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AIMS APAC REIT to buy Woolworths' HQ.

Thursday, September 30, 2021

It is confirmed. 


AIMS APAC REIT is going to buy Woolworths' HQ in Sydney. 

The price tag? 

Around S$454 million. 

This is going to increase the REIT's portfolio value by more than 26%.


As a long time investor of AIMS APAC REIT, I like the purchase for the following reasons: 

1. The asset will increase the number of freehold assets held by the REIT. 

2. The purchase will increase income visibility as there is a 10 years lease to Woolworths with annual rental escalation of 2.75%. 

3. There is room to build more rentable space as the asset's plot ratio has yet to be maxed out which will allow for more organic growth in the future (and this is probably a big push for the REIT to make the purchase if we look at their commendable record in maxing out plot ratios of some of their assets in Singapore.) 

4. The purchase is likely to be DPU accretive because it is going to be 60% financed by debt (which is likely to be competitively priced given the current low interest rate environment) and net proceeds raised from the recent S$250 million in perpetual bond issue will also be utilized.


A question on many unit holders' minds is probably will there be a rights issue? 

The REIT manager has said that they could issue new equity. 

Personally, I think that it is a forgone conclusion because when we compare the price tag of S$454 million and what we know in point number 4 above, there is a shortfall of some tens of millions of dollars. 

Equity issuance could take the form of private share placements or a rights issue, of course.


As a long time unit holder, I hope that any equity fund raising is going to be a rights issue. 

This is so that I can increase my investment in the REIT probably at a discounted price. 

After all, I never get invited to take part in private placements. 

I suppose I will just have to wait and see. 

Woolworths’ Full Year Result 26 Aug 21: Woolworths’ earnings led higher by Australian Food business.


References: 

42 comments:

Siew Mun said...

AA also need to fund the purchase of Alexander Road property for $102m. They would need to raise more funds.

AK71 said...

Hi Siew Mun,

That seems to have hit a road block.

I wonder if it is going to happen?

Unknown said...

HI AK

If it is a rights issue, it does not necessarily increase your % holdings in the company - just a dilution with more units to make the same % ?

AK71 said...

Hi Unknown,

This is a topic that has come up from time to time and sometimes even experts get confused.

In response, I blogged about it a few years ago and you might want to read the blog:

REITs and rights issues: Dilutive or not?

So, it really depends. ;)

Wei said...

Hi AK,

I'm unable to post the screenshot here, but based on the announcement file on SGX, 2.5.2, the pro-forma NAV will decrease from $1.36 (before acquisition) to $1.32 (after acquisition).

Does this mean in this scenario it is dilutive, or is the decrease in NAV due to costs related to this acquisition? Thank you!

-Wei

garudadri said...

I agree fully with you. As a long time holder, I added more with the recent drop and will do so again if there are s more to come
The supermarket sector is fairly resile,t and they will be sticky tenants with escalating revenue that will bolster returns and stabilize the REIT

AK71 said...

Hi Wei,

What we focus on will depend on what we are after.

If we think of REITs as asset plays, then, NAV per unit (which has not been financially engineered to look better) should be at the top of our list.

So, people who rushed to load up on Eagle Hospitality Trust because it was trading at a huge discount to NAV might have focused on this aspect.

Looking at NAV alone, however, is probably myopic.

REITs can be asset plays but they are mostly interesting to me if they generate good and reliable income.

You might want to read the blog I linked earlier in my reply to Unknown on what I consider to be dilutive. :)

AK71 said...

Hi garudadri,

The last time I added to my investment in AA REIT was last year at $1.15 a unit.

I would be quite happy to have another opportunity to add to my investment in the REIT at a discounted price. :)

Much like IREIT Global's most recent recent rights issue, stability is indeed the name of the game. ;)

References:
1. IREIT Global: 214 for 1000 rights issue.
2. AIMS APAC REIT investment is larger now.

laurence said...

Everyone buys what AK buys!!!!!! 0:)
Buy, buy, buy !!!!! ;)

AK71 said...

Hi Laurence,

Bu yao hai wo. -.-"

"We might have different requirements and certainly different circumstances.

"So, it is probably not a good idea to ride on someone else's coattails, no matter how famous that someone is."

Reference:
Good time to buy now or should I wait?

RayNg said...

AA next accretive acquisition
Biz TImes 2021-10-02

$100 million equity fund raising by end FY2022, and the completion of the acquisition of 315 Alexandra Road in Q4 FY2022.

AK71 said...

Hi RayNg,

Thanks for sharing this.

Sounds good to me.

Time to roll out the war chest (again.) ;p

Betta man said...

I wonder if it is private placement or rights issue.

AK71 said...

Hi Betta man,

Private placements are faster and less costly for the REIT.

I would like a rights issue but if it is more cost effective to have a private placement usually because the funds to be raised is relatively small, I would not complain (too loudly.) ;)

SgFire said...

Hi AK

I read the BT article today, it seem that borrowing cost of this acquisition is so close to npi.

How do you make sense of this ?

AK71 said...

Hi SgFire,

I shared what I like about the purchase.

So, the answer is here in this blog.

Of course, if we do not believe that the benefits outweigh the cost, better to avoid for peace of mind. ;)

SgFire said...

Hi Ak

Thank you for the advice. Lets huat with George Wang

AK71 said...

Hi SgFire,

Alamak, AK was only talking to himself, as usual.

No advice given. -.-"

Huat ah! :D

AK71 said...

Post acquisition:

- DPU from 8.95c to 9.37c.
- Gearing at 38.6%.
- Reduced concentration risk.
- WALE will increase.

SgFire said...

No news on rights issue yet. I hope they will give us advanced distribution first

AK71 said...

Hi SgFire,

Well, although I hope it isn't, it could be a private placement instead of a rights issue.

Siew Mun said...

Huat ah AK!
https://www.businesstimes.com.sg/companies-markets/aims-apac-reit-posts-188-rise-in-h1-dpu-to-s00475

AK71 said...

Hi Siew Mun,

Thanks for sharing the good news. :D

FellowInvestorForIncome said...

Hi AK, do you think that there will be announcement on rights/private placement soon for their latest big acquisition of WoolWorth’s HQ?

AK71 said...

Hi FIFI,

In their press release, they said:

"The acquisition is subject to approval by the Foreign Investment Review Board of Australia."

So, I will wait and see.

However, they also said:

"With a competitive local debt financing package secured for 60% of the purchase consideration and net proceeds raised from the recent issuance of the S$250 million perpetual securities, the Manager has sufficient capacity to complete the transaction."

So, there might not be a rights issue although that option remains open. :)

Reference:
AIMS APAC REIT: Press Release.

FellowInvestorForIncome said...

Hi AK,

Yeah, I’m waiting too! Looking to expand my holdings with them.

I sure do hope that it’s rights issue.

AK71 said...

Hi FIFI,

Either way is fine with me. :)

Since your preference is for a rights issue to happen, I shall cross my fingers for you. ;p

FellowInvestorForIncome said...

Hi AK,

Huat ah! The prices hasn’t come down enough for me to bite that is why I’m hoping to rely on rights for their upcoming acquisition :p

AK71 said...

Hi FIFI,

I know how you feel. :)

AA REIT has been a relatively rewarding investment for income and I would add to my investment too if Mr. Market goes into a depression again.

I did add to my investment in the REIT a few times last year which makes it a bigger investment in my portfolio.

The REIT is now trading at pre-COVID19 price level or maybe a bit higher.

At or around $1.45 a unit should see some support is my guess.

At under $1.45 makes it a pretty good buy for anyone who wants a piece of the REIT while waiting for the next bear market.

Reference:
AIMS AMPAC REIT investment is larger now.

FellowInvestorForIncome said...

Hi AK,

I increased my share in AA reit by about 50% during early stage of covid too when the price crashed and slowly recovered. Managed to buy in at $1.05 and have not bought in since. I’m currently looking at around $1.35 (fingers crossed) to be able to buy in again :D

Waiting for the bear to arrive :p

AK71 said...

Hi FIFI,

I have been rubbing shoulders with George Wang since he led his team to recapitalize AA REIT during the GFC.

He eats his own pudding and I am just riding on his coattails. ;p

Looking forward to more good years. ;)

FellowInvestorForIncome said...

Hi AK,

Looking forward to their next announcement :D

https://links.sgx.com/1.0.0/corporate-announcements/QMGZ67RHF32W7MEE/687094_AA_REIT_FIRB_Approval_Acquisition_WoolworthsHQ.pdf

AK71 said...

Hi FIFI,

Thanks for sharing the good news.

Good luck to all of us. :D

FellowInvestorForIncome said...

https://links.sgx.com/1.0.0/corporate-announcements/I38172RAMICLKUQY/690888_AAREIT_Completion_WoolworthsHQ_MediaRelease.pdf

It looks like there’s no fund raising?

AK71 said...

Hi FIFI,

Thanks for the update.

Not touching my war chest is not a bad thing either. ;)

hobbez said...

Hi AK and all,

I like it that AIMs is making DPU accretive acquisitions. I have some holdings in AA and am trying to assess if I should add to it. The main concerns that I am encountering while assessing are mostly related to Perpetual Securities. There is a lot I don't know and I am still learning and hence the doubts and questions I have below. Thanks in advance for all the expert advice.

- I notice that for the 250 million perps issuance, the interest rate is 5.375% while the NPI from Woolsworth is 5.17%. Am I missing something in how this makes sense since the interest rate appears higher than the NPI and > 50% of the funding is coming from Perps.
- How does Perps go into the financial statements? Is it 50% equity and 50% debt? So meaning that only 50% is factored into gearing ratio?
-Is NAV calculation accurate if it is 50% debt and hence, 50% liability?
- When AA declares a blended debt cost of 2.8%, does that also take the Perps interest rate of over 5% into consideration?

AK71 said...

Hi hobbez,

Yes, what matters is the blended cost since there are so many possible sources when it comes to financing.

As for perpetual bonds, it is treated as equity, not debt and gearing is unaffected.

There are other considerations which make the purchase of the property in question a strategic move.

Rent will escalate over time but the bigger consideration is the potential to build more on the land which is freehold in nature to max out the plot ratio and AA REIT is an old hand at this.

Although I am comfortable with the deal, there are people who are not.

When in doubt, it is probably a good idea to stay out. :)

Just talking to myself, as usual, of course. ;)

hobbez said...

Hi AK,

Thanks for the valuable insights. What happens to NAV in that case? Since perps are not considered debt. Does that result in NAV being artificially higher than it actually is?

AK71 said...

Hi hobbez,

Perpetual bonds are strange animals.

Although considered to be a type of equity instead of debt, it is only quasi equity since it really is debt but it is debt that does not have to be repaid if the issuer chooses not to unlike regular debt which must be repaid at some point.

As perpetual bonds do not show up as liabilities in the balance sheet and could make NAV look higher, it is another reason why using NAV to inform our investment decisions in REITs might only matter if we are interested in asset plays.

As an investor for income, I am mostly interested in the income generating ability of an entity and whether it is sustainable.

So, my analyses are usually incomplete.

Eavesdrop at your own risk. ;p

hobbez said...

Thanks AK. The information is really helpful. Not sure if I am thinking this too simplistically, but to get the 'real' NAV, I would then take the total amount of perps issued so far, which I believe is 125mil in 2020 and 250mil in 2021 to add to the net assets. The net assets is shown as 1363 mil in the most recent quarterly update, translating to NAV of 1.38. Accounting for the 375mil perp issuance so far, 'real' NAV becomes close to 1.0 instead. Does that make sense?

PS: I am aware that other REITs do perps as well so there is inaccuracy everywhere.

hobbez said...

I think I have answered my own question after digging a little deeper into the financial reports. NAV is calculated only based on stockholder equity and there is separate accounting for perps equity. As a result, NAV calculation is accurate and perps do not inflate NAV. Having said that, I am now comfortable with adding to my holdings. :)

AK71 said...

Hi hobbez

Financial engineering is always so amazing.

Good to know that you have arrived at something you can work with. :D


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