A-Reit to buy 3 properties for $228.5m

Two of them will be funded from recent share placement

ASCENDAS Reit (A-Reit) yesterday announced plans to buy three properties for a total of $228.5 million, to further diversify its portfolio of properties and their tenant-mix.

A-Reit’s manager said that it has signed two separate sales and purchase agreements, and a memorandum of understanding to purchase a property still under development.

Under the first two, A-Reit will acquire two industrial properties for a total of $131 million – the nine-storeyed DBS Asia Hub at Changi Business Park for $116 million, and a multi-storeyed light industrial building at Joo Koon for $15 million.

These acquisitions would have added 0.054 cents to A-Reit’s distribution per unit for the financial year ended March 31, 2009 on a pro-forma basis. They would also raise A-Reit’s assets under management by about 2.8 per cent.

Financing for both will come entirely from 44 per cent of net proceeds from A-Reit’s private placement last August. After these acquisitions, funds from the placement would have been fully utilised, the Reit’s manager said.

The first deal is an interested party transaction, as DBS Asia Hub will be bought from Ascendas (Tuas), a wholly owned subsidiary of A-Reit’s controlling unitholder Ascendas Land Singapore. Subject to JTC’s approval and other conditions, the manager expects this transaction to be completed by April.

DBS currently has a 10 years and one month lease on the property, with annual rental escalation and an option to renew the lease for another three terms of three years each.

Under the second agreement, Flextronics Manufacturing will lease the Joo Koon property for five years with annual rental escalation and an option to renew the lease for another three two-year terms.

The third signing was an MOU to purchase for $97.5 million a Jurong property. This is to be completed in 2011 or 2012 and will only be acquired then.

A-Reit now has total assets of about $4.8 billion in its portfolio of 91 business and science park and industrial properties, as well as logistics and distribution centres. Its unit price gained two cents to close at $1.92 yesterday.

Ascendas REIT – Company update (Anni KUM, DID: 6432 1470)

Previous Day Closing price: $1.92

Recommendation: HOLD (maintained)

Target price: $2.03 (upgraded from $2.02)

A-REIT is acquiring two properties for S$131m, which could contribute to revenue from FY11 (starting Apr-10). We estimate the impact on DPU to be marginal. A-REIT also plans to acquire a property under development in Jurong for $97.5m in 2011/2012. Overall, the scale of the transactions is not surprising, though we are quite positive on the quality of the deals. Gearing will still be at a comfortable 33.6%. We maintain Hold due to limited upside to price target of $2.03. Forward yield of 6.6% provides support.

Marginal impact on DPU

A-REIT has proposed to acquire two properties for S$131m. The acquisition is expected to be completed by Apr-10. Separately, it signed a MOU to purchase a property under development in Jurong that is expected to be completed in 2011/2012, for S$97.5m. The total value accounts for
4.7% of A-REIT’s entire portfolio value. The near-term impact on DPU is marginal, with accretion of 0.01-0.05 cts for FY11-12F.

Adding two blue-chip tenants into its stable

The most significant of these properties is DBS Asia Hub at Changi Business Park, to be acquired from its sponsor, Ascendas, for S$116m. Completed in Sep-09, it is 100%-leased to DBS for 10 years with annual escalation and renewal options. The second property, 31 Joo Koon Circle, (Light Industrial segment) will be leased by Flextronics in a sale-and-leaseback arrangement for 5 years.

Room for growth

Though it was announced that the acquisitions will be funded by proceeds from the private placements in Aug-09, we have assumed 100% debt-financing, as there is ample room to gear up. As such, gearing could increase from 31.2% to 33.6%. Our revenue forecast has been raised marginally by 2.2% for FY11. Revenue contribution would increase due to the built-in annual rental escalation.

Near-term upside capped by rich valuations

The scale of the acquisition is in line with previous guidance and we are quite positive about the quality of the target assets. With the additions, A-REIT’s properties will increase to 93 (total GFA 3m sqf). A-REIT offers a forward yield of 6.6%. With limited price upside, we maintain Hold with price target of $2.03 (prev. $2.02).

Scoop of the Day: A-REIT announced that it has signed an S&P to acquire two properties (DBS Asia Hub and 31 Joo Koon Building) for S$131m; and an MOU to acquire a property-under-development in Jurong for S$97.5m (expected acquisition completion in 2011/12). DBS Asia Hub is leased to DBS for 10 years while Joo Koon Building is leased to Flextronics Manufacturing for 5 years, both of which with annual rental escalation agreements. The acquisition of these two properties will grow A-REIT’s AUM by 2.8%. The acquisitions are expected to have a DPU accretion effect of 0.054¢ (+0.4%). The acquisitions will be funded entirely with net proceeds from its August 2009 placement. Maintain NEUTRAL with target price of S$2.11, pegged at 6.5% FY10 yield. We believe further retracement in stock price may present A-REIT as an attractive buying opportunity. At current share price, A-REIT offers investors an FY10 yield of 7.2%.