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Buy CLCT? AA REIT and IREITs' rights issues OTW.

Thursday, June 1, 2023

For readers who who are not subscribed to my YouTube channel or who simply prefer reading blogs to watching videos, I produced 2 videos recently and these are the transcripts.
This was a comment from a reader yesterday.

1. For Capitaland China Trust, do you think sentiments towards China are overly pessimistic?

Hence, could the Trust be trading at a fair price 

2. I am sure you saw the right issue on AIMS APAC Real Estate Investment Trust.

Any comment on that?

AK had this to say about China.

For CapitaLand China Trust, I am just holding on to what I have now.

After seeing how China handled the COVID-19 pandemic and also what they did to their biggest tech companies, I don't really know how to read investments in China now.

Another reader said this about Capitaland China Trust.

Hard to wait for the banks when REITs like Capitaland China Trust kept enticing me with lower and lower prices. How like that?

AK said to the reader.

I have been holding on to my position in Capitaland China Trust and not done any buying or selling.

I am not sure as I am more wary of policy risks in China than anything else right now.

Jamie Dimon, CEO of JP Morgan, said this in a recent interview.

China is a far more complex situation now.

He was mostly referring to policy risks, but he was also concerned about geopolitical risks.

Too much uncertainty caused by the Chinese government.

We can also see that Chinese economic recovery has been weak and, to be honest, I agree that much of it has been self-inflicted.

It is not hard to understand that I would rather put more money into investments I have less to worry about.

AK is becoming timid with age.

I had this to say about AIMS APAC real estate investment trust.

The proposed rights issue is relatively small, but it is necessary so that the REIT does not take on more debt to grow organically.

The sponsor has also thrown its weight behind the exercise.

The sponsor, which holds about 75 million units, or about 10% of the total units in the real estate investment trust, has provided an irrevocable undertaking to the manager and the joint bookrunners and underwriters, which include DBS Bank.

The sponsor will accept, subscribe and pay in full for its total provisional allotment of the new units under the preferential offering.

They will also make applications for the number of excess new units under the preferential offering which are not taken up by other unitholders.

Hence, demonstrating their confidence in the real estate investment trust.

The exercise will raise around $100 million through the private placement and preferential offering.

Private placement is to place about 56 million to 58 million units at an issue price of about $1.21 to $1.25 per unit to raise proceeds of $70 million.

The non-renounceable preferential offering or rights issue will raise another $30 million.

This is through the issuance of about 25 million new units to existing eligible unitholders at about $1.19 to $1.23 per new unit.

Existing unitholders will be eligible to an advanced distribution of between 1.7 cents to 1.9 cents per unit.

This would be for the months of April and May.

The record date to be entitled to the advanced distribution and the eligibility to participate in the preferential offering is at 5pm on June 9.

The funds raised will help unlock greater value organically through active enhancement and re-development strategy.

It will also help to secure growth opportunities through targeted acquisitions.

I rather like rights issues which raise money in order to generate more income for the investors.

This is a relatively small rights issue and, therefore, not too demanding.

If AK can talk to himself, so can you!

(Continue scrolling down to read about IREIT Global and its rights issue.)

REITs and rights issues.

I have said before that I rather like rights issues if the money raised is used to generate more income for investors.

In the latest fund raising exercise by IREIT Global, this seems to be the case.

They are proposing to acquire 17 retail parks in France.

A strong reason to invest in these assets is that this retail format will continue to outperform in the context of global inflation partly caused by the COVID-19 pandemic.

"The popularity of hard discounters, discounters and outlet stores in France has risen exponentially in recent years.

"Retail Parks, an Out-of-Town asset class, have been resilient through the COVID-19 pandemic due to their accessibility, open-air format, wide range of available spaces, parking facilities, manageable operational cost, value-for-money brands and for some retailers, omni-channel experiences."

These 17 retail parks are leased to B and M Group, a European discount retailer listed on the London Stock Exchange with a market cap of about 4.7 billion Sterling Pounds.

They have been occupying these assets since 2005 on average.

There is a Weighted Average Lease Expiry of 6.8 years but there is an option for lease break 4.6 years from now.

A combination of competitive rents due to out-of-town locations and a resilient retail model which is discount retailing suggests to me that this is a good investment.

Of course, all investments are good investments at the right price.

The asking price is approximately $112 million.

This gives approximately 1.7% discount to the average of the two independent valuations of approximately $114.1 million.

The price is very close to valuation.

Although this might suggest that we are not getting a fantastic deal, it also suggests that this kind of properties is probably in high demand.

The seller isn't desperate to sell.

However, similar to the purchase of Woolworth's HQ in Australia by AIMS APAC real estate investment trust, I like that these 17 properties in France have excess plot ratios which could be developed for more rental income in future.

I would take this potential into consideration since we should always have a long term perspective when investing in good income producing properties.

So, apart from rental escalation being pegged to inflation, this could be another way to extract more income from the assets.

When we take into consideration that new developments of such assets are being restricted in future due to new French regulations, these assets will become even more valuable in future.

This reminds me of Saizen REIT when its properties were valued at under replacement cost.

No one in his right mind would construct a new building when buying an old one would be much cheaper, and would give similar or higher rental yields.

So, the assets Saizen REIT was holding were undervalued.

In the case of out-of-town assets in France, new ones are apparently not allowed by law.

With the future in mind, we could make the case that these assets could be undervalued.

Of course, having these properties in the portfolio would reduce concentration risk which has been a major pain point for many investors forever.

I don't really care for the other advantages put forth by the management.

The next thing I want to know is how the acquisition is going to be funded and whether it is going to be yield accretive.

Apparently, it is going to be yield accretive.

Pro forma adjusted FY2022 accretion of 2.0% was computed based on audited FY2022.

This is with the assumption that Darmstadt Campus is 100% vacant for FY2022 from 1 January 2022 with nil revenue but with operating expenses.

OK, how much do investors have to pay?

Cost of properties = $112 million.

Expenses related to purchase = $20 million.

Now, I know how people paying ABSD in Singapore feel.

The deal will be funded by the following.

1. A non-renounceable underwritten preferential offering of new Units to existing Unitholders on a pro rata basis or a rights issue.

2. External bank borrowings.

3. Borrowings from Tikehau Capital.

Both Tikehau Capital and City Developments Limited, the joint sponsors, and the manager, will subscribe in full their allotment in the rights issue.

They will also subscribe to excess units which other investors do not take up, such that their aggregate subscriptions would amount to a maximum of $40 million.

IREIT Global has a market capitalization of around $550 million.

As the sponsors jointly hold about 50% of the total units issued, without further information, I can only hazard a guess that we would see around 10% increase in the number of units issued.

We could assume that approximately 168 million new Preferential Offering Units might be issued at an illustrative issue price of 45 cents per Preferential Offering Unit.

This could raise gross proceeds of approximately $75 million.

So, if we like this proposed investment in French retail parks, we have to be ready to increase our investment in the real estate investment trust by about 10% through the rights issue.

If AK can talk to himself, so can you.

IREIT Global presentation.


AK71 said...

After further number crunching, we should be prepared for possibly increasing our investment in IREIT Global by 15% through the rights issue.

To be honest, it is all a back of the envelope, quick and dirty calculation.

Better to wait and see. 🤭

garudadri said...

Dear AK
Thanks for this timely post
I must admit that I am disappointed by this plan from AA REIT. This is my biggest holding and when everything was seeming to stabilize, this fund raising cams
Look at the market reaction! For are,actively modest equity raise, the share price has cratered by 9%
Ore importantly, despite its credentials, the private place,ent received an underwhelming response and got done at 1.21
The market will show more negative reaction now as the rights issue will sail through at circa 1.19-1.20
I regret my decision to add in the recent months and I must admit I was “deceived” by their good performance despite all the odds stacked against REITS in this unfavorable interest rate climate
To avoid losing out big time, there will be no option for investors other than
1- Subscribe for significant excess, which might not give you much
2- Wait for the dust to settle after this accident and buy more at around 1.10-1.15 or even lower if rates go higher and the company disappoints at the next quarter
CLCT and IREIT are my holdings as well and the same applies to these two although the China sentiment will be a cloud over the former
I had added CLCT at 1,1.06, 1.12 but will wait this out and add more only at 98c or so- even this is risky
Finally, although I agree about what you explained regarding IREIT acquisitions, I still feel that there is risk fie existing unit holders and we are going to see the shares drift under 45c and lower after this
Thankfully, I added last at 50 cetnts and did not buy more at 48 plusrecently
Overall, I must admit that the SG REITS have failed their investors and I will think twice about going in as I have succumbed to this yield chase
Even for income investors, disregarding capital erosion is not good
Total shareholder returns are much better with banks and to avoid overexposure, the only way out is to invest overseas
The “home bias” will prove detrimental to ,any
Warm regards

AK71 said...

Hi Garudadri,

Oh, for sure, I agree that Singapore banks are better investments for income in the current environment of higher interest rates.

This is even as their Net Interest Margins plateau.

At least they are lenders and not borrowers.

If we invest in dividend payers which are borrowers, in this environment, we want to make sure they have strong balance sheets.

When interest rates do decline again as I think they would eventually, borrowers like REITs should do better.

I know many people look at capital gains or loss but unless we are going to realize those gains or loss, it is mostly academic to me.

I am still more interested in whether I am going to get paid.

So, I will decide to buy, hold or sell based primarily on this consideration.

For REITs, we really have to be prepared for possible rights issues if we invest in them.

I have a blog on this.

Is investing in REITs right for you?

Pun on the word "right" was unintended.

If we are fully invested and don't have the resources to take part in rights issues, then, we could lose out.

AA REIT has a good track record when it comes to AEIs and redevelopment of existing assets.

They have said that they want to focus on organic growth to generate more income in their last report.

They could either take on more debt to raise funds or issue equity to do this.

With interest rates so much higher compared to a year ago, I would support the decision to do equity fund raising.

As for IREIT Global, I really like the out-of-town assets which they are looking to buy in France.

IREIT definitely has the debt headroom to fund the acquisition fully with debt.

However, they are being prudent and after this acquisition is over, their gearing ratio will be at a conservative 33% or so.

IREIT is really inviting shareholders to invest in more income producing assets.

If the rights should be priced at 45c a piece, an estimated distribution yield of 8% or so is probably not too far off.

Of course, I get the point that undervalued can stay undervalued for a long time.

As long as I am being paid to wait, and paid well enough, I can wait. :)

The Dreamzola Traveller said...

Wow, very long post.

Well, I m gonna wait and see how things turns out.
Portfolio pretty much stable for now, no hurry to acquire more territory.
Soldiers stand down! Attack only when there's blood in the streets. LOL

AK71 said...


Rare to find lengthy blogs in ASSI, right?

This is actually 2 blogs in 1.

If you follow my YouTube channel, you will see the corresponding videos.

Instead of providing the 2 transcripts in 2 separate blogs, I decided to lump them together.

If you are not already invested in AA REIT or IREIT Global, taking a wait and see stance is not a bad idea.

Even for people who are already invested, they could wait a little bit and see if the unit stays above the rights price.

If unit price should drop below the rights price, then, buying more from Mr. Market is a better option.

Siew Mun said...

In addition to subscribe rights and excess rights, will need to buy more if it's 1.20 and below to avoid dilution and maintain DPU.

garudadri said...

Dear AK
Robust employment numbers from the US overnight. Yields moving higher and the markets as well. The implications for rates are that they might linger higher for longer
The AA REIT offer will be at 1.18 and in all likelihood, at some stage we will see 1.15 if the fed hikes further
I will apply for excess rights but only a modest excess and hopefully there will be stability
Let us see what the IREIT offer will be
I guess it might be around 45-46 cents,
Most crucial for them will be whether they can fill up Darmstadt
Too much uncertainty

AK71 said...

Hi Siew Mun,

Mr. Market can be pretty irrational and the wild swings in unit price reminds me of this.

If there should be abject pessimism sinking the unit price to under $1.19 a unit, I would skip the rights issue and buy more from Mr. Market instead.

This is assuming the rights units would be priced at $1.19 a unit, of course.

If the money is used for AEIs and redevelopment of assets to max out plot ratios, the DPU should improve over time if things are done right.

Investing in properties is for the long term and as long as the fundamentals are sound and the management is competent, I am quite willing to put in more money if I can afford to.

AK71 said...

Hi Garudadri,

AA REIT published a range of prices for the rights issue with the lower end at $1.19 per rights unit.

With the private placement, they had a range starting from $1.21, and with the price settling very close to $1.21, I expect the rights issue to be priced at the lower end too.

We could certainly see $1.15 a unit again.

So, like you, I am going to be more conservative.

As for IREIT Global, the management provided an illustrative price of 45 cents per rights unit and it could be the final price.

The management has said that after sealing the deal to backfill 25% of the asset in Darmstadt, they were in advanced negotiations with a few more prospective tenants.

Getting 25% of the asset filled was crucial as it could spur activity but, of course, time will tell.

I agree with you that there is a lot of uncertainty.

This is another reason to like the proposed purchase of the 17 French retail parks.

It would improve income visibility with long lease expiries, and rental escalations pegged to inflation in place.

I guess I am putting more funds to work.

Capricon said...

AIMS rights offering price is fixed on 1.189 as per announcement

AK71 said...

Hi Capricon,

Ah, just a little bit under $1.19.

I am ready.

Come, take my money. ;p

Capricon said...

I am contemplating whether to add at 1.22 or lower before XR.. the FOMO mindset.
Can share your views from TA perspective? 😅

DL said...

Hi AK,
Preferential Offering - is this similar to rights issue? Is the success share allotted same as the normal share and entitle to the distribution?

AK71 said...

Hi Capricon,

Charts are less accurate when we have stocks splits, consolidation or rights issues thrown in.

For what it is worth, before the effects of the upcoming rights issue, the next significant support is at $1.20 a unit with a possibility of $1.19 being touched.

Momentum oscillators have all turned negative as the REIT experienced selling on high volume in the last session.

If the momentum continues, we could see support being broken.

If this should happen, the next support would be at $1.16.

I would buy more at that price if it should happen and skip the rights issue. ;p

AK71 said...

Hi DL,

Preferential Offering is Rights Issue.

I think investors got tired of rights issues some time ago and the investment bankers came up with a new name. ;p

Rights units are the same as regular units once they are paid for and available for trading in the stock market.

reggrg said...

Hi AK,

I am one of the silent reader of your blog. Like always, thank you for your insightful thoughts.

However, I am concern about the right issues from IREIT. Since IPO till date, the REIT manager has not been able to address the issue of declining DPU.

As a huge shareholder of IREIT, are you concerned about the IREIT's DPU downtrend for the past few years? Also, do you think the IREIT DPU will continue to slide further over the years with the strengthening of SGD/EURO plus the declining occupancy rate?

AK71 said...

Hi reggrg,

Always good when a silent reader decides to comment.

I don't think it is correct to say that the DPU for IREIT has been in decline since its IPO date.

There were years when it went up, if I remember correctly.

IREIT Global's rental escalations are mostly pegged to inflation.

So, in the many years when inflation was weak and add to that a weakening Euro, we get negative growth in Singapore Dollars terms.

Whenever we invest in REITs with overseas assets, there will always be FOREX risk.

If we don't like this, then, we can only invest in businesses with purely Singapore exposure which is in itself a risky idea.

I doubt that anyone can tell with certainty if the Singapore Dollar will strengthen continually against the Euro as too many things go into the mix.

As for occupancy, it declined largely because of the vacancy at Darmstadt and that reminds us of the risk of having Master Leases which is something all REITs must recognize.

I am staying invested in IREIT Global partly because I think having some exposure to European real estate is a good way to diversify my passive income sources.

Some investments will do better than others at different times.

For a REIT, IREIT Global has a strong balance sheet.

The sponsors hold 50% of the units in issue.

They could end up with an even higher level of exposure since they have given their word to subscribe to excess rights.

Of course, if we can tell for sure that the Euro will continue to decline against the S$ and that the occupancy rate is going down forever without any positive rental reversions, we might want to avoid IREIT Global. ;)

keng said...

Looks like Ireit price slowly falling toward 0.45!

AK71 said...

Hi keng,

This is not unexpected since the REIT manager has already provided an "illustrative" price of 45c per unit for the rights issue in the announcement. ;)

AK71 said...

I said this in response to a viewer of my YouTube video:

From what I can tell, IREIT Global has a competent manager if we see how they had the foresight to lock in low interest rate 100% till 2026.

The balance sheet is also very strong which tells me that they are not reckless.

I am willing to bet that this is partly because the sponsors have a lot of skin in the REIT since they hold around 50% of the units in issue.

A weakening Euro and an economic recession are not things anyone can control.

Unfortunately, these things will impact the REIT's performance negatively.

I am not worried about the REIT going under.

VT said...

AIMS is now $1.17! I feel like Adam Cheng in the old HK stock market drama.. "Drop! Drop! Drop!"

AK71 said...

Hi VT,

That's a classic! LOL!

I am already in the queue to buy at $1.16.

If it should be filled, I am saying bye bye to the rights issue. ;p

garyp said...

Hihi AK, im a silent supporter too.. what do u mean say bye bye to the rights issue? U mean you're Selling your rights or Do nothing? :)

AK71 said...

Hi garyp,

If I can buy from Mr. Market at a price lower than what I must pay to subscribe to my rights entitlement, I doubt that the nil-paid rights would be worth anything.

So, it truly is do nothing bye bye. ;p

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