ALLCO – Nomura
ALLCO, nomura remains STRONG BUY
– Amid strong office reversions, Allco is successfully using the current demand cycle to enhance cashflow quality by both lengthening leases and negotiating annual step-up rental reviews. With cashflows underpinned, we think Allco is set to pursue further opportunistic acquisitions. We reiterate our STRONG BUY call.
– Allco NAV adjusted to reflect rights issue. We have adjusted our fair value for Allco to S$1.54/share, to account for the issue of 198.7mn new rights units at a 19.9% discount to the reference price of S$1.30/unit (our pre-rights NAV was S$1.73/unit). Exhibits 1-3 reconcile our NAV adjustments. While most REITs have pursued placements at modest discounts, Allco has adopted the more novel funding approach to reward long-term unit-holders. Following the issue of the rights, we forecast FY07 gearing will fall to 0.31x (from 0.35x), which we think will give scope for further leveraged, yield-accretive acquisitions. On our estimates, Allco could invest a further S$275mn (100% debt funded) and still keep gearing below 0.45x. An acquisition delivering a 100-150bps positive carry could potentially lift DPU by 5.9-8.8% in FY08. Management appears to be closely looking at acquisitive possibilities in the Japanese market.
– NAEF: management upbeat on prospects . In its recent presentation at the Nomura Asia Equity Forum (NAEF), management was upbeat on the REIT’s prospects, noting:
* Office renewals in China Square (Central) had broached S$10.00/psf pm, versus current passing rents of S$4.50/psf pm. Management concurred with our view that the REIT should start benefiting from the profit-share provisions in the master lease by mid-FY08;
* 55 Market Street has been fully let, achieving rents of S$7.75/psf pm on average, well above the initial feasibility expectation of S$5.20/psf pm; and
* Central Park Perth continues to benefit from a supply/demand imbalance, underpinning strong reversions. According to CBRE Richard Ellis, Premium Grade A (face) rents are currently A$500/psm pa, while Grade A rents are A$420/psm.
* CBRE expects rents to rise by 16-25% in 2007 as a consequence of low vacancy (below 1% over the next two years) and the lack of supply no significant supply is scheduled for completion until 2009F.
– Asset acquisition recap: Centrelink property in Canberra. . Allco will acquire a 50.0% indirect interest in the Centrelink Property for A$108.75mn (S$136.5mn). The property has a projected cash yield of 6%. (Note: the reported initial yield of 7.7% and assumed income of A$5.2mn for FY07, and 7.4% yield and assumed income of A$10.1mn for FY08, are accounting yields, due to the long lease revenue being recorded on a straight-line basis). The property is to be leased by an Australian Federal government entity, Centrelink, for an initial term of 18 years from 4 July, 2007, protecting Allco’s cashflow from near-term market fluctuations. The lease incorporates a 3% annual rental escalation for the initial 18-year term. The office building has been purpose designed for Centrelink, and has an NLA of approximately 40,000sm and 1,093 car parking bays. According to the Property Council of Australia, as at end 2006, Canberra had an office vacancy of only 1.8%, the lowest in 16 years. While vacancy is low, supply is on the rise, with an expected 260,000sm due for completion in 2007 and 40,000sm over 2008-09. While the supply/demand balance is expected to shift, the Centrelink lease structure will underpin surety of cashflow. – More capital raising / more acquisitions. The manager, as part of its rights issue, received approval for a general mandate for the issuance of additional new units in 2007, provided that the number of new units does not exceed 50.0% of the number of units in issue as at 31 December, 2006. The general mandate would allow Allco REIT to potentially issue an additional 247.7mn new units, indicating the potential to raise in excess of S$250mn. Given the nature of the mandate sought, it suggests Allco is looking to make further acquisitions in the next six months, with Japan, in our view, a possible target.
– Amid strong office reversions, Allco is successfully using the current demand cycle to enhance cashflow quality by both lengthening leases and negotiating annual step-up rental reviews. With cashflows underpinned, we think Allco is set to pursue further opportunistic acquisitions. We reiterate our STRONG BUY call.
– Allco NAV adjusted to reflect rights issue. We have adjusted our fair value for Allco to S$1.54/share, to account for the issue of 198.7mn new rights units at a 19.9% discount to the reference price of S$1.30/unit (our pre-rights NAV was S$1.73/unit). Exhibits 1-3 reconcile our NAV adjustments. While most REITs have pursued placements at modest discounts, Allco has adopted the more novel funding approach to reward long-term unit-holders. Following the issue of the rights, we forecast FY07 gearing will fall to 0.31x (from 0.35x), which we think will give scope for further leveraged, yield-accretive acquisitions. On our estimates, Allco could invest a further S$275mn (100% debt funded) and still keep gearing below 0.45x. An acquisition delivering a 100-150bps positive carry could potentially lift DPU by 5.9-8.8% in FY08. Management appears to be closely looking at acquisitive possibilities in the Japanese market.
– NAEF: management upbeat on prospects . In its recent presentation at the Nomura Asia Equity Forum (NAEF), management was upbeat on the REIT’s prospects, noting:
* Office renewals in China Square (Central) had broached S$10.00/psf pm, versus current passing rents of S$4.50/psf pm. Management concurred with our view that the REIT should start benefiting from the profit-share provisions in the master lease by mid-FY08;
* 55 Market Street has been fully let, achieving rents of S$7.75/psf pm on average, well above the initial feasibility expectation of S$5.20/psf pm; and
* Central Park Perth continues to benefit from a supply/demand imbalance, underpinning strong reversions. According to CBRE Richard Ellis, Premium Grade A (face) rents are currently A$500/psm pa, while Grade A rents are A$420/psm.
* CBRE expects rents to rise by 16-25% in 2007 as a consequence of low vacancy (below 1% over the next two years) and the lack of supply no significant supply is scheduled for completion until 2009F.
– Asset acquisition recap: Centrelink property in Canberra. . Allco will acquire a 50.0% indirect interest in the Centrelink Property for A$108.75mn (S$136.5mn). The property has a projected cash yield of 6%. (Note: the reported initial yield of 7.7% and assumed income of A$5.2mn for FY07, and 7.4% yield and assumed income of A$10.1mn for FY08, are accounting yields, due to the long lease revenue being recorded on a straight-line basis). The property is to be leased by an Australian Federal government entity, Centrelink, for an initial term of 18 years from 4 July, 2007, protecting Allco’s cashflow from near-term market fluctuations. The lease incorporates a 3% annual rental escalation for the initial 18-year term. The office building has been purpose designed for Centrelink, and has an NLA of approximately 40,000sm and 1,093 car parking bays. According to the Property Council of Australia, as at end 2006, Canberra had an office vacancy of only 1.8%, the lowest in 16 years. While vacancy is low, supply is on the rise, with an expected 260,000sm due for completion in 2007 and 40,000sm over 2008-09. While the supply/demand balance is expected to shift, the Centrelink lease structure will underpin surety of cashflow. – More capital raising / more acquisitions. The manager, as part of its rights issue, received approval for a general mandate for the issuance of additional new units in 2007, provided that the number of new units does not exceed 50.0% of the number of units in issue as at 31 December, 2006. The general mandate would allow Allco REIT to potentially issue an additional 247.7mn new units, indicating the potential to raise in excess of S$250mn. Given the nature of the mandate sought, it suggests Allco is looking to make further acquisitions in the next six months, with Japan, in our view, a possible target.