Attended $Ascendas Reit(A17U.SI) EGM today with @leewe and @Sporeshare for the proposed S$1.66b acquisition comprising of 28 freehold US properties and 2 properties in Singapore. More details on the acquisition can be found here.
These are the questions and answers I manage to write down for sharing purposes only. I may or may not fully capture the essence of what is being asked and what is being replied - these are based on my notes and if you want an accurate reference of the proceedings, you should consult the minutes of the EGM. I may also add in my comments/views at the end of the answer to each question.
A unitholder asked about tax matters under the proposed structure in relation to the US properties, especially since the dividends (property income) is repatriated back to Singapore - mainly on how to minimise tax paid so as to maximize shareholder returns.
CEO replied that AREIT will be adopting a clean structure in the US side of things in that it is buying into a holding company that then holds the properties in US. It is exempted from corporate taxes and only exposed to 30% withholding tax. CEO further said that it is going through a route of onshore loans to maximize interest expense and reduce net income onshore and consequently reducing tax amount. CEO also said there are other structures available - other than the one proposed for this acquisition - such as PIE but this will cause US investors to be exposed capital gains tax and that AREIT has to be a tax agent and there are a lot of administration that needs to be done at the REIT level. He further elaborated on Ascott REIT and MINT acquisitions also do not follow PIE structure.
My views: I think the clean structure should bode well. It reduces the administration of the REIT to the minimum which prevents unnecessary costs (of being a tax agent) from arising.
The same unitholder asked about how forex is hedged in overseas expansion/acquisitions.
CEO said in any foreign investments, management is very mindful of forex risks. This can be demonstrated in the UK and Australia acquisitions in that 100% of assets are hedged to protect NAV. For loans, local denominated loans are being used. For income stream hedging, there is a 12-month forward hedging policy.
My comments: CEO did not mention the frequency of the hedge for the US properties. I took the opportunity to ask him in person after the EGM has concluded. CEO said that income is being repatriated every quarter, so the frequency of the hedge is quarterly for 12-month forward.
The next unitholder asked something about occupancy rates and rental reversions in Singapore properties, I cannot recall the exact question.
CEO replied that as REIT manager, it has a variety of rental packages. Sometimes, if the tenant has difficulties, the manager will help the tenants by lowering rent and clocking a negative reversion. Yet, on the other hand, sometimes the manager is able to command a higher rental reversion. CEO added that the uncertainty in market can actually be a good thing. For example, he illustrated that economic uncertainty may result in tenants not being able to have access to loans and hence it is harder for tenants to leave and get approval for capex to move and fit out. This example is especially useful for tenants who currently enjoy rent lower than market conditions.
However, CEO also pointed out that because the tenants are diverse in its industry, it is also possible to acheive very strong positive rental reversions. He illustrated that a logistical company allowed AREIT to renew the rent at 20% positive reversion because this company had very strong pharma clients who are willing to pay the logistical company.
My views/comments: AREIT's resilience is a testament to its diversification and scale. While some parts may not do well, as a whole it should be OK. I would think that with diversity in tenants and the scale, industries may take turn to outperform each other and accordingly, rental reversions will take turn to become better for specific industries. Poor performing industry may be compensated by strong performing industry and the reverse applies when there is a switch in economic conditions/certainty.
The next unitholder is a proxy for Nikko something fund management. He opined that they are not favourable of the deal for several reasons - mainly on changes in valuations over 1 year period, tight entry yields, less-than-ideal EFR method - and proposed further suggestions as to how this EFR could have been better. He said that for a premium REIT, RI is not necessary and PP + PO will be more favourable, RI may not have enough to go around for unitholders to subscribe.
CEO replied that US is a very deep market. The US locations are vibrant and there are strong anchors such as top research and tech universities which are not going to go anywhere. He also said that technology is a strong disruptor and will continue to be, so tech talents will be in demand and it is going to be in the cities that AREIT is now looking to acquire.
CEO also acknowledged that US is a big country and the yield range can be low 5% to 8+%. While AREIT is getting it at 6.4%, it is in good cities. (The proxy unitholder talked about other REIT getting a better deal in US broadly).
On funding, CEO acknowledges the pros and cons of RI. He said that RI is often negatively perceived as some companies that do it are doing it when their stock is trading below NAV. But in this case, AREIT is trading at a huge premium. He then said RI at the current price is one way to reward unitholders that have been with the REIT. CEO also spoke about other funding options such as a mix of PP and PO but the discount factor would be very different. Currently, at 15% discount to TERP is unheard of and it is a good entry for unitholders to scale up with AREIT.
My views/comments: If the fund management or fund manager is unhappy with the EFR, please do not subscribe. I am sure many retails are willing to subscribe. One reason why I think why fund managers would prefer a PP and PO is because they can get unequal access (eg, via PP) and consequently, rake up their AUM and collect more AUM fees. In addition, I think 15% discount is obscene and it is a no-brainer to scale up. Had it been a PP + PO, I may think twice. For example, I am unlikely to subscribe (or subscribe a lot) if it had been say, 3-5% from let's say $3.20.
The next unitholder asked why the US properties and Singapore properties are lumped together as one resolution instead of geographically separated. That way, can see the extent of approval by unitholders for the assets of each country.
CEO said that the vendor packaged it that way and AREIT cannot separate them. Independent director, forgot his name, added that it is also in line to maintain the majority-Singapore portfolio even as they expand overseas.
The next unitholder, Vincent, made a series of compliments to the management for doing a RI and increasing the freehold assets making the portfolio more stable for the future and its increased exposure for growth. But he asked if AREIT is paying too much for Nucelos and FM Global.
CEO said that for FM Global, there is more than 25 years of leased signed with the vendor. There is a formula behind rental escalation for FM Global which CEO cannot give exact details but he said that there is a minimum 2.5% rental escalation for 25 years period. This property has been stabilised by the Sponsor and timely for divestment. More importantly, he said that the property has 73 years of leasehold left and its location is 2-min away from Haw Part MRT. All these reasons taken together contributed to the price being paid.
For Nucleos, it is bought over from Ascendas SingBridge and it is a clean structure. CEO said that the building is a specialised one (for bio and life sciences) and there is restricted demand. So, 7% is attractive and it would be difficult to find a business park property that gives 7%.
My views: As long as Singapore maintains its political and regulatory stability, I think the Singapore properties are decent.
Vincent then asked about how the REIT manager will be mitigating local risks for the US properties. He pointed out examples of environmental threats - forest fire in California, earthquakes, etc).
Chairman said that all these risk factors were taken into account during the due diligence stage on behalf of unitholders. CEO echoed the Chairman's words and said that due diligence was done in accordance with regulations and AREIT got buy insurance for such risks - CEO gave examples, such as having insurance over 50 years, 500 years insurance on flood.
My views/comments: Interesting, I never knew got 500 years insurance, LOL!!!
Vincent then asked about the challenges of managing foreign assets and the use of foreign property managers/leasing companies. How will the Singapore team understand and keep in touch what is going on overseas and how to have an oversight on the foreign assets.
CEO said the property managers and leasing companies are third party. But AREIT have about 10 people on the ground and based in US. CEO made a comment saying that AREIT want to scale up prudently from day one. He gave an example for the UK properties purchased last year, the Sponsor already had a team managing the assets and performing AEI prior to AREIT's purchase of the UK assets. Hence, the properties are not only stable but also have own people on the ground running the assets, so when AREIT buys over, it allows AREIT to scale up concurrently as there would be people on the ground since day 1 of their acquisition. He re-interated that at this point, there is a current team of AREIT people already on the ground managing the US assets.
My views/comments: Overall I think it is a prudent approach. With acquisitions, sometimes there can be problems integrating - we have seen too many failures of two or more good companies when acquired having poor integration leading to an overall disaster. Think of it as having an efficient and effective handover and takeover between parties.
The last unitholder asked about tax rate assumptions. What are the assumed federal and state tax rates used to calculate the profit (I think) figures. He also asked about sensitivity analysis if there is a change in regulatory tax rates and how it impacts the REIT's DPU (I think).
CEO mentioned again about the clean structure AREIT will be adopting and hence it would be exempted from corporate tax. The only tax that it has to pay is the withholding tax of 30%. For completeness, CEO answered his question on federal tax rate being 21% across all states and state tax rates of ~2.5% and 7.6% for Portland and Raleigh respectively. He re-interated that AREIT will be exempted from federal and tax rates.
My views/comments: Usually there is an army of investment bankers, accountants, and tax lawyers to structure the most efficient way of conducting business. I think it is a good question.
That concludes the things I managed to take down. If you spot any irregularities, feel free to comment below, I will then bring in your comments in the form as an edit.
Meanwhile, time to think about where to spend my vouchers collected from today's EGM.