It was a jam-packed newsworthy day yesterday in the REITs space with the proposed merger of Ascott REIT and Ascendas Hospitality Trust (AHT), the MAS consultation on increasing gearing limits on REITs and a proposed acquisition of 12 properties by Frasers Logistics and Industrial Trust (FLT) from its sponsor. To be honest, I was kinda irritated by the merger as I am in the midst of writing my REIT Spotlight on AHT and this would put another thing on my plate for that article.
Anyway, I decided to focus on FLT as it is something closer to my heart. Here are some highlights from announcement and some financing speculation..
Acquisition Highlights
The acquisition portfolio comprise of 9 German properties and 3 Australian properties valued at A$644.7 million. This is 1% discount of appraised value. It is expected to be financed by a mix of debt and equity, and is expected to close end-August 2019. The portfolio is located close to other existing properties, so there should be benefits from economies of scale.
Operational effects
Positive operational effects across the board:
- Longer WALE
- Larger proportion of Freehold properties
- Younger properties
- Properties have 100% occupany, long WALE with fixed / CPI linked escalations.
Financial effects
Based on their computation, the acquisition is slightly DPU accretive and NAV accretive. Gearing will go up to 36.1%. Note that this pro-forma computation is based on extrapolation of 1H2019 results and does not include 1 off capital gains taxes on divestments. As such, in the short term, the REIT’s DPUs will be depressed to AUD3.47c (SGD3.37c).
The announcement also discloses the pro-forma effects of the acquisition on FY2018 financials. However, the figures are not very useful as the properties where acquired by Frasers Property in mid 2018 and as such, they do not have the full year contribution of the property to FY2018’s figures.
Potential funding mixes
By reverse engineering the financial disclosures provided in the announcement, here are some potential funding mixes implied by the announcement:
Using Post Divestment Figures
- Debt = A$1,324.3m (Debt after divestments & acquisition) – A$940.5m (Debt after divestments) = A$383.8m
- Equity = A$530.4m (Total consideration) – A$383.8m = A$146.6m
- Units to be issued (‘000) = 2,255,480 – 2,029,886 = 225,594 units
- Unit price = AUD146.6m / 225,594,000 units = AUD 65c
Honestly, I was very surprised by this figure when I computed it considering that it is significantly lower than the REIT’s current closing price of SGD 1.23.
Perhaps given the tight deadline of the transaction (having to close by end August), these divestments may not have been closed. As such the REIT may need to raise more equity than what this scenario suggests to fund the acquisition.
Using 1H FY2019 Figures
- Debt = A$1,324.3m (Debt after divestments & acquisition) – A$1,097.5m (1HFY2019 Debt) = A$226.8m
- Equity = A$530.4m (Total consideration) – A$226.8m = A$303.6m
- Units to be issued (‘000) = 2,255,480 – 2,029,886 = 225,594 units
- Unit price = AUD303.6m / 225,594,000 units = AUD1.35
This computation is more like it, although this scenario results in an equity offering price of AUD1.35 (SGD1.28), which is more than yesterday’s closing price of SGD1.23. As such, this scenario probably won’t come to pass too, but probably somewhere in between.
My Guess
I played around with the figures and it seems like a roughly 45-55 mix of debt to equity makes the most sense given the expected units to be issued. This would imply a unit price of about SGD1.16 per unit, which represents a decent discount to current price while still being priced at a premium to book.
As for whether retail investors will get to participate, it is difficult to say. If it were to be structured as a preferential offering, it would be roughly a 1 for 10 offer. This ratio is similar to the preferential offering conducted last year by FLT.
That said, given the tight deadline, increased institutional interest in the REIT (thanks to it joining the EPRA NAREIT index) plus the small offering ratio, my personal feeling is that this acquisition will be funded via private placement. I would not be surprised if the REIT initiates a preferential offering, though I wonder how they’ll be able to complete an EGM and preferential offering in less than 2 months time.
We’ll see if I’m right.
Past articles on REIT M&A
CRCT acquisition of 3 malls from Capitaland
OUE Commercial REIT and Hospitality Trust Merger
FLT preferential offering results
My previous article
SSB August 2019 Issue details
Happy Hunting,
KK
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