Equity issuance: Round Two

Private placement to raise S$301.6m

Seeking S$301.6m through private placement. The manager of AREIT is proposing the issuance of 185m units to institutional and other investors at S$1.63-1.70 apiece to raise gross proceeds of at least S$301.6m. The price range represents a discount of 3.8-7.8% to the volume weighted average price of S$1.7674 per unit for full-day trades on 7 Aug 09. The placement is being managed and underwritten by Cazenove and DBS. Assuming approval from the SGX, the new units are expected to trade from 20 Aug 09.

Proceeds to fund SingTel BTS and potential acquisitions/BTS. Proceeds from the private placement will be used to: 1) fund the development of a build-to-suit (BTS) facility for SingTel (about S$175.4m; 58% of gross proceeds) announced in May this year; and 2) fund potential acquisitions and/or build-to-suit opportunities (S$120.6m; 40% of gross proceeds); and 3) general corporate and working-capital purposes, and expenses incurred for the placement.

Comments

Asset leverage pared below 30%. Assuming the placement is fully taken up and net proceeds are fully utilised to cut debt, asset leverage will decline to 29.3% from 35.7%. This should give AREIT more financial flexibility to acquire or develop build-to-suit properties when opportunities arise.

Share base diluted by 11%; DPU diluted by 10%. Upon completion and assuming no other changes, AREIT’s share base of 1,685m units will expand by 11%, and DPU for FY10 will fall 10%. Dilution for FY11-12 is less severe at 3-4% as contributions from SingTel BTS and other development projects kick in.

Acquisitions look probable, once more. With an expanded share base, dividend yield at 7% makes acquisitions more probable, as physical property yields of industrial assets remain high at 7-8% and SIBOR remains low at under 1%.

SingTel BTS in a nutshell. AREIT is developing a 9-storey hi-tech industrial building at Kim Chuan Road for SingTel. The total estimated development cost is S$175.4m, which includes construction and land costs, and the installation of mechanical and electrical equipment. The completed building will be leased to SingTel for an initial 20 years with annual rental escalations and an option to renew for a further 10 years on expiry. Completion of the building is expected in Apr 2010. Management expects an average net yield of 11% from the facility in the 20-year lease period.

Valuation and recommendation

Increased contributions and less severe expense assumptions. We account for dilution and add in potential contributions from SingTel BTS from FY2011. We also assume that S$120.6m of the proceeds will be used to acquire properties. Separately, we increase our net property income margin assumptions to 75% from 73% in view of strong cost-control initiatives in the last few quarters; and decrease our cost-of-debt assumptions to 4.3% from 4.7% as we believe lower asset leverage after the placement and continued low interest rates will result in a less demanding cost of debt for AREIT. Following our changes, our DPU estimates fall 8% for FY10 but rise 3-5% for FY11-12. Our DDM-based target price rises to S$1.74 from S$1.70 (discount rate of 8.4%).

Maintain Neutral with higher target price of S$1.74 (from S$1.70). Although the equity issuance did not come totally as a surprise, we were disappointed that no firm acquisitions or development works were announced in tandem.

As one of the market leaders in the SREIT space, we expect AREIT’s speedy move to capture ready equity to be followed by a second round of equity fund-raising by REITs to further strengthen their balance sheets in preparation for a sharp devaluation of asset values at year-end and uncertainties in capital markets.

AREIT is trading above its book value at 1.1x and offers a 7% dividend yield. While yields still look relatively attractive, we believe there are cheaper alternatives among the REITs while the outlook for the industrial sector has yet to turn sunny. Maintain
Neutral.

A-Reit issuing new units to raise $302m

It says new funds could strengthen its capital structure

ASCENDAS Real Estate Investment Trust (A-Reit) is looking to raise at least $301.6 million through a private placement of new units – just months after a $408 million cash call in January.

The private placement will ‘strengthen A-Reit’s balance sheet to take advantage of potential investment opportunities’, said Reit manager Ascendas Funds Management’s CEO and executive director Tan Ser Ping.

A-Reit asked to halt trading in its units yesterday morning and said it is issuing 185 million new units to institutional investors at between $1.63 and $1.70 apiece. The new units are equivalent to 11 per cent of the 1.68 billion units in issue as of June 30.

The issue price range represents a discount of 3.8 to 7.8 per cent to the volume weighted average unit price last Friday.

The Reit manager, with joint lead-managers and underwriters Cazenove & Co (Singapore) and DBS Bank, will determine the issue price through a book-building process. The process started yesterday and should finish today.

After setting aside $5.6 million for fees and expenses, A-Reit will have net proceeds of around $296 million. Of this, $175.4 million will go towards developing a high-tech built-to-suit facility for Singapore Telecom.

SingTel will lease the property off Upper Paya Lebar Road for 20 years and has an option to extend the lease for another 10 years.

A-Reit will use another $120.6 million for potential acquisitions of income-producing properties and built-to-suit development opportunities.

‘A pipeline of potential investment opportunities at different stages of development has been established and some of these may gradually materialise as the economic condition stabilises,’ Mr Tan said.

A-Reit also said the new funds could strengthen its capital structure and allow it to borrow more at potentially better terms. Should it use all the net proceeds to repay debt, its aggregate leverage would fall from 35.7 per cent at Aug 9 to 29.3 per cent.

Analysts BT spoke to yesterday were not completely taken aback by A-Reit’s latest cash call – some noted that its gearing is relatively high in the sector and new funds may help bring that down.

A CIMB report last week showed that A Reit’s leverage is higher than that of at least eight other Reits, based on last reported figures.

The buoyant stock market may have facilitated fund-raising too, some analysts said.

To ‘ensure fairness’ to holders of existing units, A-Reit will give them an advanced distribution of distributable income for the period from July 1 to the day immediately before the date on which the new units will be issued.

A-reit delivers again

• 3.62 Scts DPU, higher than expectations
• Portfolio occupancy levels likely to remain stable
• Maintain BUY, TP S$1.73 based on DCF- total return of 18%, backed by a stable 8% dividend
yield

1Q10 results ahead of projections. Distributable income grew by 18% to S$61m, (DPU of 3.62 Scts) ahead of projections, largely due to a better than expected operational performance. A stronger than expected net property income margin of 79% and portfolio occupancy of 97% vs projections of 92% were the main factors.

Pre-possessing an asset – 13 International Business Park. A-reit repossessed the property, as the anchor tenant was unable to fulfill lease obligations. Limited impact on earnings as (i) the property accounts for c1% of topline, (ii) it is backed by an 8-month security deposit, and (iii) A-reit has since released c37% of the space at higher rates and is in advance negotiations for another 18%.

Adjusting occupancy assumptions upwards. Having concluded 1/3 of expiring leases for the year, A-reit has exceeded expectations by keeping portfolio occupancy relatively stable at 97% and with only a slight moderation in occupancy for its multi-tenanted buildings (MTB) portfolio (down 1pct to 94%). Looking ahead, with only c9.4% of its income up for renewal for the remaining FY10, and backed by recovering economic outlook, we expect forward rental renewal negotiations to improve. As such, we raise our occupancy assumptions for MTB properties from 85% to 90%, leading to higher DPU estimate of 12.8 SCts-13.0 Scts.

Maintain BUY, TP adjusted to S$1.73 based on DCF. We favor A-reit for its ability to deliver sustained positive returns to unitholders. Current price translates to an attractive FY10-
11F yield of c8%.

A Good Start

1QFY10 results above expectations. A-REIT reported a 6.9% YoY fall (+12.1% QoQ) in 1Q10 DPU to 3.62¢, above ours and consensus estimates. Annualised DPU came in at 14.48¢, 8.8% above our FY10 forecast of 13.3¢ (10.5% above the Street’s 13.1¢ estimates). Revenue was up 10.7% due to positive rental reversion and contributions from new acquired properties and development projects. A-REIT will trade ex-1Q10 distribution on 29 Jul 2009. We have raised our DDM-backed target price to S$1.72 (S$1.57 previously) to reflect a lower cost-of-equity assumption of 9% (9.7% previously). Maintain BUY.

Earnings resilience expected despite increasing tenants in arrears. Our recent channel checks on A-REIT suggest more industrial tenants in arrears in rental payments given the recessionary economic conditions. Management confirmed that about 1% of its NLA (~ S$3m annual revenue) is highly vulnerable to full-fledged default. In any case, A-REIT has already received S$2.1m in security deposits from these tenants. On a portfolio basis, A-REIT is backed by 6 months of security deposits, mitigating downside DPU risks. While earnings impact may be muted, we believe the loss of a single major tenant may be fairly damaging to the perception of A-REIT’s stable of assets.

Occupancy at healthy levels. Reflecting the slowdown in global demand, occupancy rate for A-REIT’s multi-tenanted properties declined marginally to 94.0% from 95.3%. However, overall portfolio occupancy remains high at 97.1% (97.8% in 4QFY09) due to the contribution from single tenanted buildings with long term leases. We expect positive rental reversion, albeit at a slower pace, for the Business & Science Parks and Hi-Tech Industrial properties as these properties are 30% under-rented.

Trading at attractive yields. At current prices, A-REIT offers investors a stable dividend yield of 8.5% for FY10 and 8.7% for FY11 – with dividends well supported by the long-term leases on single-tenanted buildings which accounts for 50% of revenue. We recommend buy on dips as stock has rallied 48% since Mar 09.

Stable performance

• Meeting expectations in the first quarter. A-REIT’s 1Q10 results met consensus and our expectations. Net property income of S$80.7m (+15.8% yoy) and distributable income of S$61.0m (+17.9% yoy) was reported, with growth attributed mainly to an enlarged portfolio base of 89 properties vs 86 properties one year ago. DPU declined 7% yoy to 3.62cts, due to increased number of units after its rights issue. DPU for the first quarter forms 28% of our forecast of 12.8cts for FY10.

• Occupancy down marginally, but reversions holding up. Portfolio occupancy was down 70bp qoq to 97.1% as at end-Jun. This was mainly attributed to a decline in the occupancy rate for its multi-tenanted properties which came down to 94.0% from 95.3% a quarter ago. A-REIT’s Business and Science Park segment and Hi- Tech segment continued to have positive reversions, although at a slower pace, as rents of expiring leases remain significantly below market rental rates. After renewing 689,115sf of net lettable area (NLA) in 1Q10, A-REIT is left with 9.4% of its gross revenue due for renewal for the rest of the financial year, down from 14.1% due at the beginning of the financial year.

• Tenant risk updates. A-REIT estimates that about 129,167sf (0.6% of total NLA) of NLA accounting for S$0.14m (0.4% of total monthly revenue) of gross revenue is occupied by tenants that are considered vulnerable. However this risk is mitigated by S$1.08m of security deposits held by A-REIT. In the quarter, 88,330sf of space accounted for 0.64% of A-REIT’s gross revenue from 13 International Business Park has been reposed as the master tenant, LabOne, was unable to fulfil its lease obligations. A-REIT has 8 months of security deposit which will be used to pay rent due while the space is being marketed. 36.9% of the space has since been leased at rates not lower than the existing rate and another 16.8% of space is in active negotiation with a prospective tenant.

• Maintain Neutral at unchanged target price of S$1.68 (discount 8.5%). We expect occupancy levels to continue to weaken due to the uncertain outlook of industrial indicators. However, increased contributions of AREIT’s built-to-suit development projects completing over FY10 and built-in rental growth for its leaseback arrangements will moderate the decline in revenue.