Source: The Edge Singapore
AA REIT bides time on China deals，white knight George Wang builds asset pipeline
STORIES BY GOOLA WAROEN
George Wang got a much warmer reception from shareholders of AIMS AMP Capital Industrial REIT (AA REIT) during its annual general meeting last week than he did last November. In fact, the whole meeting was a rather sedate affair compared with the fiery shareholder meeting eight months ago, when Wang had pushed through a recapitalization plan for the then-MacarthurCook Industrial REIT that involved, among other things， selling shares at a steep discount to a group of investors he himself had led. With private security personnel present，the hugely dilutive deal was passed narrowly，partly as a result of Wang holding out the promise of using his business connections to steer the troubled industrial REIT towards opportunities in China.
Since then, Wang says he has indeed spent more time jetting between China and his home in Australia than anywhere else. "I have not been here for some time，" he tells The Edge Singapore， after AA REIT's AGM，which was held at the STI Auditorium in Capital Tower last week. "This is the second time this year." But, the effort and time he has been spending in China appears to be paying off now， with his boutique property investment firm AIMS Financial Group，which ultimately controls AA REIT， snaring a slew of deals.
On July 2，AIMS Financial Group said it had signed a cooperation memorandum with Hainan Development Holdings Ltd and Guang dong Finance Trust Ltd to jointly establish a real estate development fund and a real estate investment trust (REIT). The creation of the fund and the REIT is part of a plan by the three parties to develop Hainan as an international tourism destination. According to the cooperation memorandum, the real estate development fund will kick off with RMB 1 billion ($205.1 million) and eventually expand to RMB 3 billion. Meanwhile, the three parties will conduct preliminary work for the setting-up of the REIT. In addition， Wang says AIMS Financial Group plans to build an eco-city in Tianjin and set up an eco-tourism development fund. "It will be a two-phase, mixed development with a retirement village, golf courses，leisure and hospitality [facilities]," he says. "There is a need for hospitality facilities in first-tier cities because of growing demand. Besides, Tianjin is just a 27-minute rail ride from Beijing."
It will be some time before AA REIT begins acquiring assets in China， though，says Wang. Instead，the REIT still has a lot of work to do to cut its financial costs and improve its cash flow. At any rate，it will be tough for the REIT to make an acquisition that would be immediately yield-accretive，with its own yield currently hovering at 9.9 %，above the average yield of 8.5 % for the REITs and one of the highest among locally listed REITs.
Repositioning AA REIT
That's not to say that AA REIT hasn't made plenty of progress since Wang took over. During FY to March 31, its performance yardsticks appear to have stabilized as a result of the recapitalization deal, which included the injection of fresh assets. For the quarter to March, the first full quarter after the exercise，the REIT reported net property income of $11.9 million, up 20 % q-o-q and 28% y-o-y. Its distributable income was $7.9 million, 49% higher q-o-q and 58% higher y-o-y However, its distribution per unit (DPU) was only 0.53 cent, down 71 % y-o-y and up marginally q-o-q because of the large amount of new shares it had sold.
AA REIT's balance sheet is also clearly in much better shape now. As at end-March， its debt-to-asset gearing stood at 29.8%, down from as much as 41 % before the recapitalisation deal. Its net asset value (NAV) as at end March stood at 31 cents per share, about 30% more than the current market price of its units AA REIT has 26 industrial properties worth some $657.7 million. On average, the properties are 96 %-occupied, versus the industry average of 91 %. The REIT is holding security deposits that average 9.5 months of rent per property, providing it with a good buffer in the event of non-payment by its tenants. The weighted average lease expiry is 4.4 years.
Wang is now looking for ways to drive up AA REIT's revenue and cash flow. Among other things， he says the REIT's manager plans to negotiate rents with its sub-tenants directly as the master leases expire. That opens the way for it to raise rentals from 2011, which is when the master leases start expiring. About 86 % of AA REIT's property portfolio is under master leases.
Meanwhile, Wang is working on a plan to cut AA REIT's interest costs. For FY2010, its borrowing costs ballooned to $13.89 million from $5.86 million the previous year. Even in 4QFY2010, after the recapitalisation exercise, its borrowing costs came in at $3.15 million, about twice the $1.53 million it forked out a year ago, “it’s too high,” he gripes. “Last time, we had no choice.” Now， we have a choice. We need to bring a local bank in." Wang adds that he is in detailed talks with one local bank in particular, but declines to name the institution. Local banks have a cheaper cost of funds and offer competitive corporate interest rates.
AA REIT is also looking at other longer-tenor funding options such as bond issues, but will need to improve its credit rating to get a good deal. In December, following the recapitalisation exercise, Moody's Investors' Service upgraded its rating on AA REIT from Caa l to Ba2 - two notches below an investment grade rating of Baa3. To get to that investment grade rating, Moody's says the REIT needs to "demonstrate a sustained track record in managing its business growth with a prudent mix of long-term debt and equity financing, substantially strengthen its business scale and successfully spread out its debt maturity profile".
Wang says plans are already under way to strengthen AA REIT's portfolio. First, it is looking to sell a lone property in Japan acquired by the previous management. It may also consider offloading other assets that are underperforming and launch asset-enhancement initiatives to improve the revenue potential of properties that it keeps. AA REIT aims to be positioned broadly across the industrial property sector， holding everything from logistics facilities to business parks. By contrast, Ascendas REIT is focused on business parks, while Mapletree Logistics Trust and Cache Logistics Trust are solely invested in warehouses
With these moves, Wang figures that AA REIT will eventually garner better market valuations, putting it in a position to begin expanding its portfolio. The REIT plans to expand its portfolio to $1.4 billion within the next five years. Initially, it is likely to hunt for assets in Singapore, where only one-fifth of industrial properties have been securitized. But China would be the next logical market for the REIT. “We have to strengthen the team in Singapore further before we educate them about China,” Wang says.
The clock is ticking for Wang, though. Even as he works to put AA REIT on a stronger footing, other property groups are moving to launch industrial property REITs of their own. Notably, Mapletree Investments has said it intends to list its Mapletree Industrial Trust, which holds largely flatted factories. Mapletree Logistics Trust, the property group's only REIT at the moment, currently trades at a yield of just 7.1 %, putting it in a stronger position than AA REIT to acquire assets on terms that are immediately yield-accretive.
Adding to competition, Cache Logistics Trust, backed by ARA Asset Management and CWT, hit the market in April and now trades at a forecast yield of 9.3 %. Things could heat up even more if GIC Real Estate decides to list Prologis, which holds logistics assets. Is Wang ready for the competition? Or has he bitten off more than he can chew by grabbing control of AA REIT?
Born in Hainan, Wang migrated to Australia at the age of 24 in the late 1980s with little more than A$2,000 in his pocket. He worked as an insurance salesman before branching out into selling mortgages. The enterprising Wang then went on to create AIMS Financial Group, which was initially a mortgage originator but has since expanded into securitisation, property funds management and REITs. Emerging from the credit crunch relatively unscathed, AIMS Financial Group bought MacarthurCook in Australia at a distressed price of less than A$lO million ($11.8 million) in 2009. That gave Wang control of AA REIT as well as MacarthurCook Property Securities Fund, which is listed in Australia and Singapore, and MacarthurCook Industrial Property Fund, which is listed in Australia.
AA REIT was at the time desperately in need of a cash infusion to survive. Specifically, it needed to refinance $225 million worth of existing debt, and find a further $91 million to acquire 1A International Business Park, a deal on which it was unable to backtrack. Wang pulled together a slate of cornerstone investors that included Australia's AMP, enabling AA REIT to raise a total of $217 million through the sale of new shares and a subsequent rights issue. Under the recapitalisation exercise, AMP also sold four of its industrial properties to AA REIT for $69.4 million.
AIMS Financial Group is now in the process of selling MacarthurCook Industrial Property Fund. In June, HRPT Property Trust, an US based REIT, offered to pay 41 Australian cents per share for the fund, significantly more than the 17 Australian cents at which it traded when AIMS Financial Group bought the MacarthurCook group. "It should be completed in August," Wang says of the transaction with HRPT Property Trust.
As for repositioning and growing AA REIT, Wang says he is undaunted by the new industrial REITs coming to market in Singapore. Besides setting the REIT on a stronger financial footing, Wang has also moved to strengthen its management. Since the start of the year, AA REIT's manager added new directors to its board, including Eugene Lai, a former CEO of the Ascott Group, and Norman Ip, ex-CEO of Straits Trading Co. Wang has also recruited Giam Lay Hoon, a one-time company secretary and in-house counsel at Temasek Holdings, as director of AIMS Financial Group Singapore. The CEO of AA REIT's manager is Nicholas McGrath, a trained lawyer from Australia who was CEO of Allco Commercial REIT's manager.
Wang says AA RE IT may well benefit from the listing of more industrial REITs, as that would accelerate the securitisation of industrial properties in the city-state. "It's good that the other REITs are listing," he says. "We're in a good position. We can learn fast." Also, the heft AA REIT would gain from acquisitions on its home turf would put it in a stronger position to eventually lean on Wang's connections and venture into China. "Once we've settled this, we can go to China, maybe in 2012," Wang says. "We need to take the management team to China to try and understand China. That needs time."
AA REIT bides time on China deals，white knight George Wang builds asset pipeline