A-REIT – DBS

Delivering acquisitions 

• Buying 3 properties for S$228.5m

• Improve income visibility with enlarged sale and leaseback portfolio.

• Growth priced in at 1.2x P/BV, maintain HOLD S$2.07

3 properties at a go for S$228.5m. Ascendas REIT (A-REIT) proposes to acquire 3 properties for S$228.5m. Two of the properties (costing S$131m) are operating assets and are expected to complete in March/April 2010. The third is a property currently under-development and the purchase will take effect upon construction completion in 2011/12.

Quality tenants with long leases + annual step-ups structure. The two operational properties have long underlying land lease tenures of over 50 years with blue-chip vendors in DBS Bank and Flextronics. DBS Bank will lease the property back for a period of 10 years while Flextronics will lease its property back for 5 years. Both leases have in-built annual escalation clauses with option to extend at the expiry of the initial lease tenures.

Slightly yield accretive. Contribution from the acquisitions will likely offset the anticipated operational weakness. While the injection yield at c6.8-7.8% is in line with our forecast, the total acquisition size S$228.5m is slightly above our estimate. We adjust our numbers upwards accordingly to take into account the acquisition of all 3 properties, leading to a slight DPU uplift of 0.2-1.0% in our FY11-12F estimates.

Maintain HOLD, TP S$2.07. We like A-REIT for its ability to source for quality acquisitions and management’s impressive track record. However, the stock is currently trading at a demanding 1.2x P/BV, in which we believe that a fair amount of acquisition growth could have been factored into its share price. Given limited upside to our target price, we maintain our HOLD call.