S-REITs: Is the Acquisition Accretive or Dilutive?

I see this post as a continuation of my previous post titled “S-REITs: What have they been buying and selling? Read here.

After all not all purchases are advantageous from the retail investor’s point of view. One key question in everyone’s mind: Is the purchase ultimately accretive or dilutive to the DPU long term? Post-acquisition, will the dividend payout increase or drop?

Is the purchase just a way for the sponsors to dump unwanted & unproductive properties to the Reit investors? Or will it be in line with the long term interests of the investors? An enlarged portfolio may not necessarily be a good thing. A more focussed basket of quality high yielding assets would be better.

What can be found for sure is the short term impact to the DPU. Long term wise, the overall DPU of the Reits will be dependent on a whole host of factors, be it time based vendor supports / master leases, economic performance of the industry, interest rates fluctuation, attractiveness of the properties, etc.

Let’s face it, as small retail investors, individually we have little voting rights… in the decision making processes for these acquisitions. However, that should not be an excuse not to be informed and plan if you intend to be a long time holder of the Reits which you are currently vested in.

Accretive to DPU

1) AIMS APAC Reit: On 9 Oct 2020, AIMS APAC REIT (AAREIT) completed the proposed acquisition of a modern ramp-up logistics facility at 7 Bulim Street. The acquisition will be funded by the S$125m perpetual securities issuance and additional debt of S$12m.

The acquisition will be DPU accretive but the difference in timing between the perps issuance and completion of acquisition will lead to a c.1.5% negative carry to FY20F DPU projections. However, the acquisition will be c.1.8% accretive to DPUs from FY21F onwards. (Read here)

2) Ascendas Real Estate Investment Trust: Ascendas Reit on 21 Sept 2020, announced the proposed acquisition of a suburban office building, to be developed at 1 Giffnock Avenue, Macquarie Park, in Sydney, Australia (MQX4), for A$167.2 million (S$161.0 million) from Frasers Property Industrial and Winten Property Group.

Net property income (“NPI”) yield for the first year is approximately 6.1% post-transaction costs.The pro forma impact on distribution per Unit (“DPU”) for the 12 months ended 31 December 2019 would be an estimated improvement of 0.046 Singapore cents assuming MQX4 was acquired and completed on 1 January 2019. (Read here)

3) Elite Commercial REIT: On 19 Oct 2020, Elite Commercial REIT announced that it has entered into a conditional share purchase agreement to acquire 58 commercial buildings across the UK.

Elite Commercial Reit’s manager said the accretive acquisition will increase the trust’s size, market capitalisation, free float and liquidity.

The distribution per unit (DPU) accretion is expected to be 3.2 per cent, based on pro forma DPU, assuming the acquisition is financed through the issuance of new units to the fund and a £30 million equity fundraising.

Following the proposed acquisition, the Reit’s portfolio valuation will increase by about two-thirds, to £531.6 million from £319.1 million as at Aug 14. Net property income is also set to increase by 59.1 per cent. (Read here)

4) Frasers Centrepoint Trust: On 3 Sept 2020, FCT proposed to raise up to $1.39 billion in equity to fund its acquisition of the remaining 63.1 per cent of AsiaRetail Fund for $1.06 billion.

The acquisition is expected to be DPU-accretive for unitholders. Based on FY2019 pro forma figures, distribution per unit (DPU) will increase 8.6% from 11.99 cents to 13.02 cents. However due to the impact of COVID-19 this year, DPU will grow 4.7% post-acquisition based on 9M 2020 pro forma figures (excluding one-off rental rebates). (Read here)

5) Lendlease Global Commercial Reit: On 1 Oct 2020, it was announced that LENDLEASE Global Commercial Reit has acquired a stake in Jem shopping mall, through a 5 per cent stake in Lendlease Asian Retail Investment Fund 3 at a purchase consideration of around S$45 million.

The acquisition is accretive to LREIT’s distribution per unit based on the assumption that the acquisition had been effected on 2 October 2019, and LREIT held and operated Jem through 30 June 2020, and other assumptions as set out in LREIT’s announcement dated 1 October 2020. (Read here)

6) Manulife US Real Estate Investment Trust: Manulife US Reit on 28 Oct 2020 morning said it has completed its purchase of a Class A office building in Sacramento, California. The pure-play US office Reit had announced the US$198.8 million acquisition of 400 Capitol Mall in September 2020.

The Acquisition is expected to be DPU accretive to the Unitholders. The 1H FY2019 pro forma DPU is expected to increase by 2.3% from 3.04 US cents to 3.11 US cents after the Acquisition.
The Acquisition is also NAV per Unit accretive and lowers the overall gearing of Manulife US REIT. Post-Acquisition, the pro forma NAV per Unit as at 30 June 2019 is expected to increase from US$0.79 to US$0.80.
The pro forma aggregate gearing as at 30 June 2019 is expected to improve from 37.1% to 36.6%. This will provide debt headroom of approximately US$123.3 million and US$330.2 million based on Manulife US REIT’s internal target gearing limit of 40% and regulatory gearing limit of 45%, respectively. (Read here)

7) Mapletree Logistics Trust: MLT announced on 19 Oct 2020 that it is seeking to acquire nine logistics properties in China, Malaysia and Vietnam, and also the remaining 50 per cent interest in 15 properties in China for a total of $1.09 billion.

Proposed Acquisitions are expected to be distribution per Unit (“DPU”) and net asset value (“NAV”) per Unit accretive.

The final funding structure will be decided by the Manager at the appropriate time taking into account the then prevailing market conditions to provide overall DPU accretion to Unitholders on a pro forma basis while maintaining an optimum level of aggregate leverage. (Read here)

8) Suntec Real Estate Investment Trust: On 9 Oct 2020, it was announced that Suntec Reit manager is looking to acquire a half stake in London’s Nova development from Canada’s pension fund, based on an agreed property value of £430.6 million (S$766.5 million).

There will be a DPU uplift of 4.9% on the annualised first-half 2020 DPU for the enlarged portfolio. (Read here)

Dilutive to DPU

1) ARA Logos Log: On 26 Oct 2020, ARA LOGOS Logistics Trust announced the $404.4m proposed acquisition consisting of:
i. S$225.9m(2) in respect of five logistics properties in Australia including a development asset; and
ii. S$178.5m(4) in respect of a 49.5% interest in New LAIVS Trust and 40.0% interest in Oxford Property Fund.

Dilutive impact to DPU (see below left) (Read here):

2) IREIT Global: IREIT Global on 19 Oct 2020 concluded an oversubscribed rights issue, raising some S$142.8 million to finance the acquisition of properties in Spain and repay a loan from City Developments Limited (CDL).

Part of the proceeds will be used to acquire the remaining 60 per cent of four freehold multi-tenanted office buildings located in Spain’s Madrid and Barcelona, from Tikehau. These properties are already 40 per cent owned by IReit.

Based on the finalized rights issue announcement, they are going to issue out 291.4 million new units to raise approximately €88.7 million. The new units will be issued out at a issue price of S$0.490 per rights unit. This means that the rights issue will be more dilutive than the above illustration as there are more units being issued at a lower valuation.

It is good to note that though the DPU and NAV will be significantly diluted, the aggregate leverage will be reduced significantly as well. This brings about more opportunities for further acquisitions if IREIT Global finds suitable assets to acquire. (Read here)

3) Lippo Malls Indonesia Retail Trust: LMIRT on 18 Sept 2020 proposed to raise $280 million through a non-underwritten renounceable rights issue to partly finance its planned acquisition of Lippo Mall Puri.

To quote the article titled “Lippo Malls Indonesia Retail Trust (LMIRT) – Biting Off More than It Can Chew?” (Read here), see below:

“In our simulated model, we will test the impact on the DPU based on rights issue priced 10%, 20%, 30%, 40% and 50% discount to the current close of Friday, 04-Sep-2020 at S$0.116.

Source: ProButterfly Research, REITScreener Research

Running the various scenarios, its clear that neither the DPU nor the NAV is going to be accretive. In fact the DPU yield is also going to be dilutive! “