AIMS AMP Capital Industrial REIT: Acquisition of Northtech.

I received many SMS and emails regarding this REIT's trading halt today. When it became known that the REIT is to make an acquisition and this time using mostly money from a private placement, there was much concern in the air with some asking if they should sell their investment in the REIT. Let us ask the question, "Is this acquisition sensible?"

Acquisition of Northtech building is NPI (nett property income) yield accretive. The building's NPI yield is 7.6% while the REIT's current NPI yield is 7.2%. This building has another 44 years left in its land lease from URA which is pretty good. Gearing level would be at 33.6% upon completion of the acquisition and placement exercise. Quite comfortable. See presentation slides here.

However, what is immediately important when we are investing for income is, of course, the income distribution per unit (DPU). How would the DPU be affected? Let us look at some numbers.

Acquisition price of Northtech building is S$72m. Private placement will fund approximately S$42m of the acquisition and debt would fund the rest. The REIT has an existing loan facility and also an acquisition loan facility which is a three year term loan facility and a revolving credit facility totalling $45m. What is not immediately known is the interest rate for the new acquisition loan facility. However, judging by how the manager was able to refinance previously to reduce interest margin from 3.5% to 2.16%, I am hazarding a guess that the interest rate for this new loan facility would be similarly attractive.

The share placement would bump up units in issue by about 11%. Currently, total units in issue is approximately 1,979,909,000. After placement, total units in issue would be approximately 2,199,898,000.

I estimate the NPI of Northtech building to be S$5.5m per year and the REIT's NPI prior to this acquisition (excluding 23 Changi South Ave 2 and including 27 Penjuru Lane) to be S$59m per year. NPI bumps up 9% but the number of units in issue goes up by 11%. Expecting the distributable income to be similarly affected, DPU would be diluted by 2% or so. Negligible but not nice, nonetheless.

It is also apparent that the REIT would have quite a bit of undrawn debt facility after this acquisition is over. They could possibly use this for asset enhancement purposes or for further acquisitions.

Existing unit holders can look forward to an advance distribution that would pay out the distributable income of the REIT for the period from 1 January 2011 to the day immediately before the date on which new units are issued. The DPU is estimated at 0.285c and would be paid on or around 28 March 2011. See announcement here.

Of course, the share placement does not allow all unitholders to participate in the enlarged capital base of the REIT and benefits a smaller pool of institutional investors as they buy at a 7 to 10% discount from the current market price. A rights issue would have been more equitable, for sure.

What would I do? Would I sell my stake? No, a DPU of 2c per year as per my estimate means a distribution yield of 9.3% based on the current unit price of 21.5c. In fact, if there should be some irrational selling when the trading halt is lifted, I would increase my long position in the REIT if its unit price should test 21c, which technically, is a strong support.

Please remember that although I have spent quite a lot of time (almost 2 hours) crunching numbers and styling this blog post, going through past reports and announcements as well as the ones published today, my estimates remain just that, estimates. They are good enough for me but you have to decide if they are good enough for you. Please read the disclaimer at the end of the page. ;)

See announcement on acquisition and private placement here.

Read article on AIMS AMP Capital Industrial REIT in The Edge dated 14 Feb 2011 here.

Related posts:
AIMS AMP Capital Industrial REIT: Revised DPU and fair value.
AIMS AMP Capital Industrial REIT: 3Q FY2011.