By Paul Rickard

It is said that with advancing years, memories tend to shorten. Maybe that is my problem when it comes to first impressions of an IPO for an industrial property trust paying a distribution yield of just 7.3% pa, because it seems like only yesterday that yields on industrial property were in double digits. It is easy to forget just how far interest rates have fallen over the last few years, and the impact this has had on the yields of assets such as property.

The Initial Public Offer (IPO) is for Propertylink and is due to open next week. And to be fair to Propertylink, it is more than just a standard industrial property trust. However, the question still remains - is 7.3% enough?

Propertylink

Propertylink owns a portfolio of industrial and logistics properties, and manages properties on behalf of other external investors. It has $1.55bn of assets under management. To be listed on the ASX, it comprises three business streams:

  • An internally managed property trust of 33 industrial and logistics properties. These are located in the major capital cities with a weighting towards core Sydney and Melbourne markets, worth at last valuation, $685m;
  • A property management business, where it manages industrial and commercial properties on behalf of external institutional investors, such as The Norinchukin Bank. There are nine separate funds being managed comprising $873m in property assets; and
  • A co-investment activity, where it invests its capital in some of the nine external funds. In aggregate, it currently has about $24m invested in these funds. 

Most of the revenue ($47.9m out of $63.6m in FY17) is derived from the internally managed property trust. The property management business is expected to contribute $12.5m, but also has the potential to earn performance fees. Just $3.3m will be earned from the co-investment activity.

The key metrics underlying the property trust include a portfolio of 33 buildings, 46% weighted to Sydney and 34% in Melbourne. The current occupancy rate is 95.0%, with a WALE (weighted average lease expiry) of 3.6 years. It has 176 tenants, with no single tenant contributing more than 5% of the total net rent. It has been valued at $685m, with a weighted average capitalization rate of 7.65%.

Propertylink started business in 2001 when it took over the management of two property trusts in Sydney and remained a small asset management business for its first 11 years. It has grown rapidly since it merged with Echo Capital in 2011 and the existing senior management team joined, as the following diagram shows. It is forecasting that in FY17, it will grow assets under management by another $675m. 

Propertylink adopts an active management strategy across the portfolio (property trust) and with the external funds it manages for institutional investors. It is designed to deliver superior risk-adjusted returns by leveraging the Group’s in-house asset management capabilities and expertise, as detailed in the diagram below.

The IPO

The IPO is looking to raise $499m from investors. $376m is being used to pay existing investors who are selling their securities, $95m to repay debt, and $24m for the costs of the offer.

Upon completion of the offer and with a new debt facility of $300m (drawn to $257m), the company will have total assets of $725m. Gearing will be 35.0%. 

Investors are being asked to pay between $0.75 and $1.49 per security, with the final price to be determined in an institutional book build. While this sounds like a huge range, it doesn’t translate to that material a difference in the price metrics because the same value of funds is being raised, with the number of securities on offer changing as the final price changes. Effectively, all the range does is determine the equity share to be retained by the current investors and management, and the distribution yield payable to new investors.

For example, if the final price is $0.75, existing investors and management will own just 6.7% of the company and new investors through the IPO 93.3%, and the forecast distribution yield will be 7.80% pa. If the final price is at the top of the range at $1.49 per security, existing investors will own 12.1% of the securities and the distribution yield will fall to 7.30% pa.

The company expects to pay distributions twice a year in August and February, in the range of 80% to 100% of distributable earnings. For FY17, this is forecast to be 7.30% pa (based on a price of $1.49 per security). 20% to 30% of the distribution is expected to be tax deferred.

The offer is expected to close on 3 August, with trading on the ASX under stock code PHL set to commence on 5 August.

Nagging Doubts

Whether it is due to the composition of the lead manager syndicate, the complexity of the offer with its pricing range and 277 page PDS, or the very rapid expansion of the company and the existing owners largely bailing out, I have some nagging doubts about this offer. Maybe it is just that the 7.30% distribution yield (at the top of the range) doesn’t seem enough.

To be fair to the promoters, the distribution yield is not out of line with the market. Although not directly comparable, 360 Capital Industrial Fund (ASX code TIX) is trading on a forecast distribution yield of 7.9% for FY17, while the Industria REIT (ASX Code IDR) is trading on a forecast FY17 distribution yield of 7.3%. Both have longer WALES than Propertylink (at 4.9 and 5.3 years respectively), although TIX is currently more highly geared at around 43%.

Upsides for investors are that the financial forecast does not include the payment of any performance fees in FY17, and that the existing management team has delivered credible investment performance. The PDS says that on five of their external funds, they have achieved a combined IRR (Internal Rate of Return) of 28.5% pa since establishment.

And the outlook for industrial property? Jones Lang LaSalle provides an opinion, which in summary says:

“Industrial property yield tightening in this cycle is possible, based on a number of factors: the wide spread to Government bonds; the positive spread to many international industrial property markets; strong investor demand for industrial property from both domestic and offshore investors; and the spread between prime and secondary grade yields remains wider than at the peak of previous cycles.”

Potential investors should contact one of the brokers in the offer, which includes Credit Suisse, Goldman Sachs, J.P. Morgan, CommSec, Baillieu Holst and Ord Minnett.