A-REIT – OCBC

STILL IN THE PINK OF HEALTH

•Completes purchase of Cintech properties

•Leverage around 36% post acquisition

•Positive rental revisions in the cards

Completion of acquisition of Cintech properties

Following the announcement on 6 Feb to acquire three properties at Science Park Drive from sponsor Ascendas Land, Ascendas REIT (AREIT) reported that the transaction was completed on 29 Mar at a total consideration cost of S$185.5m. No consideration units were issued as Ascendas Land had indicated that it did not wish to receive any equity consideration. This is contrary to A-REIT’s initial intention to fulfill the acquisition by making partial payment via unit issuance amounting to not more than 50% of the purchase price. As a result, the purchase consideration was fully paid in cash by way of internal resources and drawdown of debt. This should raise A-REIT’s aggregate leverage from 34.3% as at 31 Dec 2011 to ~38%, according to management. However, following the recent revaluation gains of S$260.5m (+4.5%) over the prior valuation for its portfolio properties, we estimate that its leverage may be lowered closer to 36%.

Portfolio performance remains resilient

In the same announcement, A-REIT updated that its Singapore properties continued to achieve positive rental reversions of 2.6-12.5% YTD upon renewal of its existing leases. Moreover, the passing rents for all the leases in its multi-tenanted buildings, with expiry dates over multiple years, are still some 13-28% below the prevailing market spot rental rates. This is in line with our view that A-REIT’s operating performance is likely to stay resilient in the coming quarters. As a note, property consultant DTZ Research is expecting industrial rents to fall by 5-10% in 2012. This is still higher than AREIT’s passing rents, even if industrial rents correct to the higher end of the estimates.

Maintain BUY

We now factor in the acquisition of Cintech properties and portfolio revaluation into our forecasts. We also re-jig our DDM model assumptions (cost of equity at 7.5%, up from 7.0% previously) and roll over our valuation to FY13. This raises our fair value marginally from S$2.30 to S$2.31. Maintain BUY.