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By Leo Sek – Clime Asset Management

Since September 2009, ING Industrial Fund (ASX: IIF) has embarked on a major restructure and recapitalisation. The fund has sold property assets in Australia and Canada and has raised $700 million of new equity, significantly reducing its gearing level. At the same time, its share price has fallen from above 60 cents per unit to 44 cents per unit. Does this represent value and how does it compare to the other listed property trusts?

Asset sales and equity raising

During October and November 2009, IIF disposed $136.9 million of Australian property and $76.1 million worth of Canadian property assets at approximately the audited 30 June 2009 book value. The proceeds from sale were used to reduce debt.

In addition, IIF completed a $700 million equity raising at $0.48 per new unit with the net proceeds of $647 million also used to repay debt.

The Australian properties sold were:

Below, we have prepared IIF’s pro forma balance sheet as at 30/06/10, which takes into account property sold and equity raising, then comparing it to 30/06/09.  In doing so, we have conservatively assumed that:

•    the weighted average capitalization rate for the overall portfolio will increase from 8.3% (at 30 June 2009) to an average 9%; and

•    another $166.7 million worth of property will be sold during the second half of FY 2010.

Thus, the balance sheet is forecast to look like the following:

Source: ING Industrial Fund 20 June 2009 balance sheet, ING Industrial Fund ASX announcements

Management provided guidance for calendar year 2010 net operating income of $108.1 million.

Source: ING Industrial Fund – Capital management initiatives, October 2009

Deleveraged and distributing

Following the capital raising a new $1.63 billion Australian syndicated facility agreement (“SFA”) was negotiated. The key terms include:

•    an increase in the Total Leverage Ratio  from 55% as at 30 June 2009 to 71%, reducing to 67% by 31 December 2011

•    Loan to Value Ratio  over Australian secured property of 70%, reducing to 60% by 31 December 2011

•    Forward Looking Interest Cover  of 1.3 times, increasing to 1.4 times for the year ending 31 December 2010; and

•    no distributions will be paid to ordinary or exchangeable note holders until the Loan to Value Ratio is below 45% and the forward looking interest cover is greater than 1.75 times

IIF has stated that it has raised sufficient equity to reduce its gearing and satisfy covenant requirements. Therefore it can now pay distributions to unitholders. Post recapitalisation, we estimate IIF’s gearing ratios to be as follows:

IIF management has forecast distributions of 3.21 cents per unit for calendar 2010, payable quarterly starting from the March 2010 quarter.

Conclusion

If management maintains its current debt reduction course, the risk to refinancing the new SFA facility on reasonable terms is lessened. As a sign of the banking syndicates’ increased comfort with IIF’s gearing level, the margin paid over BBSW was reduced from 3.5% when the loan was first granted to 3% post the recapitalisation.

At 44 cents per unit, IIF is trading at a forecast yield of 7%. This is higher than the weighted average yield for the property trust sector of approximately 6.2%.

However, whilst the balance sheet has improved, with gearing reducing from 65.8% to pro forma 44.2%, this is still higher than the weighted average gearing for the property trust sector of circa 33%.

IIF’s distribution yield is relatively attractive when compared to its peer group of listed trusts. However, it is well below that currently offered by Australand Subordinated Step Up Exchangeable Trust Securities (ASX: AAZPB), which are yielding 10%.  AAZPB provides protection against rising interest rates and the company has pro forma gearing below 28%. Investors should note that IIF units are equity and AAZPB notes are debt and either or both may not represent appropriate investments depending on the investors risk profile.

Clime Asset Management uses StockVal.

 

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