A-REIT – CIMB

Good acquisition but limited impact

AREIT announced the proposed acquisition of HIC for a purchase consideration of S$191.2m. Although we view this acquisition positively, the impact on DPU is small, estimated at 0.8%-1.6% in FY15 and FY16, respectively. Maintain Hold with a slightly higher DDM-based (discount rate of 7.6%) target price of S$2.40 as we adjust earnings slightly higher.

What Happened

Ascendas REIT (AREIT) announced the proposed acquisition of Hyflux Innovation Centre (HIC) for a purchase consideration of S$191.2m. The property is located at Kallang Industrial Estate and is within three minutes walk to Boon Keng MRT station. The asset comprises a 10-storey high-specification building with a basement and surface car park. HIC has a GFA of 467,520 sq ft, and a current occupancy of 83.9% with a tenure of 30 + 28 years 10 months from Feb 10. Upon completion of the acquisition on 30 Jun 14, 50% of the property’s GFA will be leased back to the vendor and Hydrochem Pte Ltd for 15 years, with an annual rental step-up pegged to CPI. In addition, rental support for the remaining vacant space will be provided by the vendor for three years.

What We Think

We view this acquisition positively as it is expected to generate an NPI of 6.98% in the first year and boost DPU by 0.8%-1.6% in FY15-FY16, respectively. In addition, income support for the unoccupied space for three years will ensure income stability while the manager seeks potential tenants. Based on our estimation, income will be supported at c.S$4psf/mth, a level which is slightly higher than the average S$3.0-3.5 psf/mth for high-spec. industrial buildings. However, given the prime location of this property we believe a passing rent of S$4 psf/mth is sustainable. In terms of funding, given a leverage ratio (as at 31 Mar 14) of 29.5%, we believe AREIT will finance this acquisition mostly, if not entirely, by debt. Upon completion of the acquisition, AREIT’s leverage ratio is expected to creep up slightly to a very manageable level of 31.4%.

What You Should Do

Maintain Hold rating with a slightly higher DDM-based TP of S$2.40 despite our positive view on the acquisition as the impact on DPU is immaterial.