A-REIT – CIMB

Good pricing

AREIT is placing out 140m new units to raise ~S$350m for acquisitions. We like the pricing of its proposed acquisitions and project long-term accretion of 3% on a stabilised basis. Acquisitions continue to reflect management’s disciplined approach.

We lower our FY14 DPU by 3% for dilution and raise FY15 DPU by 3%forcontributions from its acquisitions. Rolling forward our forecasts and with the above accretion, we raise our DDM-based target price (discount rate: 6.7%). Maintain Outperform with catalysts expected from stronger-than-expected rental reversions.

What Happened

AREIT is placing out140m new units to raise gross proceeds of no less than S$350m. The issue price is S$2.50-2.55, implyingFY13 yields of 5.5-5.6% and representing2.1-4.1% discounts to its adjusted VWAP. Proceeds will be used to fund potential acquisitions: i) S$126m for Singapore Science Park II; and ii) S$210m for the partial funding of business space and a white commercial property at Kallang Avenue from PLC8 (a Soilbuild-related entity). The latter is a property under construction which should be completed around mid-2014 with a value of around S$490m.Factoring in the acquisitions and placement, asset leverage should be about 34.6% (39% if the assets are fully debt-funded).

What We Think

We like the acquisitions for their attractive pricing. The placement also appears necessary and AREIT’s good share price YTD has just offered it an opportunity. Acquisition yields from Science Park II are attractive at high 6% while the Kallang Avenue property should have yields of 6%or so upon completion, translating to blended yields of 6.3-6.4%. With these, we project full-year stabilised accretion of 3%, assuming its remaining commitments for Kallang Avenue are funded at 2.0% costs. There will, however, be near-term dilution of 3% in FY13 before the Kallang Avenue property is ready. With this, our FY14 DPU will be flat before growing by+9.5% in FY15.

What You Should Do

We continue to like AREIT for its disciplined approach toa cquisitions. Any share-price weakness on the placement should offer good entry points. Maintain Outperform.