AREIT – CIMB

A-REIT acquires Creative Building for S$246.8m

A-REIT has entered into a put and call option to acquire Creative Building at 31 International Business Park from Creative Technologies (CREAF SP, S$6.53, Underperform, target price S$5.31) for S$246.8m. The purchase comes with a leaseback term of five years, and an option to renew for 3+2 years. Additional rent is payable in the third and fifth years of the lease if Singapore’s cumulative CPI in years 1-3 and in years 4-5 exceed 5%. The additional rent payable would be equivalent to the inflation rate in excess of 5%.

Yield-accretive and rents secured. The building is being acquired at an average yield of 6.24% for the initial 5-year lease, above A-REIT’s current trading yield of 6.1%. Creative Technologies will be paying a cash security deposit of S$72.2m, almost equivalent to its 5-year rent. Rent payable under the lease will be deducted monthly from this deposit. This lease arrangement offers almost a 100% guarantee of the rent of the 5-year lease period and excludes only the additional payments pegged to the inflation rate.

Asset leverage increases to 44% from 43%. This is A-REIT’s single largest acquisition to date. A-REIT’s portfolio will increase to 90 properties totalling S$4.6bn by the end of FY09. A-REIT’s business parks component will also be raised to 30% of its portfolio, from 25%. We estimate that asset leverage will reach 44%, assuming 100% debt funding for all its acquisitions this year. Additional acquisitions for the rest of FY09 are likely to require equity-funding, in order to keep asset leverage within the long-term target of 45%.