A-REIT acquires Creative building for S$247m (TP S$2.86)

Story: A-REIT announced yesterday that it has entered into a put-call arrangement with Creative Technologies Ltd to purchase their asset at 31 International Business Park for a total consideration of S$246.8m. Based on this acquisition price, the asset is purchased at a 6.24% NPI yield and with the tenant, Creative Technologies Centre Pte Ltd, paying a cash security deposit of S$72.2m ( equivalent to 5 years rental). The tenant will lease back the property for 5
years with an option to renew for a further 3+2 years.

Point: The reit has started their new financial year with a bang with this new capture worth S$246m and is in line with our expectations of S$400m worth of acquisitions this year. This latest acquisition will add a further 50.3 sqm of NLA to their portfolio, expanding it 3% to 1.73m sqm valued at c. S$4.3bn. Post purchase, A-REIT’s exposure to Business & Science park assets will increase to 31% from 25% of total portfolio previously.

The purchase is expected to be funded fully by debt/and or with part equity. However, we have assumed that management will draw down its debt facilities for this purchase. This will increase its gearing from 38.2% to 42% , which is still within its comfortable 40-45% LT gearing level.

In addition, development projects currently in the works ( worth c. S$ 179m ) will also be progressively added to the portfolio over the coming financial year which will further grow DPU moving forward.

Earnings surprise for A-REIT will derive from further 3rd party acquisitions and/or asset injections by their sponsor that are currently not factored in our estimates (above our S$400m p.a estimates)

Relevance: Maintain BUY on A-REIT , TP unchanged at S$2.86. We continue to like A-REIT as one of Singapore’s largest industrial property landlord. At current trading price of S$2.50, the reit is currently trading at FY09 and FY10 yield of 6.2% and 6.4% respectively.

A-Reit buyer of Creative’s HQ building in Jurong East

ASCENDAS Real Estate Investment Trust (A-Reit) has emerged as the buyer of Creative Technology’s headquarters building at 31 International Business Park in Jurong East. The price will be $246.8 million.

Creative said in March that it had agreed to sell and lease back the property but did not disclose the buyer’s identity. The deal is subject to approval by Creative shareholders and JTC Corp.

On completion of the sale, a Creative subsidiary will lease the property for five years, with options to renew for a further three plus two years.

A-Reit’s manager said the average yield for the initial five-year lease will be 6.24 per cent. Additional rent is payable in the third and fifth years of the lease if the cumulative increase in Singapore’s Consumer Price Index exceeds 5 per cent.

Had A-Reit bought, held and operated the property since the start of the current financial year, the proposed acquisition would have boosted its distributable income per unit by 0.07 cent.

A-Reit’s manager will receive a $2.5 million acquisition fee. Other transaction costs are estimated at $3.7 million.

The property, valued by CB Richard Ellis at $246.8 million, is a part five-storey, part seven-storey and part eight-storey tower with basement parking.

It has an auditorium and a 2,000-capacity outdoor amphitheatre and is on a 265,739-sq-ft site with 30 + 30 year leasehold tenure from Dec 16, 1994.

A-Reit plans to fund the acquisition by debt and/or equity. On the stock market yesterday, the counter ended 14 cents lower at $2.50.

4QFY08: Benefitting From Spillover Demand From CBD

A-REIT reported gross revenue of S$84.4m in 4QFY08, an increase of 13.9% yoy. Overall occupancy reached 98.4% as at Mar 08, compared with 96.6% last year. AREIT announced a DPU of 3.69 cents for 4QFY08, an increase of 11.8% yoy. This represents an annualised yield of 5.7% and will be paid on 30 May 08.

Positive rental reversion for Science & Business Park and Hi-Tech Industrial. A-REIT benefits from the shortage of office space within the Central Business District (CBD). This has forced many companies to relocate non-client-facing backroom and data centre operations to suburban locations such as Alexandra Technopark and Changi Business Park (CBP). There is also positive impact from an inflow of multinational companies expanding in Singapore. A-REIT signed renewed and new leases for a total net lettable area (NLA) of 784,925sf during the quarter, representing 9.7% of NLA for multi-tenanted buildings. Renewal rates for Science & Business Park and Hi- Tech Industrial were S$3.76 and S$3.10psf pm, 68.8% and 49.8% higher on a yoy basis.

A well-diversified portfolio. A-REIT had a portfolio of 84 properties and total assets of S$4.2b as at Mar 08. The weighted average lease to expiry is 5.9 years. A-REIT has a quality and well-diversified tenant base of over 790 international and local companies. The top 10 tenants account for 27.9% of portfolio income. The largest tenant, Singapore Telecommunications, accounts for only 6.5% of portfolio income. A-REIT’s weighted average funding cost is 3.1% due to its corporate rating of A3 and consistent track record. It will be concluding a three-year S$200m transferable loan facility, after which the earliest date for refinancing is Aug 09.

Maintain BUY. A-REIT provides FY08 distribution yield of 5.81%, a healthy spread of 3.46% over 10-year Singapore government bond yield at 2.35%. Our target price is S$3.00 based on the two-stage dividend discount model.

Proposed JTC REIT aborted

Risk of direct competition with JTC REIT averted. JTC announced that it would divest a portfolio of high-rise ready-built properties to Mapletree Investments for a total consideration of S$1.7b. The properties comprise 39 blocks of flatted factories, 12 amenity centres, six stack-up and one ramp-up buildings, three multi-tenanted business park buildings and one warehouse building. Mapletree Investments was previously appointed to establish and manage a proposed JTC REIT, which will acquire these properties from JTC. JTC decided not to proceed with the JTC REIT as its REIT financial advisors, DBS Bank, Goldman Sachs and UBS, have advised that current volatile market conditions are not conducive for a REIT IPO.

We view the aborted JTC REIT positively as it prevents unhealthy competition between two industrial REIT under the ambit of JTC. The transfer of these properties to a private trust sponsored by Mapletree Investments is expected to complete by Jul 08. Mapletree will then explore the possibility to list the portfolio as a REIT, possibly in combination with its other industrial assets. Mapletree could list the assets under a separate REIT or inject the assets into Mapletree Logistics Trust. Both scenarios are more palatable compared to having direct competition with a sister REIT with similar investment mandate.

Positive rental reversion for Science & Business Park and Hi-Tech Industrial space. A-REIT benefits from the shortage of office space within the Central Business District (CBD). This has forced many companies to relocate non-client-facing backroom and data centre operations to suburban locations such as Alexandra Technopark and Changi Business Park (CBP). There is also positive impact from inflow multinational companies expanding in Singapore. AREIT has renewed and signed new leases for total net lettable area (NLA) of 784,925sf during 4QFY08, representing 9.7% of NLA for multi-tenanted buildings. Gross rental rates for these new contracts for Science & Business Parks and Hi-Tech Industrial were S$3.76 and S$3.10psf pm respectively, 68.8% and 49.8% higher on a yoy basis.

Maintain BUY. A-REIT provides FY08 distribution yield of 6.32%, a healthy spread of 3.97% over 10-year Singapore government bond yield at 2.35%. Our target price is S$3.00 based on two-stage dividend discount model.

FY08 results inline

FY08 results inline
A-REIT reported FY08 results with distribution of 14.1cps, up 10.8% vs FY07 and inline with ML estimate of 14.0cps. Distribution growth was attributable to a 16% increase in net property income of which 10% was driven by income contribution from new acquisitions and 6% was driven by organic growth.

Business Parks and Hi-Tech key growth sectors
The spillover effect from tightness in CBD office continues to benefit A-REIT via portfolio exposure to business and science parks. Renewal rates for business parks improved 46% while Hi-Tech renewals were up 40% vs 2007. Portfolio wide occupancy was slightly down vs 3Q however remains high at 98.4%.

Development exposure reaching cap, Gearing 38%
A-REITs has committed developments to the value of S$309mn which equates to 8% of the regulated 10% development cap. In our opinion this limits A-REITs ability to participate in additional near term developments. Current gearing is at 38%. This is below stated target gearing of 45% but close to historical highs.

Maintain Sell
We maintain our Sell on A-REIT and fair value estimate of S$2.09. While operationally the business is sound we believe better relative value can be found in industrial S-REIT peers. To play the Ascendas group strengths we suggest switching into a-iTrust, while to stay exposed to the Singapore industrial market we suggest switching into Cambridge Industrial.