AllCo – Phillip
High Yielding Office REIT
Allco REIT (“Allco”) is the first real estate investment trust (“REIT”) listed on the SGX (30th Mar 06) with retail and commercial assets located in Singapore and Australia. Allco’s investment policy focuses on high quality office and retail properties across the Asia-Pacific region.
High quality and well located commercial properties. Allco’s initial portfolio comprises 100% direct interest in China Square Central, 50% indirect interest in Central Park (Perth) and an investment of 20% interest in AWPF. The total initial portfolio of Allco comprises 3 properties with approximately 74,282 sq m of net lettable area as well as an investment of S$55.5 m in AWPF. The total appraised value of the whole portfolio (excluding 55 Market Street) amounts to approximately S$624.6m.
Allco’s first acquistion after listing (55 Market Street) has been an excellent investment, tapping into the booming office property market. We believe that Allco has a good acquisition strategy that can act quickly to benefit from opportunities.
Strengthening of property market in Singapore and Australia. Strong demand and absorption are expected in both Singapore and Australia property markets. Rental rates are expected to perform better with lower vacancy rate for the next six months. This positive news brings in continuous strong interest in the REIT market as well as higher revalued properties.
Tax efficient structure. Allco has shown its creativity in maximizing distribution through a different approach other than asset enhancement or rental growth. Allco’s recent internal restructuring is estimated to increase distribution payout by approximately S$2m per annum for FY07 and FY08, increasing DPU by approximately 7%.
Stable and secure distribution. Most of Allco’s lease agreements have long lease term creating income stability. 79.3% of the leases will only expire beyond 2008 as shown in Fig 5. At the current price of S$1.13, Allco is trading at a yield of 5.22%, way above the office average yield of 3.83% and a price to net asset value of 1.39x.
Valuation. Our fair value for Allco is S$1.27. This translates to a 4.61% yield and a price to net asset value of 1.35x for FY06F; a 5.53% yield and a price to net asset value of 1.39x for FY07F. In our relative comparison, our fair value is above the average S-REITs/office yield and below the average price to net asset value. At the current price of S$1.13, we recommend a Buy for Allco with a 12% return.