A-REIT – OCBC

Acquiring 3 properties for S$228.5m

Acquiring three properties for S$228.5m. Ascendas REIT (A-REIT) announced that it has signed two separate conditional sale and purchase agreements to acquire DBS Asia Hub and 31 Joo Koon Circle for S$116m and S$15m respectively. DBS Asia Hub, which is located at Changi Business Park, received its TOP in Sep 2009 and is leased to DBS Bank for 10 years 1 month with annual rental escalation. Acquisition price is between the independent valuations of S$115m and S$118m by Jones Lang LaSalle and Colliers respectively and works out to be S$278.2 psf on GFA basis. In addition, DBS has an option for the landlord to construct Phase 2 of DBS Asia Hub, which is expected to have a GFA of 7,081 sqm (76,219 sq ft). 31 Joo Koon Circle will be leased to Flextronics for five years with annual rental escalation and acquisition price works out to be S$79.7 psf on GFA. The acquisitions will be financed with the proceeds from the private placement in Aug 2009 and are expected to be completed by Apr. A MOU has also been signed for the acquisition of a property under development in Jurong for S$97.5m. This property will only be acquired upon its completion, which is expected to be in 2011/2012. 

Marginal impact to DPU. After factoring in the acquisitions, we have raised our forecasts for revenue by 2.3% to S$426.1m (S$416.4m previously) and net property income by 2.3% to S$332.6m (previously S$324.8m). We have also bumped up our FY10/11 DPU estimate to 12.95 S-cents (previously 12.90 S-cents). Financial impact of the acquisitions is small but it is expected to grow over time with annual rent escalation. The acquisitions have a more meaningful impact in strengthening A-REIT’s portfolio structure as it increases its exposure towards good quality tenants and also extend the lease expiry of its portfolio. Given the lack of information of the development in Jurong and its long completion date, we have not factored in this acquisition in our forecasts and valuation. 

Maintain HOLD with fair value of S$1.76. Our RNAV estimate and fair value (pegged at parity to RNAV) remain unchanged at S$1.76. Based on last price of S$1.92, A-REIT is currently trading at a FY10/11 DPU yield of 6.7%; but current valuation is not cheap, at Price/NAV of 1.2x and Price/RNAV of 1.1x. With a projected total return of -2.1%, we maintain our HOLD rating on A-REIT.