– Expands presence in Japanese office market. Allco REIT has signed purchase agreements to acquire the Galleria Otemae Building (Osaka), Azabu Aco Building and Ebara Techno-Serve Headquarters Building (Tokyo). Consideration for the three buildings is ¥11.65bn (S$153.1mn) with the properties being acquired at a 1.6% discount to valuation.

– Yield accretive; Debt funded. The new acquisitions are yield accretive and were acquired at a weighted initial yield of 4.7%. Properties will be 100% debt funded with a weighted average cost of debt of approximately 2.1%. The new acquisitions are expected to complete by the end of Sept 07. Post the acquisitions gearing will increase from 25% to 34%. Total property investments of Allco REIT will increase to S$1,454.6mn.

– Trading at 25% discount to NAV. Allco’s recent underperformance now sees the stock trading at a 25% discount to last reported NAV of S$1.38. This is the second largest discount amongst the SREIT sector. We believe recent share price underperformance and the large discount to NAV is unwarranted given our expectation of strong organic earnings growth and potential new acquisitions as cash raised via the rights issue is redeployed.

– Maintain Buy; PO S$1.75/share. We maintain our Buy rating on Allco Commercial REIT and 12 month price objective of S$1.75/share. We expect organic rental uplift from existing assets together with portfolio expansion to be the key drivers of future earnings growth. We have updated our earnings estimates to reflect the Japanese acquisitions.