Acquires Business Park property in Beijing for RMB 300m

Tapping sponsor links in China. Ascendas REIT announced he acquisition of Ascendas Z-Link, a Business Park property located in Zhongguancun Software Park (“Z-Park”), within the Haidian district in Beijing. The property was acquired from a related party of its sponsor, the Ascendas China Industrial and Business Park Fund, for RMB 300m.

Z-Park is a state-level park sponsored by the National Ministry of Information Industry catering to information technology and research & development (R&D) companies and is understood to be dubbed as China’s “Silicon Valley” due to its pioneering efforts in the innovation and creativity industry. It is also located in close proximity to China’s top universities such as Peking University and Tsinghua University. This acquisition, in our view, is in line with AREIT management’s China strategy of selectively acquiring Business & Science Park assets in major tier one cities.

100% leased building with quality names. The 27,430sqm business park asset is understood to be fully leased. Major tenants include quality household names like Baidu,Inc.com and Raisecom Technology Co, Ltd. Hence, earnings quality is likely to be relatively solid. The presence of these technology giants further affirms Z-Link’s good location within the technology hub in Haidian District.

Upon completion of this acquisition, A-REIT’s China exposure will still be relatively small at c1.1% of asset value and is expected to continue growing as management looks for higher yielding acquisitions. We will like to highlight that management has previously indicated that China’s presence in its portfolio will grow to be capped at 15% of total assets/earnings exposure in the longer term.

Earnings impact minimal, maintain HOLD with S$2.14 TP. The acquisition is likely to be fully funded by debt and we estimate earnings accretion to be minimal at c0.02 Scts based on an initial yield of 8.2%. Gearing is estimated to remain at c35%, which is conservative even after accounting for funds to be utilized for the development of its projects in Singapore.

We continue to like A-REIT for its diversified portfolio and management’s track record of delivering earnings growth for unitholders, but current upside to our TP is limited. As such, we maintain HOLD rating and DCF-derived TP of S$2.14. A-REIT currently offers a FY12-13 yield of about 7.0%.

A-Reit’s DPU down 5% with more units issued

ASCENDAS Real Estate Investment Trust (A-Reit) has reported a 4.4 per cent year-on-year rise in total amount available for distribution to $65.9 million for its first quarter ended June 30, 2011.

But the industrial Reit’s distribution per unit (DPU) dipped 5 per cent to 3.2 cents, mainly due to an 11.1 per cent increase in the number of units outstanding as a result of new units issued in the first quarter of this financial year. Gross revenue for the quarter ended June 30 grew 5.6 per cent year on year to $119.9 million, contributed mainly by new investments. But operating expenses were higher because of higher utilities cost, resulting in net property income rising just 1.6 per cent to $8.88 million.

The fiscal first quarter saw A-Reit’s occupancy rate rising to 92.5 per cent for its multi-tenanted properties and 96.2 per cent for its portfolio, up from 92.1 per cent and 96 per cent respectively.

‘Positive rental reversion was seen throughout all segments as a result of the improvement in the industrial rental market,’ said Tan Ser Ping, CEO and executive director of A-Reit’s manager Ascendas Funds Management (S) Ltd.

With improving industrial rental market, A-Reit could also benefit from leases that are up for renewal.

For the balance of the financial year ending March 31, 2012, the Reit has 10 per cent of its revenue due for renewal. The majority of these leases have passing rents that are below the existing market rents. Looking ahead, A-Reit expects global growth to moderate and Singapore’s economic outlook to remain positive in the second half of this year.

With its diversified portfolio as well as a good mix of properties with long and short-term leases, A-Reit expects to sustain its current performance.

The Reit will continue to seek investments with good fundamentals and potential asset enhancement opportunities to complement its existing portfolio and to further enhance its footprint in the business space and industrial property arena with the portfolio comprising predominantly Singapore-based assets in the foreseeable future, the Reit’s manager said.

The counter ended trading yesterday down two cents at $2.14.

Further enlarging business-park presence

Acquires Nordic European Centre for S$121.6m

Moderate DPU accretion. AREIT has acquired Nordic European Centre, its sixth property in the International Business Park (IBP) for S$121.6m. This translates to S$512 psf NLA and an initial yield of slightly above 6%, a slight premium to yields for its current portfolio. We are neutral on the acquisition with the improvement in its asset quality overshadowed by the small accretion and a slightly high acquisition price. Nevertheless, we recognise benefits through an expansion of AREIT’s leading market share in the business-park space, strong leasing and renewal expectations (with its proximity to the Jurong Lake District) and operational efficiencies (as AREIT’s sixth asset in IBP). We factor in the acquisition and adjust our FY12-13 DPU estimates by – 0.6% to +0.6% and our DDM target price to S$2.18 (from S$2.17) (discount rate 8.2%). We continue to like AREIT for its quality management and asset portfolio and see catalysts from higher-than-expected occupancy and rentals and accretive acquisitions.

The news

AREIT has acquired Nordic European Centre, its sixth property in IBP for S$121.6m from a fund managed by Alpha Investment Partners Ltd. This works out to S$398 psf GFA and S$512 psf NLA. The pro-forma annualised financial effect is estimated by management at 0.02 Sct (0.2% of FY12 DPU), assuming 40:60 debt:equity funding. After the acquisition, business and science parks will account for 39% of its portfolio (by asset value) from 37%. The acquisition will also bring in more quality tenants such as Merck Pte Ltd, Evonik Degussa (SEA) Pte Ltd and Thyseenkrupp Mannex Asia Pte Ltd.

Comments

Initial yield estimated at slightly above 6%. Pegging the property to rentals for its business-park assets, we estimate an initial yield of 6.2-6.3%, slightly below the NPI yield of 6.5% for its overall portfolio. At S$512 psf NLA, the acquisition is also priced at a 15% premium to AREIT’s business-park valuation of S$443 psf as at end-Mar 11. We believe AREIT paid the slight premium as it wants to expand its leading market share in the business-park space further and on expectations of strong leasing and renewals and operational efficiencies.

Expectations of strong leasing and operational efficiencies. The asset is located in the Jurong Lake District, which will be developed into a major commercial and leisure hub. This could allow AREIT to ride rental upside as the hub develops. Notwithstanding a lower occupancy of 83% currently, we do not foresee difficulty in leasing out the remaining space in view of its quality specifications. As AREIT’s sixth asset in the IBP, AREIT is also likely to extract operational efficiencies and cost savings with economies of scale in managing its assets.

Accretion could be enhanced by debt funding. Notwithstanding management’s plans to redeploy the net proceeds from its previous placement (previously to fund development and AEI projects in Shanghai and Singapore) for this acquisition, we expect management to draw down its borrowings eventually for development and AEI projects with its current low gearing of 32-33%. We have thus factored in full debt funding. There could be upside to management’s annualised DPU accretion of 0.02 Sct from this acquisition in view of current low interest rates.

Valuation and recommendation

Moderate DPU accretion on full-year contribution in FY13. Overall, we are neutral on the acquisition. We adjust our FY12/13 DPU forecasts by -0.6% to +0.6%, assuming full debt funding. Accordingly, our target price rises to S$2.18 (discount rate: 8.2%) from S$2.17. We continue to like AREIT for its quality management and asset portfolio. We see catalysts from higher-than-expected occupancy and rentals and accretive acquisitions.

Ascendas REIT acquires Nordic European Centre at International Business Park for S$121.5m

In the News

Ascendas REIT announced the acquisition of Nordic European Centre – a 7 Storey business park building located in International Business Park within the Jurong Lake District masterplan. The property has a total GFA

of 28,378 sqm (NLA of 22,066 sqm) and located in close proximity to Ayer Rajah Expressway. This is the 6^th property within the International Business Park that AREIT owns, which empowers the landlord with

significant presence to extract possible operational efficiencies. In addition, the acquisition will bring in quality MNCs tenants like Merck Pte Ltd, Evonik Degussa (SEA) Pte Ltd and Thyseenkrupp Mannex Asia

Pte Ltd. The building was previously owned by a fund managed by Alpha Investment Partners Limited since July 2006.

The purchase consideration is S$121.5m representing a price/GFA of S$398 psf.

Our thoughts:

(1) Initial yield is estimated to be c6.0%; accretive to earnings. This compares favorably against the current NPI yield of c.5.9% on its portfolio of Business Parks assets, based on latest valuation and reported numbers

by the REIT. Current occupancy level of 83% also offers opportunity for further earnings upside going forward. We note that this acquisition will be funded through proceeds of recent placement/debt and will be accretive

to DPU. However, the acquisition is relatively small in comparison to its portfolio, and DPU is estimated to increase by only c 0.02 Scts or <1%.

(2) debunks “excess capital theory” in the street; acquisition within our estimates. With this acquisition, Ascendas REIT deploys a major part of its “excess capital” that was raised in previous placement exercise.

We understand that the manager will continue to hunt for assets in Singapore and could possibly tie up a couple of other opportunities over the coming quarters. We have assumed S$200m worth of acquisitions in our numbers for FY12.

We maintain our TP and Call.