AIMS AMP Capital Industrial REIT: 4.35% Fixed Rate Notes.

AIMS AMP Capital Industrial REIT is raising $30m in the debt market from the issue of unsecured 4.35% fixed rate notes in a private placement. This is the second series of such notes to be issued.

The first series of such notes was issued in August 2012 and was 5x oversubscribed. Those notes were at 4.9% fixed rate and mature in 4 years in 2016. That exercise raised $100m.

The second series of notes are to be issued on 5 Dec 2012 and will mature on 5 Dec 2019. The money raised will go to repaying a $28.8m secured bank loan due in Feb 2014.

There are improvements in the second series over the first:

1. The cost of debt is lower at 4.35% compared to 4.9%.

2. The tenor is longer at 7 years compared to 4 years.

These improvements are significant as they suggest that there is a strong demand for debt issued by the REIT. The demand is so strong that lenders are willing to accept a lower yield for a longer tenor. This bodes well for future issues and also lends confidence to investors in the REIT as funding concerns are addressed.

One of the major criticisms of the REIT model was that the long term investments in real estate were accompanied by short loan tenors, usually three years, from lenders in the past which were the CMBS (now exinct) or banks. Longer loan tenors provide stability.

However, the longer tenors of medium term notes attract a higher coupon rate when compared to shorter term bank loans. The higher coupon rate also reflects higher risk to lenders from the notes being unsecured. The bank loans AIMS AMP Capital Industrial REIT secured in the past have an average of 3.3% in annual interest burden, if I remember correctly, which is much lower than the coupon rate of the current exercise but I guess we cannot have everything.

AIMS AMP Capital Industrial REIT has the same BBB- credit rating as CDL-Hospitality Trust and I expect the REIT to issue more of such notes in future. Could we perhaps see a 10 years tenor and a 3.5% coupon rate in the next issue?

Related post:
AIMS AMP Capital Industrial REIT: 2Q 2013.

Useful information on the REIT:
Corporate Profile Seminar Presentation (17 Nov 2012)