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AIMS AMP Capital Industrial REIT’s Maiden Australian Expansion

Australia

AIMS AMP Capital Industrial REIT (SGX: O5RU) announced this morning that it has entered into a conditional agreement with Stockland Direct Office Trust No. 2 to acquire a 49% interest in the Optus Centre, subject to regulatory and unit-holders’ approvals.

The property, a premium A-Grade business park located at Macquarie Park in Sydney, Australia, is valued by independent third party firm CBRE at A$377m. The REIT’s 49% stake is thus worth A$184.7m and it would be paying A$184.4m (approximately S$215m) for the purchase. The acquisition would also be the REIT’s first in Australia.

Optus Centre has a net lettable area of 84,194 square metres (sqm) and is actually entirely leased to wholly-owned subsidiaries of Optus, which is the second largest telecommunications operator in Australia behind Telstra.

Optus in turn, is a wholly-owned subsidiary of Singapore telco giant SingTel (SGX: Z74) and is in charge of the latter’s Australian operations.

Interestingly, the Optus Centre’s lease with Optus has a rental escalation component where the rents paid on the property are subjected to fixed annual increases of 3%.

Currently, Optus has three leases with Optus Centre, which are set to expire after 7.7, 9.7 and 8.7 years.

The REIT would be paying for this acquisition with debt. A$73.8m would be coming from an existing revolving credit facility while the remaining A$110.7m would come from a new 5 year term-loan facility.

AACIR’s manager has the intention to lock in at least 50% of the interest rates on the afore-mentioned Australian-dollar debts to help lower some of the financial risks associated with the acquisition.

Some of the REIT’s pro forma financial numbers for the half-year ended 30 Sep 2013 is given below (presented as though the acquisition was completed just before the end of the half-year period):

 

Actual Pro forma

Change

Total Assets

S$1.11b S$1.32b

19%

Total Debt

S$279m S$500m

79%

Aggregate Leverage (Total Debt over Total Assets)

25% 38%

50%

Book Value

S$787m S$783m

-0.5%

Book Value Per Unit

S$1.492 S$1.486

-0.4%

Distributions

S$27m S$28m 4%

Distribution Per Unit (DPU)

S$0.0512 S$0.0541

6%

Net Property Income S$34m S$42.5m 25%
Net Property Income Yield 6.3% 6.6%

5%

From the numbers above, it seems that the acquisition can immediately help boost the distributions to existing unit-holders, which is great.

Before the acquisition, the REITs’ portfolio of 25 industrial properties – consisting of cargo lift warehouses, manufacturing facilities, ramp-up warehouses, and business parks – were located entirely in Singapore. If the acquisition’s completed successfully, the REIT would have 18% of its portfolio in Australia, giving it much better geographical diversity.

So while there are some key benefits to the acquisition, investors should also note the large increase in leverage in the REIT now. Leverage – the act of using ‘other people’s money’ – is not inherently good or bad, it just poses more risks for investors if used in large quantities.

But for what it’s worth, Mapletree Industrial Trust (SGX: ME8U) and Sabana Shari’ah REIT (SGX: M1GU), two REITs with a focus on industrial properties in Singapore, utilise similar leverage as compared to AACIR at 36.2% and 37.5% respectively.

So, despite a large increase in borrowed funds, it seems that AACIR’s not taking on excessive risks to grow its portfolio, at least in comparison with its peers.

Nicholas McGrath, chief executive of the REIT’s manager, commented on the acquisition:

This investment enables the Trust to acquire a premium asset which is accretive to the Trust, provides long-term cashflow certainty, strengthens our asset base and diversifies our portfolio with the addition of a premium business park office campus leased to Optus.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.