Enlarging the Business Park pie

Two acquisitions for S$131m 

Maintain Underperform. AREIT has acquired DBS Asia Hub at Changi Business Park and 31 Joo Koon Circle for a total S$131m. After factoring in the acquisitions and payment of CMBS loans, our DPU estimates have been raised by 1-4% for FY10-12. However, there is no material impact on our DDM-based (discount rate 8.4%) target price of S$2.02. Although we see merits in the acquisitions, increment to DPU is not material, in our estimation. We maintain our Underperform rating in anticipation of negative rental reversions. 

Acquisition 1: DBS Asia Hub acquired from parent. AREIT acquired DBS Asia Hub at Changi Business Hub from parent Ascendas Land for S$116m. The purchase consideration was below the average of two valuations (S$118m by Colliers International; S$115m by Jones Lang LaSalle). The price works out to S$327psf on a net floor area (assuming 85% efficiency), about 19% below AREIT’s business park valuation of S$405psf as at 31 Mar 09. However, net yield for the property, estimated at under 7%, is in line with AREIT’s portfolio property yield of 6.7% in FY09. The estimated gross rent of S$2.32psf/month is broadly in line with AREIT’s average business park passing rents of S$2.59 for FY09. We understand there had been some discount given to a single quality tenant and long lease period of 10+3+3+3 years vs. AREIT’s business park portfolio which is mainly multi-tenanted and with standard 3-year leases. There are also annual step-up increments included in the lease. This should be in the range of 1.5-2%, according to standard market practice. 

Phase 2 option. The property is sold with a novated “DBS Lease” under which the tenant can exercise a conditional option for the landlord (i.e. AREIT) to construct Phase 2 on the premise. Phase 2 is expected to have a gross floor area of 7,081 sq m. There will be no EGM required for this acquisition although this is an interestedparty transaction as the asset value is less than 5% of AREIT’s NAV. 

Acquisition 2: 31 Joo Koon Circle acquired for S$15m as a sale-and-leaseback deal with Flextronics. Estimated yield is about 7.8%. This translates to a unit sale price of S$80psf, comparable to construction costs of S$98-130psf, according to RLB construction cost estimates for light industrial properties dated Dec 09. Net yields of 7.8% are above AREIT’s portfolio property yield of 6.7% in FY09. Estimated gross rent of S$0.52psf/month is on a triple nett basis. Annual escalations have also been structured as lease terms of 5+2+2+2 years. 

MOU signed to acquire development property. Separately, AREIT has signed an MOU to acquire a property under development in Jurong for S$97.5m The property will only be acquired upon completion, expected in 2011/12. 

Funding from private placement. The two acquisitions will be backed by private placement proceeds that were raised in Aug 09. Separately, we understand that a S$300m CMBS loan due last year has been paid down. A short-term revolver facility was used for the excess funding required. All-in cost of debt is estimated at 3% for the revolver. 

Weighted average lease expiry (WALE) increases from 4.8 years to 4.9 years after the acquisition. AREIT’s Business Park segment also increases from 31% to 32% by portfolio value.

Valuation and recommendation 

Maintain Underperform; target price of S$2.02 intact. We factor in full contributions from the acquisitions from FY11, with completion expected in Mar 10. The impact on DPU is 1% for FY11-12. We also factor in payment of the S$300m CMBS in FY10, which would reduce interest expenses, and increase our FY10 DPU estimate by 4%. However, the increase in DPU has not changed significantly to move our target price of S$2.02. 

Although we recognise the low absolute purchase prices of the assets, step-up rent increments and credible tenants which would add stability to the portfolio, the increment to DPU is not material, in our view. AREIT offers a prospective total return of 12% from potential price upside of 5% and projected yields of 7%, below our expectations for market returns. We maintain our Underperform rating in anticipation of negative rental reversions in the next financial year.

Acquiring 3 properties for S$228.5m

Acquiring three properties for S$228.5m. Ascendas REIT (A-REIT) announced that it has signed two separate conditional sale and purchase agreements to acquire DBS Asia Hub and 31 Joo Koon Circle for S$116m and S$15m respectively. DBS Asia Hub, which is located at Changi Business Park, received its TOP in Sep 2009 and is leased to DBS Bank for 10 years 1 month with annual rental escalation. Acquisition price is between the independent valuations of S$115m and S$118m by Jones Lang LaSalle and Colliers respectively and works out to be S$278.2 psf on GFA basis. In addition, DBS has an option for the landlord to construct Phase 2 of DBS Asia Hub, which is expected to have a GFA of 7,081 sqm (76,219 sq ft). 31 Joo Koon Circle will be leased to Flextronics for five years with annual rental escalation and acquisition price works out to be S$79.7 psf on GFA. The acquisitions will be financed with the proceeds from the private placement in Aug 2009 and are expected to be completed by Apr. A MOU has also been signed for the acquisition of a property under development in Jurong for S$97.5m. This property will only be acquired upon its completion, which is expected to be in 2011/2012. 

Marginal impact to DPU. After factoring in the acquisitions, we have raised our forecasts for revenue by 2.3% to S$426.1m (S$416.4m previously) and net property income by 2.3% to S$332.6m (previously S$324.8m). We have also bumped up our FY10/11 DPU estimate to 12.95 S-cents (previously 12.90 S-cents). Financial impact of the acquisitions is small but it is expected to grow over time with annual rent escalation. The acquisitions have a more meaningful impact in strengthening A-REIT’s portfolio structure as it increases its exposure towards good quality tenants and also extend the lease expiry of its portfolio. Given the lack of information of the development in Jurong and its long completion date, we have not factored in this acquisition in our forecasts and valuation. 

Maintain HOLD with fair value of S$1.76. Our RNAV estimate and fair value (pegged at parity to RNAV) remain unchanged at S$1.76. Based on last price of S$1.92, A-REIT is currently trading at a FY10/11 DPU yield of 6.7%; but current valuation is not cheap, at Price/NAV of 1.2x and Price/RNAV of 1.1x. With a projected total return of -2.1%, we maintain our HOLD rating on A-REIT.

Delivering acquisitions 

• Buying 3 properties for S$228.5m

• Improve income visibility with enlarged sale and leaseback portfolio.

• Growth priced in at 1.2x P/BV, maintain HOLD S$2.07

3 properties at a go for S$228.5m. Ascendas REIT (A-REIT) proposes to acquire 3 properties for S$228.5m. Two of the properties (costing S$131m) are operating assets and are expected to complete in March/April 2010. The third is a property currently under-development and the purchase will take effect upon construction completion in 2011/12.

Quality tenants with long leases + annual step-ups structure. The two operational properties have long underlying land lease tenures of over 50 years with blue-chip vendors in DBS Bank and Flextronics. DBS Bank will lease the property back for a period of 10 years while Flextronics will lease its property back for 5 years. Both leases have in-built annual escalation clauses with option to extend at the expiry of the initial lease tenures.

Slightly yield accretive. Contribution from the acquisitions will likely offset the anticipated operational weakness. While the injection yield at c6.8-7.8% is in line with our forecast, the total acquisition size S$228.5m is slightly above our estimate. We adjust our numbers upwards accordingly to take into account the acquisition of all 3 properties, leading to a slight DPU uplift of 0.2-1.0% in our FY11-12F estimates.

Maintain HOLD, TP S$2.07. We like A-REIT for its ability to source for quality acquisitions and management’s impressive track record. However, the stock is currently trading at a demanding 1.2x P/BV, in which we believe that a fair amount of acquisition growth could have been factored into its share price. Given limited upside to our target price, we maintain our HOLD call.