A-Reit buys $125.6m asset, unveils placement

The property consists of two 7-storey buildings at Biomedical Grove

ASCENDAS Real Estate Investment Trust (A-Reit) is buying a property at Biopolis for $125.6 million, and is raising some $400 million through a private placement to fund the deal and other projects.

The industrial Reit is also in talks to purchase a portfolio of properties worth around $200 million, and the transaction might be completed in the next three to six months.

A-Reit gave these updates yesterday morning.

The latest property it bagged consists of two seven-storey multi-tenanted buildings – Neuros & Immunos – at Biomedical Grove. A-Reit is acquiring them from a unit of its sponsor, Ascendas.

The buildings have research laboratories and offices spread across a net lettable area of 28,345 square metres and they are fully occupied. Their sites have a lease tenure of 30+30 years from February 2005.

A-Reit said the deal is yield-accretive and would have added 0.03 cents to the distribution per unit for the financial year ended March 31, 2010, on an annualised pro forma basis.

There are some assumptions behind this; for instance that A-Reit had owned the property for the entire financial year and funded the deal using 40 per cent debt and 60 per cent equity.

The purchase price is the lower of two valuations conducted by consultants. Jones Lang LaSalle valued the property at $126 million, while CB Richard Ellis thought it was worth $125.6 million.

Transactional costs come up to around $1.9 million, which include an acquisition fee of $1.256 million payable to A-Reit’s manager.

A-Reit, in which share trading was halted yesterday, also unveiled a private placement. It will issue 206.186 million new units at $1.94 apiece to raise around $400 million in gross proceeds. Net proceeds after fees and expenses would be $393.3 million.

The private placement was ‘2.55 times oversubscribed’, A-Reit said. Its closing unit price on Wednesday was $2.04. This means the issue price carries a discount of 4.9 per cent.

The bulk of the gross proceeds will go towards buying Neuros and Immunos. Another $117.6 million is for the forward purchase of a property in Shanghai – a deal A-Reit announced earlier.

The Reit will channel another $97 million to asset enhancement works at other properties, and use $35.9 million to fund a development project.

A-Reit believes the private placement will help it ‘act more expeditiously and be more responsive when pursuing potential growth opportunities’. It revealed that it is in talks to acquire some $200 million of assets.

The private placement will also help cut A-Reit’s gearing. Its aggregate leverage as at Dec 31 was 34.7 per cent, which would fall to 32.6 per cent after revaluation gains of $307.6 million are taken into account.

Pending the deployment of the net proceeds from the private placement, the aggregate leverage goes down to 25.1 per cent.

Moody’s Investors Service does not expect the purchase of Neuros and Immunos and the private placement to have immediate impact on A-Reit’s A3 corporate family rating and Baa1 senior unsecured rating.

First deal in China

• Sealed S&P contract of a business space property for RMB587.9m

• Earnings impact is small, but acquisition is a test of its execution ability in China

• HOLD Call, TP S$2.19 maintained.

Acquiring a business space property under construction The 79,880 sqm GFA business space property is well located in Jinqiao Export and Processing Zone (“JEPZ”), a well established and connected development zone in Pudong New District, Shanghai. The purchase will cost RMB 587.9m (S$117.6m) and complete towards end 2012 upon TOP of the property.

No pre-commitments yet. It seems to us that A-REIT has taken a leap of faith in acquiring the development project without any pre-commitments to-date. This, in our view, deviates from management’s more conservative approach towards acquisitions where the property usually comes fully/partially leased. Nevertheless, we believe this will provide A-REIT with the opportunity to showcase its execution ability, while there is ample time of 2-years to fill the space – concerted marketing efforts through its existing tenant network and leveraging on its parent, Ascendas Group’s established presence in China. In addition, the vendor has undertaken to guarantee RMB67m rental, (or a gross rental yield of 11%), hence mitigating leasing risk for A-REIT.

Assuming that (i) A-REIT is able to fill up the space upon completion by end 2012, (ii) at an average rental rate of RMB 2.30/day or a topline of RMB 67m, and (iii) funded with a 60-40% equity/debt ratio, DPU impact is estimated to <1%.

Maintain HOLD, TP S$2.19. While we like A-REIT for its diversified portfolio and management’s track record of delivering earnings growth for unitholders, current upside to our TP is limited. As such, we maintain our HOLD rating and DCF-derived TP of S$2.19. A-REIT currently offers a yield of 6.4-6.9%

A-Reit buys Shanghai property for 587.9m yuan

ASCENDAS Real Estate Investment Trust (A-Reit) has made its foray into China by buying a business park building in Shanghai for 587.9 million yuan (S$113.8 million).

The industrial Reit will continue looking for more investments in Singapore and beyond, including the major Tier One cities of China.

A-Reit announced its forward purchase in China yesterday, almost three months after it first unveiled plans to venture into the mainland.

The property’s location is in the Jinqiao export and processing zone in Pudong New District, with expected gross floor area of around 79,880 square metres.

A-Reit is buying the property from Hyday Holding and the latter’s parent Qingjian International (South Pacific) Group Development Co.

The sellers will provide A-Reit with a rental guarantee of 67.6 million yuan upon completion of the deal, which should happen in the second half of next year.

Assuming that A-Reit had held the property for the whole of FY2009/10, the DPU for that period could have been 0.07 cent higher, on an annualised pro forma basis, and after considering applicable taxes in China.

A-Reit plans to market the property through its network of existing tenants, and through its sponsor Ascendas’s operating platform in China.

Tan Ser Ping, CEO and executive director of A-Reit’s manager, said that A-Reit will continue searching for investment opportunities in Singapore and the region. In China, it will focus on major Tier One cities such as Shanghai.

Even as the Reit expands abroad, its portfolio will comprise largely ‘Singapore-based assets in the foreseeable future’, he said.

A-Reit lost four cents on the stock market yesterday to close at $2.06.

Delivers another steady quarter

3QFY11 results inline with expectations. A-REIT reported 3QFY11 DPU of 3.29¢ (+0.6% YoY; -0.3% QoQ). Annualized 9MFY11 DPU came in at 13.3¢, marginally below our FY11 DPU forecast of 13.7¢. A-REIT had retained S$4.5m derived from a finance lease granted to a tenant, pending discussion with IRAS on tax treatment of this income. Had this income been distributed, DPU would have been 0.24¢ higher. Net property income rose 2.0% YoY contributed mainly from a larger portfolio base. We raise our FY12-13 DPU by 2-6.5% to account for higher rental assumptions and a new BTS project. We correspondingly raise our TP marginally to $2.20. At our TP of S$2.20, AREIT offers a yield of 6.2%, a reasonable peg in our view. Maintain NEUTRAL.

Occupancy improved. Reflecting the stabilisation in global demand, A-REIT’s portfolio occupancy has improved to 95.6% in 3QFY11 (95.3% in 2QFY11). For its multi-tenanted properties, occupancy has also improved to 91.1% (90.5% in 2QFY11). In 3QFY11, A-REIT saw negative rental reversion for the renewal leases for properties in the Business & Science Parks, Hi-Tech Industrial and Logistics & Distribution Centres of between -2.5% to -9.2%, mostly due to large floor plate discount. We expect positive rental reversion in the following quarters as expiring leases are mostly under-rented.

Focus on built-to-suit and other acquisition opportunities. A-REIT also announced that it has embarked on a built-to-suit logistics facility development at estimated cost of S$35.9m. We estimate accretion to FY13 DPU to be just 0.3%.

Stock almost fully valued; maintain NEUTRAL. We maintain our FY11 DPU forecast of 13.7¢ as dividends are well supported by the long-term leases. At its current price, A-REIT offers investors a stable dividend of 6.4% for FY11, but minimal upside compared to pre-crisis yields of 5.3%.

3QFY10/11 Results Lacklustre; Maintain HOLD

Distribution Income on the downtrend. Ascendas REIT (A-REIT) reported 3QFY10/11 gross revenue of S$109m, up 3.74% YoY but down 1.89% QoQ. Net property income (NPI) of S$83m also rose 2.05% YoY but declined 1.06% QoQ. Its income available for distribution was up 2.6% YoY but down 0.5% QoQ. A-REIT will disburse 3.29 S cents to unitholders, payable on 28 Feb. This is the second consecutive quarter that A-REIT saw a decline in gross revenue, NPI, income-available-for-distribution and income distributed.

Portfolio Management. Portfolio occupancy improved marginally to 95.6% at end Dec versus 95.3% at end Sep. Occupancy of its multi-tenanted buildings also clocked in 91.1% versus 90.5% three months ago. The manager secured 30,165 sqm of lease renewals and 48,796 sqm of new leases during the quarter, achieving positive rental reversion only in one out of the four industrial sub-sectors1 . 2.9% of property income remains due for renewal this financial year. A-REIT also announced that it has embarked on its 11th development project, a built-to-suit logistics facility in the eastern part of Singapore at an estimated cost of S$35.9m2 . This facility is fully pre-committed for a period of 10 years upon expected completion in 4QFY11/12. In addition, A-REIT has completed Phase 2 of Plot 8 Changi Business Park in Dec. This property is fully pre-committed to Citibank N.A. and the lease will commence progressively from Feb 2011. For FY10/11, management also aims to at least maintain the previous financial year’s level of net income on the back of a high-degree of predictability and sustainability of portfolio earnings.

Maintain HOLD on valuation grounds. As of 31-Dec, A-REIT has an aggregate leverage of 34.7% and an interest-cover-ratio of 4.6x, which is fairly comfortable in our view. It also has ample debt headroom to fund further investment opportunities, with an additional S$931m leeway to reach 45% aggregate leverage. We were disappointed that there was no announcement of international acquisitions, despite previous reports that A-REIT has set up a representative office in Shanghai and is actively exploring investment opportunities in Asia3 . A-REIT is currently trading at a 37.5% premium to book, with a 1-year forward yield of 6.4%, while the broader industrial-REITs are trading at an average 7.8% premium to book with a forward yield of 7.5%. While we believe A-REIT may deserve a premium because of its size and quality of its portfolio, valuations and prospects do not seem compelling at the moment. Maintain HOLD with a reduced RNAVderived fair value of S$2.20.