Cash payment from AME REIT to AME in the property is only 6.6% of asset value

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AME Real Estate Investment Trust (AME REIT) is closing in on its listing after signing sale and purchase agreements (SPAs) for 34 industrial properties belonging to its parent company AME Elite Consortium Bhd last Wednesday.

These involve the purchase of assets with a total value of RM557 million from AME. The signing of the SPAs will pave the way for listing on the main market of AME REIT, adding to the number of REITs on Bursa Malaysia.

However, the cash portion that will be paid by AME REIT to AME seems quite small. Only RM37 million of the consideration will be settled in cash, while the bulk is to be settled through the issuance of 520 million units in AME REIT.

This contrasts sharply with the RM853.2 million in cash paid by IGB Commercial REIT for the purchase of 10 commercial assets from IGB Bhd in 2021, when the first was seeking listing. In this transaction, the cash portion represented approximately 27% of the value of the properties.

AME REIT’s cash consideration for the assets is only 6.6% of the value of the assets.

This raises the question of what existing AME shareholders would get by selling the assets to a REIT.

Apart from only RM37 million in cash from the sale of the 34 assets to AME REIT, shareholders will not receive any special dividends or in-kind dividends from the disposals, as the proceeds of RM255 million expected to be generated from the exercise will be be used for repayment of loans (RM105 million) and future development and investment projects by AME (RM145.35 million).

As it stands, it remains to be seen if there is much upside for AME stocks in the near term. AME’s share price has been trading in a narrow range of RM1.58 and RM1.63 each since June 13.

And the current price of RM1.60 is 14% lower than at the start of the year, meaning investors have been selling AME shares.

As a reminder, the listing of AME REIT involves the offering of a total of 254.8 million units by AME subsidiaries, including a proposed retail offer of up to approximately 174.8 million units. , including 156.61 million via a restricted sale offer (ROFS) to existing shareholders.

The basis for ROFS is one ROFS unit for every five ordinary shares held in AME.

AME has previously estimated that the group would raise around RM255m from the exercise, meaning AME REIT units would be priced at RM1 per unit, if the proposed offer of RM254.8m units came true.

The decline in AME’s share price could also be attributed to its financial performance for the year ended March 31, 2022 (FY2022).

According to Lee Chung Cheng, an analyst at JF Apex Securities which covers AME, the group’s RM46.3 million basic net profit for FY 2022 is just 93% of the research firm’s full-year forecast. . It is down 4.3% over one year.

The weaker-than-expected result was primarily due to lower recognition of construction progress coupled with lower margins in its construction segment, Chung Cheng said in a May 27 report. He has a hold call on AME with a target price of RM1.63 per share.

Nonetheless, Chung Cheng still favors AME in the longer term due to resilient demand for industrial properties, as well as the group’s potential to infill beyond Johor after its REIT listing.

“Furthermore, AME will have more room to maneuver as its debt ratio will be reduced from 0.4 times to 0.2 times. Going forward, the group would also be able to unlock the value of its real estate assets by leasing by securitizing assets that meet AME REIT’s investment criteria,” he states in the report.

AME also has good unbilled industrial property sales and a construction backlog, he adds.

In the last quarter of fiscal 2022, AME successfully closed RM37.6 million in new property sales, contributing to total sales of RM168.4 million for the year. As of 4QFY2022, the group had unbilled sales of RM91.3 million. On the construction front, AME has an outstanding order book of RM399.8 million.

AME’s management is optimistic about the outlook for the industrial property sector. His group’s chief executive, Kelvin Lee Chai, points out that even at the height of movement control orders and international border closures, AME achieved its highest ever level of new industrial property sales.

“For the 12 months to March 31, 2022 (FY2022), we saw a 20% increase in sales to RM168.4m in FY2022 from RM140.3m last year. one year, thanks to foreign and national direct investment (FDI and DDI).

“What’s more, this momentum has only continued to gain momentum. Just last month, we successfully enticed Nasdaq-listed medical device giant Insulet Corp to set up a new fit-for-purpose facility with a built-up area of ​​approximately 400,000 square feet,” said Lee Chai at The Edge when contacted.

He adds that AME expects a sustained increase in inquiries for its i-Parks in Senai Airport City and Indahpura, as well as the new i-TechValley, which will be driven by the growing trend of diversification of the supply chain in Southeast Asia by multinational companies.

“This trend is mainly driven by the recent activation of lockdown measures in major economies, as well as the trade war between the United States and China.

“The reopening of international borders…has accelerated our sales conversion process as our potential overseas customers can now move from virtual inquiries to physical site visits,” says Lee Chai.

According to data from the National Real Estate Information Center, industrial property transactions in the first quarter of the year jumped 25% year on year to 1,824 units, from 1,459 units in the corresponding quarter.

In terms of value, industrial property transactions increased by 36.2% year-over-year in 1Q2022 compared to 1Q2021. The jump in the value of industrial property transactions was the largest of any real estate sub-sector in 1Q2022.

This shows that demand for industrial properties was still bucking the trend in 1Q2022. In comparison, the value of commercial property transactions increased by only 9.1% in 1Q2022 compared to 1Q2021, while that of residential properties increased by 17% during the period.

However, the weakness begins to show. The value of industrial property transactions in 1Q2022 fell 9.9% on a quarterly basis, according to NAPIC data.

So, will AME REIT’s listing be a catalyst for AME?

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