Listed in 2007, Ascendas India Trust (SGX:CY6U) is Singapore’s first Indian property trust. As of 31 March 2018, it had a portfolio of seven business spaces and six warehouses that are located in major cities in India such as Mumbai, Chennai, and Bangalore. The trust has been aggressively expanding its portfolio through acquisitions in recent years, including the purchase of six warehouses in Mumbai last year.
Last month (14 May 2018), Ascendas India Trust proposed the acquisition of two buildings in an IT park located in Navi Mumbai. Here are the important details of the proposed transaction that existing unit holders of the trust, and potential investors, should take note of.
The property, called AURUM IT SEZ, occupies 16.06 acres of the 30-acre AURUM PLATZ IT park, which is leased from the Maharashtra Industrial Development Corporation. AURUM IT SEZ has a residual lease term of 47 years, and its lease is renewable for another two terms of 100 years each. There are four buildings being developed in the space. Ascendas India Trust has proposed to purchase two buildings with a total build-up area of 1.2 million square feet that are due to be completed in 2018 and 2020.
Ascendas India Trust will fund the construction of the buildings through the subscription of non-convertible debentures (debentures are similar to corporate bonds) issued by the co-developer subsidiaries of the owner of the property. Upon the completion of each building, Ascendas India Trust will then pay a top-up to acquire the building. The purchase price is not expected to exceed INR 9,300 million, or S$186.0 million.
The transaction also gives Ascendas India Trust the right of first refusal on the other two buildings in AURUM IT SEZ.
Increased portfolio diversification
The proposed acquisition will increase the trust’s total floor area by 1.4 million square feet, or 10.9%. It will also improve the trust’s portfolio diversification by increasing its exposure to the fast-growing Mumbai market.
Source: Ascendas India Trust presentation
The chart above shows the portfolio make-up of Ascendas India Trust before and after the acquisition.
Will it be yield accretive?
Perhaps the most pertinent question for Ascendas India Trust’s current unitholders is whether the acquisition will increase the trust’s distribution per unit (DPU). According to a pro forma estimation by the trust’s Manager, the acquisition would have increased the trust’s DPU from 6.1 Singapore cents for FY17/18 (fiscal year ended 31 March 2018) to 6.21 Singapore cents.
The Foolish bottom line
With this acquisition proposal, unitholders can expect future growth in Ascendas India Trust’s distributions.
However, one aspect that unitholders should continue to monitor is the trust’s growing interest expense. As of 31 March 2018, despite having a low gearing ratio of just 26% (a measure of the trust’s debt level in relation to its assets), the trust had a relatively low interest coverage ratio of just 3.6. The investment in the debenture and top up required to make the property purchases may further increase the trust’s interest expense and put pressure on its bottom line.
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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 Jeremy Chia doesn’t own shares in any companies mentioned.