPU of 5.24c for the period of 10 May to 31 Dec 2013 will be paid on 31 March 2014. This means a 6.02% return for anyone who got in at 87c. Not bad.

Some numbers
(as at 31 Dec 2013):

Gearing: 41.8%
Interest cover ratio: 5.9x
All in cost of debt: 1.59%
100% of debt hedged.
Occupancy: 100%
NAV/unit: JPY 74

We could reasonably expect performance to improve in future as more expiring leases in Mallage Shobu, one of the Trust's 4 malls, are replaced with new tenants. Already, two tenant replacements have shown positive rental reversions.

Hopefully, more AEIs will be carried out and AEIs carried out at Aeon Town Moriya brought in new tenants like UNIQLO which bumped up total income.

If we annualise the Trust's last quarter's DPU of 2.02c, we are looking at 8.08c per annum or a distribution yield of 9.29% for anyone who got in at 87c a unit. Further upside is possible as more tenant replacements take place with positive rental reversions this year.

We want to be reminded that Croesus Retail Trust issued a $100 million MTN and that is not part of the numbers for the period reported here. In a blog post last month, I said:

"The hard numbers tell us that finance costs will jump by some 30% because of this S$100 million MTN and unless put to good use it will also reduce DPU by about 5%. So, the funds raised should not be left idle for too long."
See:
Croesus Retail Trust: Overnight BUY order filled.

So, I would also want to see the Trust make a DPU accretive acquisition very soon. Of course, this should mean more distributable income for unit holders.

For anyone who believes that Abenomics will snap Japan out of 20 years of deflation and that Japan's economy will be revitalised, investing in Croesus Retail Trust is a decent enough proposition even at the current price of 90c a unit. This is especially true for anyone who wants a meaningful stream of income from an investment with a good chance of capital appreciation thrown in over the next 2 to 5 years.

See presentation slides: here.

Related posts:
1. Croesus Retail Trust and Perennial China Retail Trust.
2. Added more Croesus Retail Trust.
3. Croesus Retail Trust: Initiated long position at 87c.

LMIR: 4Q and FY2013 results.

Thursday, February 13, 2014

Exactly one year ago in 2013, I divested a big chunk of my investment in LMIR at 52.5c a unit. At the time, I said that selling at that price meant giving up a distribution yield of some 5.7%. The reason for the partial divestment was the unimpressive performance of the REIT since its rights issue.

Today, one year later, I made my first purchase in an S-REIT since the middle of 2012 as I increased my long position in LMIR, adding a quantum that is about a fifth of what I sold one year ago. So, you can say that, for various reasons, some of which have been discussed here in my blog before, I remain cautious.


At a recent lunch gathering with some friends, when asked, I said that LMIR was still not trading at a price that I would call cheap. Yes, the price I got in today was not cheap but I was looking at a prospective distribution yield of 8.6% which seemed like a fairer proposition compared to 5.7% a year ago but, everything else remaining equal, cheap would mean a 10% yield or higher. Impossible, you think?

When I remind myself that the lowest I paid for LMIR was 18.5c and that I got a huge chunk of rights at 31c, you see what I mean. Prices could plunge again for whatever reason or we could see another rights issue, again, for various reasons.

There was another reason from a FA perspective why I decided to add to my long position. When I blogged about LMIR in August last year, I said that the REIT's term loan maturing this year in June worried me but this concern was addressed when they used the proceeds from the issuance of a 3 year bond to repay the term loan a few months early. This also lowered the REIT's average cost of debt from 6% to 5.3%. A big improvement. Read it: here.


Technically, it also seems to me that the downtrend has been broken and that LMIR's unit price has been consolidating for a while. Of course, no one could tell that unit price has bottomed until after the fact but support seems to have formed at 39c. What is being formed now could be just a floor. We don't know but the momentum oscillators suggested that selling pressure had eased.

Now, the news.

LMIR released their full year results tonight. Here are some of the numbers for 4Q 2013:

DPU: 0.56c
Gearing: 34.3%
Occupancy: 95%
NAV/unit: 41c

The numbers are much weaker than expected. If we were to annualise 4Q DPU, we are looking at a vapid 5.53% distribution yield at 40.5c a unit, my buy price today.

Now, what do we do as unit holders? Press the panic button?

Taking in the bigger picture, what is affecting LMIR's performance in S$ badly is probably the weak Rupiah. However, the Rupiah will eventually bounce back. It always did in the past. In the meantime, the REIT's management will have to hedge the risk.

Looking at the REIT's numbers, it did not do too badly in terms of NPI, reducing 5.5% in S$ terms, thanks to contributions from new properties probably. What really caused DPU to reduce drastically year on year was the 37.5% increase in financial expenses related to the issuance of the MTNs. Now, if these expenses do not recur in the next quarter, then, DPU could improve by quite a bit in the same period.

The next time the REIT has to raise funds could be end of this year or early next year as a $200 million MTN matures in July 2015. So, it is very likely that DPU for the next quarter could be higher. How much higher?

All else being equal, I think that a DPU of 0.66c in the next quarter is realistic. Of course, if the management works hard at bumping up occupancy, DPU could even surprise on the upside. All this is assuming that the Rupiah stays at current levels. Even a slight strengthening of the Rupiah could provide a lift to the REIT's performance.

Of course, there is no saying how Mr. Market would react although a sell off tomorrow would be quite natural. 39c could indeed be just a floor and not the bottom. Next support could be found at 35.5c, the low of 4 June 2012.

See slides presentation: here.
See financial statement: here.

Related posts:
1. LMIR: Divested 42.5% at 52.5c.
2. LMIR: 2Q 2013 DPU 0.93c.

Saizen REIT: Is the half yearly DPU of 3.25c sustainable?

Tuesday, February 11, 2014

Saizen REIT has announced a slightly higher DPU of 3.25c compared to 6 months ago. Post consolidation, the DPU 6 months ago would be equivalent to 3.15c. This means DPU has gone up by some 3.17%. Income will be distributed to unit holders on 21 March 2014.


Unit price of Saizen REIT's closed at 92.5c. So, annualising 3.25c means a distribution yield of 7.03% per annum. This yield is quite attractive for freehold residential buildings in Japan.

I really do not have any major concerns with holding on to Saizen REIT as an investment for income. I believe it is a stable income generator in S$ terms even with the JPY at historic lows. After all, the REIT hedged the exchange rate risk at S$12.32 to JPY1,000. This is pretty darn low.

The REIT will be hedging exchange rate risk again for the next six months but will employ a range this time. S$12.20 to S$13.12 : JPY1,000. Everything else remaining equal, it means that we could see DPU 6 months later either declining by 1% or rising by as much as 6.5% in S$ terms. Sounds good? I think so.

The rest of the numbers, Saizen REIT has prepared very good presentation slides as usual and I am sure they are self explanatory. I am more interested in how more recent developments could impact DPU in future.


Remember that in November last year, Argyle Street Management, which holds 8.9% of the REIT asked for cash which the REIT was holding to be returned to unit holders? That amounted to JPY4.86 billion or more than S$60 million in cash at the time.

Now, if this were to happen, it would affect not just the NAV of the REIT but also its DPU. This is because Saizen REIT's loans are amortising in nature and why this is actually a good thing over the long run has been mentioned in this blog a few times before.

Amortisation or principal repayment should be from income generated by the REIT's properties. This is only logical. The REIT, however, uses its cash resources to effect this principal repayment which enables it to distribute more of the income generated by its properties to unit holders. Out of the half year DPU of 3.25c, this measure accounted for 1.19c or some 36.6% of DPU. This is significant.

Annual amortisation approximates JPY 633 million. So, this means that with the cash the REIT has in hand, it could continue to use its cash resources to effect principal repayments for almost 8 years which would help to maintain a higher DPU.

However, if the cash were to be returned to unit holders instead, then, we should expect DPU to decline to approximately 2c every 6 months or 4c a year. I would not expect unit price to stay at 90c then either. I would expect unit price to fall to the region of 70c a unit or a bit lesser and with a DPU of 4c, we would then be looking at a distribution yield of some 5.71%.


A distribution yield of 5.71% is still pretty good for the kind of assets the REIT owns, especially when the loans are amortising in nature. Of course, one has to remember that in such a scenario, existing unit holders would most probably have had received some 20c per unit in "special dividend" too. This is not bad at all especially if we got in at the lows.

Blogging about the results in this way is really to remind myself of what is the underlying reality in Saizen REIT's DPU and to prepare myself for change which could be on the way.

See slides: here.

Related posts:
1. Saizen REIT: DPU of 0.63c.
2. Saizen REIT: A special dividend?

FCOT: Distribution Reinvestment Plan (DRP).

Received another DRP offer and this time it is from Frasers Commercial Trust (FCOT). This is probably not going to see any take up because the price of $1.2389 per new unit to be allotted is higher than what we could get from Mr. Market now which is $1.235 per unit.


It is probably good to be reminded that the headwinds for REITs could get stronger and if we want to invest in REITs, we have to recognise this. One of these headwinds is an environment of rising interest rates.

So, the DRPs which S-REITs are pushing out now make sense because, if taken up, they will lead to lower gearing levels. The REITs could pay down their debt with the funds as well when they fall due. This is probably a good thing for unit holders too.

To me, it only makes sense to take part in DRPs if we want to increase our long positions in the REITs concerned. However, with rising risk free rates, unit prices of S-REITs will continue to experience downward pressure, everything else remaining equal. So, to me, it doesn't seem very prudent to take part in DRPs at this point in time or in the near future.

I am not against others taking part in the DRPs to strengthen the balance sheets of the S-REITs I am invested in, however. In the meantime, I am quite happy to continue receiving income from these S-REITs and possibly increasing my investments in them only when Mr. Market makes offers too attractive to ignore.

Related posts:
1. Distribution Reinvestment Plan: First REIT and CIT.
2. AIMS AMP Capital Industrial REIT: DRP.

CapitaMall Trust: Buy the retail bond or the REIT?

Monday, February 10, 2014

CapitaMall Trust is offering $200 million worth of bonds. They will mature 7 years later in 2021 and will have a coupon of 3.08%. Is this a good thing?

Well, as the REIT has quite a bit of debt due for repayment this year, this fund raising effort is necessary and timely. The coupon of 3.08% is also lower than their average cost of debt of 3.4% as at 31 Dec 2013. So, this is a good thing for unit holders of the REIT. DPU won't be negatively affected.


As S$150 million of the retail bonds will be offered to the public with the minimum investment sum set at only $2,000, it is within reach of regular retail investors like you and me. If we look at this as a kind of forced savings, a pseudo-CPF if you will, and hold it for the full 7 years period, I think it is not that bad a proposition. Why?

Well, if we hold it for the full 7 years, we won't suffer any capital loss which could happen if we decide to sell before maturity.

You mean we might lose money if we cannot hold for the full 7 years? Yes, possibly, especially with expectations that interest rates will continue rising.

So, if the risk free rate should rise by 1%, investors might expect a 4.08% return from this instead of the 3.08% being offered now, for example. The bond price would have to fall in order to offer this higher return. How much must the bond price fall to give this return? Approximately 25%.

Pause.

Pause.

Pause.

Yes, 25%. The good news is that if we were to hold to maturity, then, we are safe. So, what to do? We buy the bond with money we don't need for the next 7 years. We will get back our principal when the 7 years is up, well, if CMT doesn't go belly up. (See comments by Charlie and AK71 in the comments section below.)

So, this retail bond offering could benefit anyone investing for income in two ways. Invest in the REIT for a distribution yield of 5.64% (unit price of $1.815 at closing) or to buy the bond for a coupon of 3.08% over the next 7 years.

Wah! AK71 so silly. Of course, invest in the REIT. The yield is so much higher! Well, remember that REITs are leveraged investments. Without the gearing of about 35%, the distribution yield wouldn't be so much higher and would be closer to 3.75%. Gearing is a fantastic thing, isn't it?

Wait a minute, 3.75% is still higher than 3.08%. So, investing in the REIT is still a better choice. Indeed, it seems to be the case and that would be my preference too.

Remember that this analysis has taken place in a vacuum, totally ignoring other factors which could have a bearing on the performance of the REIT or the retail bond. However, comparing the two options thus gives us a clearer picture of which option an investor for income might want to lean towards.

Read: CapitaMall Trust launches retail bond offering.

Related post:
Saizen REIT: Risk free rate and unit price.


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