It wasn’t a hat-trick industry watchers were hoping for. After two accretive transactions that were announced in October by Elite Commercial REIT and Mapletree Logistics Trust, the third and latest transaction seems dilutive for unitholders, is likely to raise gearing and could cause investors to examine the proposals more carefully.
On Oct 26, ARA LOGOS Logistics Trust (ALOG) announced plans to make two acquisitions. The first is a portfolio of five logistics properties in Brisbane. Altogether, the price of this portfolio is the equivalent of $225.9 million. According to Colliers, the valuation of the property portfolio is A$245.1 million ($237.3 million) with a couple of rental guarantees and A$242.6 million excluding the rental guarantees. Interestingly, four of the five properties have leasehold tenures ranging from 39 to 42 years lease. Only one property is freehold.
The second acquisition comprises stakes in two funds, a 49.5% stake in New LAIVS Trust, and 40% of Oxford Property Fund. These funds own five logistics properties in New South Wales and Victoria between them. New LAIVS Trust owns four properties while Oxford Property Fund one property. The cost of the two stakes is the equivalent of $178.5 million. Investing in property funds is permissible so long as the AUM does not exceed 25% of deposited properties. On a pro forma basis, ALOG would still have 89% of deposited properties invested in income producing real estate.
However, investing in the funds implies an extra layer of fees and the funds have their own gearing. The investment management fees for both the funds is 0.45% of AUM for each fund. In addition, ALOG would have to pay three different types of leasing fees, transaction fees, property management and trustee fees.
“The … fees are less than what is typically currently charged by LOGOS Investment Management Pty Limited for newly established third party funds managed by it. It should also be noted that the above-mentioned set of fees does not include any acquisition fee as the Oxford Property Fund is a closed end fund and acquisition fees are not relevant for this fund,” the ALOG announcement states. Unitholders will get to vote on the acquisition as ALOG is managed by a related corporation of the manager of Oxford Property Fund.
The proposed funding comprises a placement, a non-renounceable preferential equity fund raising and debt. ALOG’s manager has proposed to issue $70 million of units to Ivanhoé Cambridge China, a fund manager, and $17 million of units to LOGOS, ALOG’s sponsor. LOGOS will backstop the deal and subscribe for any unsubscribed units.
Based on around 321.9 million new units issued at between 58.7 cents and 57.5 cents to raise around $188.7 million and the issuing of units for acquisition fees and management fees to the manager, the acquisition is likely to dilute FY2019’s DPU by 3.2% on a pro forma basis, and lower FY2019’s NAV by 2.4%. Gearing rises from 40.1% at end Dec 2019 to 42.7% on a pro forma basis.
RHB says: “Despite a mildly dilutive transaction, we like the deal for its long WALE (11.3 years) with built-in rent escalations and tenant quality. ALOG also has a rights of first refusal to acquire the remaining fund stake, providing room for growth.”
On the other hand, if unitholders do not like the deal or are not comfortable with the proposed investments into the two funds, they will get a chance to vote against the transaction.
