Singapore REITs

Cambridge Industrial Trust acquires 128 Joo Seng Road for S$10.0 million

9th April 2007, Singapore – Cambridge Industrial Trust (“CIT”) announced that it has signed a Put and Call Option Agreement to acquire 128 Joo Seng Road (the “Property”) for S$10.0 million. The acquisition which is funded entirely by the existing debt facility, will be accretive to CIT’s distributable income.

Mr Wilson Ang, Chief Executive Officer of the Manager, said, “The Joo Seng and MacPherson industrial area is considered one of the prime central locations in Singapore for industrial occupiers. With the acquisition of 128 Joo Seng Road, we will further increase our presence in the prime Joo Seng-MacPherson industrial district. Due to the current limited supply of office space, we expect some spill over effect as office occupiers migrate to industrial spaces as alternatives for their backroom operations. In addition to this, with the upcoming Circle Line and the new Kallang/Paya Lebar Expressway, we believe that building an increasing presence in this location will further enhance CIT’s portfolio.”

General Description of the Property

Completed circa 1994, the 7-storey light industrial building sits on a land area of 3,451.8 square metres and has a gross floor area of 8,519.64 square metres. The Property has a long land lease duration of 30 years with effect from 1 May 1992, with a confirmed option for a further term of 30 years. Located at the junction of Joo Seng Road and Kampong Ampat, it is approximately 10 km away from the city centre at Collyer Quay and is in close proximity to the upcoming Tai Seng (Circle Line) MRT station. The Property is also easily accessible via the Pan Island Expressway and the upcoming Kallang/Paya Lebar Expressway.

Upon completion of the Sale and Purchase, Seng Huat Packaging Pte Ltd (“Seng Huat”) will leaseback the Property for a 7-year term with an option to renew for a further term of 3 years. The rental escalation is 5% on the commencement of the third and fifth year. Seng Huat will bear the cost of maintenance of the Property.

Branching out with acquisitions

Increased presence in the Japan market. MLT has penetrated into the Japanese market further with its recent acquisition of five logistics facilities – four in Tokyo and one in Kyoto. The total consideration of the acquisition is S$350.8m. The five logistics facilities have a total land area of 108,968sqm (GFA: 103,864sqm) with lease terms ranging from seven to 18 years. The acquisition is expected to be completed by mid 2007 and given the relative lower cost of borrowing in Japanese yen, the purchase would be wholly funded by debt.

Acquisition of a distribution centre in China. MLT has also recently announced its first acquisition in inland China with the purchase of Xian Seastar distribution centre for S$17.8m. As the Chinese government continues to increase its efforts to develop the inland regions, this would allow MLT to ride on the growth. The acquisition is expected to be completed by mid 2007 and would be wholly funded by debt.

Strategy. MLT still has around S$440m of debt headroom to maintain its gearing limit of 60%. MLT expects to make its first acquisitions into South Korea and Vietnam this year and to increase its exposure in China with more acquisitions. MLT intends to move into India next year and in the medium term, its growth will come from the emerging markets of India and China. The initial acquisitions in India are likely to come from its sponsor, Mapletree Investments, which has tied up with Bangalorebased developer Embassy Group to build logistics developments in India. With the recent acquisitions of the five logistics facilities in Japan and a distribution centre in China, MLTs portfolio has an exposure of 48%, 5%, 24%, 5% and 19% in Singapore, Malaysia, Hong Kong, China and Japan respectively.

Maintain Buy with raised target price of S$1.46. With the recent increase in the stock price by 14% since our last report, we have increased the assumed issue price for further equity raising activities to fund its acquisitions pipeline. As such, we have a lower number of assumed units issued and hence, higher DPU and a raised target price of S$1.46 based on DCF valuation. This derives a total return, including yield, of 17%. In our valuation, we have assumed acquisitions of S$1bn p.a. from 2007 to 2009. Maintain Buy.

Temasek Twr would have been -7% DPU dilutive

Biggest acquisition to date

MLT has acquired five logistics facilities in Japan from Itochu Corp for ¥27.8bn S$350.8m). Four of the properties are located in the Greater Tokyo area and the fifth in the Kyoto (Kansai) area. All five properties are freehold and have a total GFA of 103,864 sq m. The multi-tenanted assets come with long lease tenures of 7-18 years. The acquisition is expected to be completed by mid-2007.

Second acquisition in Japan, following the completion of the purchase of Gyoda Distribution Centre (S$24.4m, floor area 17,094 sq m; also from Itochu) last month. This is also the largest acquisition by MLT since its listing two years ago, beating its S$211.1m acquisition of Hong Kong’s Shatin No. 4 (floor area 60,215 sf) in April last year.

Demand for quality logistics space in Japan is rising, according to Colliers International. There is now a shortage of large high-quality distribution centres in key areas and modern distribution facilities with floor areas of over 3,000 sq m make up less than 50% of the total stock in Japan. The five properties that MLT has acquired have floor areas of above 3,000 sq m, with the biggest measuring 41,171 sq m.

Initial yield lower than expected. The acquisition will be funded entirely by debt as MLT wishes to take advantage of the low cost of borrowing in Japanese yen. The resulting proforma accretion to MLT’s FY06 DPU is 0.56ct (+11%). Assuming a cost of debt of 1% and a weighted average management fee of 2%, we estimate the average initial yield of the assets at 4.3%. While this is lower than the weighted average yield of 4.9% that we had assumed for MLT’s acquisitions this year, we expect the impact to be offset by acquisitions of higher-yielding assets in other markets such as China later in the year.

Valuation and recommendation

Reaching our target price; downgrade to Neutral. With the acquisition of these five properties, MLT’s total assets now amount to just under S$2bn (including acquisitions that are pending completion). We had projected an increase of S$1bn in asset size to S$2.4bn by the end of this year. We believe MLT is on course to meet our target. As such, our DPU forecasts and DDM-target price of S$1.32 remain unchanged. With the REIT trading near our target price, we downgrade MLT to Neutral from Outperform. Above-average forward

Maintain HOLD

Cash call to raise S$199m. Ascott Residence Trust (ART) recently announced its intention to issue 105.3m new units to raise S$199m via an Equity Fund Raising exercise. The new units will increase ART’s existing number of units by about 21%. So far, the placement tranche, which makes up 47% of the new units, has had overwhelming response with demand exceeding supply by 15 times at S$1.90/unit. Similarly, the retail tranche (making up about 8% of new units) was fully taken up via ATM within a day of its launch. The only portion left is the amount allocated to existing unitholders. This portion makes up about 45% of the new units and unit-holders have until 20th Mar to accept the offer. We do not see demand from existing unit-holders as being any less enthusiastic. So the S$199m new equity is almost certainly in the bag.

We expected the cash call. In our Jan 07 report, we had articulated that a cash call from ART was imminent. This was because as of end Dec 06, ART’s gearing of 29% (and with no credit ratings) left not much headroom for more debt. Furthermore, it had already announced S$266m of acquisitions which had yet to be completed. With the expected new equity and the newly assigned credit rating, we estimate that ART could raise a further S$192m worth of debt and still maintain its gearing at a comfortable 45%. (Gearing of 60% is allowable for REIT with credit rating.)

ART targeting S$2.0bn size by end 08. With the announced acquisition so far, we expect ART to reach an asset size of S$1.2bn fairly soon. This is a rapid 32% rise in size since its IPO in 1Q06. Going forward, we do not anticipate this rapid growth rate to slowdown anytime soon. ART has guided for an asset size of S$2.0n by end 2008. There is a good possibility of ART exceeding this and we see a S$2.5bn size as easily achievable with the bulk of acquisitions coming from its parent The Ascott Group.

Revised up fair value to S$1.94 on lesser dilution. In our fair value estimate, we had allowed for ART target size of S$2.5bn. However, with the higher price of the new units, fewer units will be issued to finance its acquisition led growth strategy. This lower cost of equity in turn has a positive impact on our valuation. We have thus marginally adjusted up our fair value estimate from S$1.82 to S$1.94. We maintain our HOLD rating on ART.