AIMS APAC REIT (AA REIT) Preferential Offering: What should unitholders do?

What happened?

If you are an investor in S-REITs, you might have noticed that several REITs have launched equity fund raising recently.

Earlier, we saw that Mapletree Industrial Trust completed a private placement to fund the acquisition of a new data centre in Japan. 

AIMS APAC REIT (AA REIT) has also announced a preferential offering which offers unitholders the right to buy 35 new units for every 1,000 units held, at S$1.189 each.

If you are a AA REIT unitholder and wondering what you should do about the preferential offering, read on to find out!

What you need to know about the AIMS APAC REIT preferential offering 

• AA REIT is offering shareholders the rights to buy 35 new units for every 1,000 old units, at S$1.189 each. 
• It will also pay a distribution of 1.8 cents per unit (stub distribution), expected to be paid on 20 July 2023.
• Investors who hold AA REIT on 9 June 2023 are eligible to subscribe to the preferential offering and to the stub distribution.
• Subscription to the rights and payment will open on 14 June and close on 22 June 2023.
• The new PO units are expected to be allotted and traded from 3 July 2023.
• Proceeds will be used to fund planned or potential asset enhancement initiatives, make potential acquisitions, and to pare down existing debt. 

#1 - Eligible unitholders will receive a stub distribution of S$0.018 per unit

AA REIT recently completed a placement of 57.7m new units at S$1.214 per unit, to raise S$70m. 

These new units starting trading from 12 June 2023, and are not entitled to subscribe to the preferential offer. Also, the new units are not entitled to the income that the REIT derived before the placement date. 

Hence, investors who owned AA REIT on 9 June 2023 would receive an advanced distribution for the income that AA REIT generated from 1 April to 11 June. 

This distribution, also known as stub distribution, amount to S$0.018 per unit. 

#2 - The sponsor underwrites up to S$15m, or 50% of the PO

AIMS APAC Capital Holdings Ltd and its related companies (Sponsor Group) will subscribe for its rights allocation and pick up new units not taken up by other unitholders, for a total amount of up to S$15m.

This represents 50% of the size of the PO, and would raise the Sponsor Group’s stake to up to 10.85%, from 10.35% currently.

DBS Bank, Maybank Securities and RHB Bank are also acting as the underwriters for preferential offering, and could pick up new units not taken up by other unitholders. 

#3 - The proceeds will be used for asset enhancement initiatives (AEI) and to enhance financial flexibility to pursue potential acquisitions

The rights issue and the recent placement exercise would raise a total of S$100m. 

About S$32m will be used to improve two of its existing assets in Singapore. 

Another S$65m is slated for AEIs, re-developments of existing properties and potential acquisitions, as well as to pare down existing debt. 

What are the reasons to be positive on AA REIT?

#1 - AEI work on two existing assets could improve overall NPI yield

AA REIT generated net property income (NPI) yield of 6.6% from the Singapore assets in FY23. 

Its manager has identified two assets to begin asset enhancement initiatives (AEI) work from second half of calendar year 2023. 

Upon completion and when these assets reach a steady state of operations, the manager believes these assets could deliver NPI yield of 7% to 8%. 

#2 - Gearing could improve from 36.1% as at Mar 23 to 32.8%

Assuming S$65.2m of the proceeds were used to pare down debt, gearing could improve to 32.8%, from 36.1% as at Mar 2023. This could help to bring down interest paid on its borrowings.

This does not take into account outstanding perpetual securities of S$375m which are classified as equity. 

#3 - Logistics and warehouses assets outperform in the industrial sector

AA REIT derives about 43% of its gross rental income from logistics and warehouses, and enjoys a high occupancy of 98% at end Mar 2023.

According to JTC, overall demand for industrial space remains robust.  Occupancy for warehouses hovers at 90.3% and rents grew 9.4% yoy. 

What are the risks for AA REIT?

#1 - Potential near term dilution to DPU

AA REIT is not likely to see gains from the AEI work on the two assets immediately. 

In the meantime, the placement and PO could raise the unit base by 11.5%. 

Should the REIT not be able to grow its distributions through other means, then distributions per unit might be lower. 

#2 - Adjusted interest coverage at 2.3% brings its gearing limit to 45%

Higher interest rates in FY23 led to a 57.3% rise in AA REIT’s interest expense on borrowings to S$28.3m. This outpaced the 18.7% rise in net property income, and adjusted interest coverage fell to 2.3x. 

The gearing limit for a listed REIT declines to 45% from 50% if interest coverage falls below 2.5x. 

However, AA REIT’s gearing of 36.1% as of 31 March 2023 remains below the gearing limit of 45%. There is also scope for AA REIT’s gearing to decline further with the equity fund raising. 

What would Beansprout do?

AA REIT’s share price has fallen close to 10% from the time the equity fund raising was announced on 31 May 2023.

The closing price of AA REIT on 13 June 2023 of S$1.18, which is below the preferential offering price of S$1.189. 

Should the share price remain at this level, investors will be able to purchase units of AA REIT directly in the market at a lower price. 

If the take up by investors in the preferential offering is low, the funds that AA REIT raised through the private placement would still be able to meet the requirements for the planned asset enhancement initiatives.

The sponsor, AIMS APAC Capital Holdings Ltd, and the underwriting banks could also take up units that are not taken up by eligible unitholders. 

In the event that all the preferential offering units are taken up, and the distributions of AA REIT remain the same as the previous fiscal year, the dividend yield of AA REIT would be 7.5% based on its closing price of S$1.18. 

To learn more about AA REIT, read our kopi-C interview with CEO Russell Ng here. 

If you are looking for Singapore dividend ideas to grow your passive income, check out our guide to selecting the best REIT for your portfolio. 

Join Beansprout's Telegram group to get the latest updates on Singapore stocks, REITs, bonds and ETFs.