Month: August 2010
MLT – CIMB
Factoring in acquisition growth beyond 2010
• Upgrade to Outperform from Neutral; target price raised to S$1.01 (from S$0.89). We see improved demand for logistics space in MLT’s key markets and are more assured of positive rental renewals for the rest of 2010. With a strong S$1bn acquisition pipeline from its sponsor, and capabilities to take up high-yielding development projects, MLT’s aggressive growth plans are ready to take full flight. We assume S$1bn of acquisitions for 2011-12, partially funded with equity. Our DPU estimate dips 2% for 2010 before rising 6-9% for 2011-12, reflecting our changes. Our DDM target price rises accordingly to S$1.01 from S$0.89 (discount rate 8.6%). MLT offers a prospective dividend yield of 7.2% and price upside potential of 20%. Upgrade to Outperform in anticipation of acquisition catalysts beyond 2010.
• Lease renewals more assured with demand surge in key markets. There has been a strong recovery in warehousing demand in MLT’s two key markets, Singapore and Hong Kong, so far this year, propelled by a manufacturing surge and improvements in external trade, auguring well for MLT’s lease renewals in FY10.
• Higher yielding build-to-suit (BTS) development projects to further fuel growth. Within a development cap of 10% of deposited properties, MLT is able to undertake about S$300m worth of projects, in our estimation.
AIMSAMPReit – BT
AIMS AMP Reit plans $79m rights issue
Funds raised to buy warehouse and logistics facility
AIMS AMP Capital Industrial REIT (AIMSAMPIREIT) is looking to acquire a ramp-up warehouse and logistics facility for $161 million, which will be partially funded through a rights issue.
It has proposed to acquire C&P Logistics Hub 2 – located at 27 Penjuru Lane – from DB International Trust (Singapore) Limited, which is the trustee of AMP Capital Business Space REIT.
As AMP Capital Business Space REIT is indirectly wholly-owned by AMP Capital Holdings, who is the sponsor and a controlling unitholder of AIMSAMPIREIT, the acquisition is considered to be a related party transaction.
The total cost of the acquisition is $163.1 million, which includes the $161 million purchase consideration, a $1.6 million acquisition fee for AIMSAMPIREIT’s manager AIMS AMP Capital Industrial REIT Management, and about $0.5 million in professional and other fees and expenses.
To help fund the acquision, AIMSAMPIREIT has proposed to issue 513.3 million new units through a fully underwritten and renounceable rights issue on a basis of seven rights units for every 20 existing units at an issue price of $0.155 per unit. The issue price represents a discount of 32.6 per cent to the closing price of $0.23 per unit on 19 August.
This will raise gross proceeds of some $79.6 million, of which $64.5 million will be channelled toward the acquisition.
Its sponsors, AIMS Financial Group and AMP Capital Investors (Luxembourg No. 4) SARL, have agreed to subscribe for their pro rata rights entitlements of 39.28 million and 82.5 million rights units respectively. Six unitholders, including Dragon Pacific Assets Limited and APG Algemene Pensioen Groep NV, have also committed to subscribing for their pro-rata rights entitlements and in some cases, to sub-underwrite a portion of the rights issue.
The warehouse facility, with a net lettable area of 975,823 sq ft, is leased out to C&P Holdings in a master lease that will expire in December 2012. It has a net property income yield of 7.7 per cent. Its annual rental for the rental year ending Dec 11, 2010, is $13 million.
Independent valuations by Colliers International Consultancy & Valuation (Singapore) and CB Richard Ellis put the purchase consideration at $162.5 million and $165 million respectively.
‘From management’s point of view, we think that we’re buying well, in a good part of the cycle. Certainly in our experience, market rents have bottomed, valuations have bottomed,’ said Nicholas McGrath, chief executive officer of AIMS AMP Capital Industrial REIT Management. ‘What we’re seeing now is increases in market rentals across our portfolio, which will translate to increases in valuations in the future.’
The acquisition also provides for the refinancing of the trust’s existing loan on improved terms. While the existing loan has an interest margin of 3.5 per cent, the $280 million new loan will have a weighted average interest margin of 2.16 per cent. The new loan is split into three tranches – a three-year $100 million term loan facility, a three- year $80 million revolving credit facility and a five- year $100 million term loan facility.
Mr McGrath also said that AIMSAMPIREIT will look to grow its presence in Asia in the medium to long term, especially in markets such as Japan and China. In Singapore, it will carry out enhancement works to increase the net lettable area at some of its properties.
It currently has 25 properties in Singapore and one in Japan.
If the acquisition goes through, its portfolio size will increase by 25.3 per cent to nearly $800 million.
The proposed acquisition is subject to unitholders’ approval at an extraordinary general meeting, which will be held on Sep 13.
MLT – DB
Strengthening foothold in Korea with second acquisition
MLT has agreed to acquire Multi-Q Centre in South Korea for KRW 28bn (S $32m). The property comprises 2 blocks of warehouses with total GFA of 308,924 sf located in Gyeonggi-do, a well established logistics cluster. Vendor Multi-Q Logistics will lease back the asset for 5 years with annual rental escalations. The acquisition is expected to complete by end 3Q10 and will bring gearing up to 44.2% assuming fully debt funded.
Yield accretive; 7th in a string of acquisitions. This is MLT's second acquisition in South Korea since 2008 and the 7th since Dec last year, bringing total acquisitions YTD to around S$460m, out of which S$260m have been completed. The acquisition is yield accretive with initial yield of >9% compared to the implied yield of 7.7% for its existing property in Korea. The property also has unutilized plot ratio which can add an additional GFA of around 40,903sf when utilized, subject to approval. Upon completion, this will enlarge MLT's portfolio size to S$3.3bn, further diversify its portfolio and enhance its growth profile.
Minor DPU accretion; maintain Buy with TP of S$0.95. No pro-forma DPU accretion or definite financing method was provided. We estimate a minor 0.5% boost to FY11-12 DPU and DDM assuming 60:40 equity/debt. With gearing of 44.2%, the highest in the sector and nearing its optimal gearing of 45%, we think an equity raising is likely in the near term especially if acquisitions continue at the current pace. We maintain Buy with valuations attractive at FY11e yield of 7.4% and 1.0x P/B.
ART – MS
Doubling Asset Base & Going Beyond Asia; Raise PT
Raise PT on reduced earnings volatility: ART on Friday announced the acquisition of 28 serviced residence properties from sponsor The Ascott Limited (TAL) valued at S$1.2bn (S$0.8bn net of debt and current assets). Management plans to fund this via divestment of Ascott Beijing to TAL; proposed equity fund raising of ~S$561mn; and S$116mn in debt financing. If completed, we see improved earnings stability from diversification into Europe and from greater earnings contribution from master leases and guaranteed income contracts. We believe the resulting value accretion more than offsets the dilution from lower growth properties in Europe. We lower our growth assumptions and adjust WACC by -0.75% to account for reduced growth but improved stability in the earnings profile, lowering 2010/11/12e DPU by 7%/6%/7% and raising ART’s PT by 10% to S$1.30.
Asset base doubles: In an environment where acquisition opportunities are few, we like that ART has managed to double its asset base, and believe that the growth in scale has clear benefits on visibility and investibility of the stock. Retaining a pipeline of up to 5,900 serviced residence units in Asia, and expanding the right-of-first-refusal grant to include Europe, sponsor TAL also continues to show support by undertaking its 47.7% pro-rata share of the share offering, and we expect the overhang of dilution to be limited.
Investment thesis: We maintain our Equal-weight weighting on ART. While variable income is largely derived from Asia, providing positive exposure to Asian growth, ART’s new fixed income base is substantial. Furthermore, marginal earnings accretion despite the scale of the transaction and the impending equity raising could also cap any near term positivity in sentiment.
ART – Macquarie
Extending its geographical footprint
Event
• ART announced the proposed acquisition of a S$1.39bn portfolio of 28 Asian and European assets from sponsor The Ascott Limited (Ascott), doubling its portfolio from S$1.59bn to S$2.85bn. With this transaction, ART transforms to an International REIT from a Pan-Asian one previously, becoming the sixth largest SREIT by asset size. Maintain Neutral.
Impact
• Divests Ascott Beijing to unlock value, part fund acquisition. ART will divest Ascott Beijing at S$301.8m (66% above June valuation) to Ascott, with net proceeds of S$168.7m to part fund the acquisition. The estimated gain from the divestment is ~S$106.2m. The balance consideration less assumed debt, minority interests and intra-group debt set-off, will be funded by an equity fund raising of~S$560.5m and S$116.3m in debt.
• Equity fund-raising; CapitaLand to maintain a 47.7% proportionate stake. ART is to issue 487.5m units (78.7% of current asset base) comprising a nonrenounceable preferential offering and a placement, with ultimate parent CapitaLand undertaking to maintain its 47.7% proportionate stake. ART’s free float will increase by 73% to S$665.3m, improving liquidity. Gearing post transaction is not expected to be higher than the current 40.7%.
• Income stability increases. The 26 European assets are subject to master lease or guaranteed income management agreements, and will increase ART’s proportion of EBITDA under such arrangements to 47.2% from 3.9%. The weighted average lease term (WALE) to expiry of these arrangements is about 8 years, and will extend portfolio WALE to 2 years, from 7 months previously.
• Key risks are credit and currency. In acquiring the European assets under their master lease/guaranteed income arrangements, ART is essentially taking on the credit risk of ultimate parent CapitaLand, which we view as very low given its strong financial position. A weakening of the EUR and GBP may impact ART negatively, though management could hedge partially the income from Europe to mitigate this risk. In the past, ART has managed its forex exposure well and earnings have not been significantly impacted by forex movements.
Earnings and target price revision
• No change. Based on our estimates, FY11 DPU accretion is ~2%. Our DCF valuation is estimated to rise marginally to S$1.22 from S$1.20 after the equity fund raising.
Price catalyst
• 12-month price target: S$1.20 based on a DCF methodology.
• Catalyst: The potential acquisition of more Pan-Asian assets in its sponsor’s pipeline of ~S$1.2bn under development.
Action and recommendation
• The negative initial reaction to the proposed transaction as proxied by the 5% fall in ART’s share price suggests investors are concerned by the increase in exposure to Europe. Given that the DPU accretion from the deal is not significant on our estimates, we remain Neutral and prefer parent CapitaLand or retail REITs such as CapitaMall Trust.