A-REIT – CIMB

Enlarging the Business Park pie

Two acquisitions for S$131m 

Maintain Underperform. AREIT has acquired DBS Asia Hub at Changi Business Park and 31 Joo Koon Circle for a total S$131m. After factoring in the acquisitions and payment of CMBS loans, our DPU estimates have been raised by 1-4% for FY10-12. However, there is no material impact on our DDM-based (discount rate 8.4%) target price of S$2.02. Although we see merits in the acquisitions, increment to DPU is not material, in our estimation. We maintain our Underperform rating in anticipation of negative rental reversions. 

Acquisition 1: DBS Asia Hub acquired from parent. AREIT acquired DBS Asia Hub at Changi Business Hub from parent Ascendas Land for S$116m. The purchase consideration was below the average of two valuations (S$118m by Colliers International; S$115m by Jones Lang LaSalle). The price works out to S$327psf on a net floor area (assuming 85% efficiency), about 19% below AREIT’s business park valuation of S$405psf as at 31 Mar 09. However, net yield for the property, estimated at under 7%, is in line with AREIT’s portfolio property yield of 6.7% in FY09. The estimated gross rent of S$2.32psf/month is broadly in line with AREIT’s average business park passing rents of S$2.59 for FY09. We understand there had been some discount given to a single quality tenant and long lease period of 10+3+3+3 years vs. AREIT’s business park portfolio which is mainly multi-tenanted and with standard 3-year leases. There are also annual step-up increments included in the lease. This should be in the range of 1.5-2%, according to standard market practice. 

Phase 2 option. The property is sold with a novated “DBS Lease” under which the tenant can exercise a conditional option for the landlord (i.e. AREIT) to construct Phase 2 on the premise. Phase 2 is expected to have a gross floor area of 7,081 sq m. There will be no EGM required for this acquisition although this is an interestedparty transaction as the asset value is less than 5% of AREIT’s NAV. 

Acquisition 2: 31 Joo Koon Circle acquired for S$15m as a sale-and-leaseback deal with Flextronics. Estimated yield is about 7.8%. This translates to a unit sale price of S$80psf, comparable to construction costs of S$98-130psf, according to RLB construction cost estimates for light industrial properties dated Dec 09. Net yields of 7.8% are above AREIT’s portfolio property yield of 6.7% in FY09. Estimated gross rent of S$0.52psf/month is on a triple nett basis. Annual escalations have also been structured as lease terms of 5+2+2+2 years. 

MOU signed to acquire development property. Separately, AREIT has signed an MOU to acquire a property under development in Jurong for S$97.5m The property will only be acquired upon completion, expected in 2011/12. 

Funding from private placement. The two acquisitions will be backed by private placement proceeds that were raised in Aug 09. Separately, we understand that a S$300m CMBS loan due last year has been paid down. A short-term revolver facility was used for the excess funding required. All-in cost of debt is estimated at 3% for the revolver. 

Weighted average lease expiry (WALE) increases from 4.8 years to 4.9 years after the acquisition. AREIT’s Business Park segment also increases from 31% to 32% by portfolio value.

Valuation and recommendation 

Maintain Underperform; target price of S$2.02 intact. We factor in full contributions from the acquisitions from FY11, with completion expected in Mar 10. The impact on DPU is 1% for FY11-12. We also factor in payment of the S$300m CMBS in FY10, which would reduce interest expenses, and increase our FY10 DPU estimate by 4%. However, the increase in DPU has not changed significantly to move our target price of S$2.02. 

Although we recognise the low absolute purchase prices of the assets, step-up rent increments and credible tenants which would add stability to the portfolio, the increment to DPU is not material, in our view. AREIT offers a prospective total return of 12% from potential price upside of 5% and projected yields of 7%, below our expectations for market returns. We maintain our Underperform rating in anticipation of negative rental reversions in the next financial year.