New IPO – Australian Industrial REIT

Co-founder of the Switzer Report
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With the market at five-year highs, IPOs are starting to get off the blocks. Channel 9, Veda Advantage and (incredibly) Dick Smith Electronics are three of the bigger names doing the rounds.

In the listed property space, brokers will this week be sounding out investors for the IPO of Australian Industrial REIT, a pure play industrial property real estate investment trust.

Australian Industrial REIT

Fife Capital, a boutique real estate investment and advisory firm, is seeding a fund that will own industrial properties located in Sydney and Melbourne valued at around $175.8 million. To be listed on the ASX, the Australian Industrial REIT is forecast to pay a distribution yield of 8.25% per annum to unitholders.

The issue of 64.5 million shares to the public at $2.00 each, will raise $129 million, with a further $52.9 million being borrowed to fund the purchase of the properties and the costs of the offer.

The properties

Eight properties are being acquired – two from external vendors, the other six from an entity controlled by the Fife Group. The properties are located in key industrial areas in close proximity to strategic road, port or rail infrastructure. They are fully leased, with a WALE (Weighted Average Lease Expiry) of 6.0 years. Five tenants (Australia Post, VIP Petfoods, Bluestar Logistics, K & S Freighters, Visy Industries) account for 72% of the lettable area. Details of the properties are as follows:

The fund – 8.25% pa distribution yield forecast

The fund will be managed by a subsidiary of the Fife Capital Group, which will earn a management fee of 0.60% per annum of the assets, plus a fee for managing the tenants. On listing, the fund will be capitalised at $129 million.

The fund boasts:

  • Quality, pure play Australian Industrial REIT;
  • Stable income stream and structured rental growth, provided by strong tenants and long term leases;
  • Conservative capital structure – the fund is initially geared at 29% (target gearing ratio is 25% to 40%), and has an unused debt facility of approximately $47 million that can be used to acquire additional properties;
  • An expected distribution yield to investors of 8.25% per annum for the remainder of this financial year, and 8.50% per annum for the first six months of 2014/15. Distributions are expected to be 30% to 40% tax deferred; and
  • At an issue price of $2.00, a small premium (3.5%) to the NTA (Net Tangible Asset Value) of $1.93.

How does the fund stack up?

Most listed REITS are either commercial or retail property focussed – there is only one other “pure play” industrial property fund, the 360 Capital Industrial Fund (ASX Code TIX). This fund was listed in December 2012 (previously an unlisted fund that underwent a compliance listing), and compared to the Australian Industrial REIT (AIREIT) it:

  • is bigger. Market cap $195 million versus $129 million for the AIREIT, property portfolio $340 million versus $175.8 million;
  • is more geared. Although debt is being reduced, gearing is 46.9%;
  • has a more diversified property portfolio (by region and number of properties – 20);
  • has a WALE of 5.1 years versus 6.0 years for AIREIT;
  • has a higher forecast distribution yield in 2013/14 – 8.85% per annum with a higher tax deferral (based on 18.6 cpu and a current unit price of $2.10); and
  • is trading on a higher premium to NTA. Based on a unit price of $2.10, a premium of 8.2% to the 30 June NTA of $1.94.

So on this market comparison, the pricing is broadly in line. With its lower premium to NTA of 3.5%, higher WALE and lower gearing, the Australian Industrial REIT is arguably lower risk than the 360 Capital Industrial Fund. However, it is a small fund with a lower distribution yield, which is only partially tax advantaged – so it is no steal either.

Of course, there are also some unlisted pure play industrial property funds. Charter Hall, for example, is currently accepting investments in the Charter Hall Direct Industrial Fund No. 2. This fund will comprise six properties, valued at $200 million with a WALE of 12.6 years, and is forecasting a distribution yield of 8.0% per annum to the end of 2014.

Verdict

An interesting IPO, though unlikely to shoot out any lights. The outlook for industrial property remains mixed, and while the yield on this investment is attractive, there are other options that also could be considered.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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