Category: A-REIT
AREIT – BT
Goodman exit seen as chance for A-Reit expansion
IN A move that could pave the way for Ascendas Real Estate Investment Trust (A-Reit) to finally expand overseas, Australia’s Goodman Group has exited the trust.
Goodman is selling its 40 per cent stake in the entity that manages A-Reit as well as a 6.28 per cent stake in the trust itself. The latter transaction is for $158.16 million or about $1.90 per A-Reit unit. The counter closed at $1.95 yesterday, down two cents.
The buyers in both transactions are fully owned units of Ascendas Pte Ltd, which will gain full control of the Reit manager, which will be renamed from Ascendas-MGM Funds Management to Ascendas Funds Management (S).
Ascendas’ stake in A-Reit will also go up to 26.77 per cent.
An announcement last night put an end to speculation late last year that Goodman would exit A-Reit. Market watchers expected Goodman to sell its stake in the A-Reit manager when the Australian group was tipped to land the job of managing a proposed Reit that will hold some properties being divested by JTC Corp.
The strategy would have been to remove the conflict of interest of Goodman having an interest in two Singapore industrial Reit managers potentially competing for the same assets and tenants.
However, JTC eventually gave its Reit management job to Mapletree Investments in February. Although Goodman did not clinch that deal, some market watchers nonetheless welcome Goodman’s exit from A-Reit’s manager, as it paves the way for A-Reit to invest in properties outside Singapore.
A-Reit has never expanded overseas because of an understanding among the shareholders of the Reit manager to avoid conflict of interest, analysts say.
Goodman Group CEO Greg Goodman possibly hinted almost as much when he told BT last night that ‘we have operations in the region, and so does Ascendas’ and parting ways will minimise mutual conflict of interest.
Another important reason Goodman is exiting its involvement with A-Reit’s manager is because ‘our approach is that we prefer to have full control of any Reit manager we’re involved with, and that’s not possible in this case’, Mr Goodman said.
However, the group is not bidding goodbye to the Singapore industrial property market.
‘Goodman will re-enter the Singapore market at some point. We know this market well and we like it,’ Mr Goodman said.
The group could invest in the Singapore industrial property scene again, possibly through its wholesale property funds, or development activity.
SREITs – BT
MacarthurCook, Cambridge and Allco seen as potential takeover targets
CAMBRIDGE Industrial Trust, MacarthurCook Industrial Reit and Allco Commercial Reit are among potential takeover targets among Singapore real estate investment trusts (S-Reits), says Goldman Sachs in a report this week.
‘We believe that Reits with relatively smaller market caps, fragmented shareholdings or larger shareholders which may be open to exiting their stakes, and relatively high yields compared with sector peers are likely takeover targets,’ the report authored by analyst Leslie Yee said.
The current S-Reit climate, with disparity in distribution yields at which Reits in the same asset class are currently trading on the stock market, provides fertile ground for merger and acquisition (M&A) activities, the bank contends.
‘Hypothetically, a Reit trading at a lower yield that acquires a Reit trading at a higher yield, would be making an accretive acquisition, if the acquirer trades at the same yield post-acquisition,’ it added.
It may be easier for S-Reits to grow by acquiring other Reits as the traditional method of growing – through the acquisition of physical assets – has become more difficult. This is because the slump in S-Reit prices on the stock market has raised their distribution yields, making it harder for them to make yield-accretive acquisitions of properties.
Goldman Sachs said other factors that have brought forward M&A as a theme for the S-Reit space include the prices of certain Reits trading below net asset value, increasing openness of management teams discussing the possibility of M&A, and trade sales.
In mid-February, Macquarie MEAG Prime Reit’s (MMP Reit’s) manager announced a strategic review to enhance value for unitholders following the receipt of unsolicited bids made to Macquarie Real Estate, which holds a 26 per cent interest in MMP Reit.
‘We think this strategic review can lead among others to an outright sale of the Reit or sale of underlying assets on a piecemeal basis. There are precedents among the Australian Reits of acquisitions of entire Reits and piecemeal divestments of their properties. We see either of these actions as among the many ways in which Reits trading below book value can help realise book value,’ Goldman said.
‘We believe that MMP Reit’s efforts could cause shareholders of other Reits trading below NAV to seriously consider how best to unlock value. We note that Reits in mature markets like Australia divest assets on a piecemeal basis to optimise their portfolio, and we do not rule out S-Reits divesting individual assets to reconfigure their portfolios or even pay special dividends,’ it added.
‘Besides Reits’ takeovers, another possibility is the takeover of Reit managers. We note ARA Asset Management has stated it is keen to acquire other Reit managers,’ the report said.
The M&A theme will be positive for S-Reits. For large-cap Reits which trade at relatively low yields, M&A will create another avenue for growth. For smaller Reits trading at relatively high yields, investors should be able to cash in on premiums paid to buy out their respective Reits. ‘We expect the focusing of M&A as a theme by investors to result in narrowing of discounts to RNAV,’ Goldman said.
It also recommends investors to be ‘overweight’ on S-Reits given the defensive nature of these instruments and their relatively high distribution yields.
‘Based on our stress tests, we are comfortable that downside risk to our revised 12-month target prices is capped at about 14 per cent on bear case scenarios which we do not expect to materialise. In a flight to quality environment, we favour well-managed big-cap names, with debt capacity to fund acquisition growth, and which trade at discount to RNAV and show strong near-term organic growth.’
Goldman has upgraded office landlord CapitaCommercial Trust from ‘neutral’ to ‘buy’ and added it to its Conviction List of top ‘buy’ calls. It has also upgraded Ascendas Reit from ‘sell’ to ‘neutral’. The bank also has ‘buy’ recommendations for CDL Hospitality Trusts, K-Reit Asia and Suntec Reit. It has downgraded CapitaMall Trust from ‘buy’ to ‘neutral’, and MMP Reit from ‘neutral’ to ‘sell’.
SREIT – DB
Exuberance fades, value endures
Attractive valuations; deep discounts to NAV unsustainable medium term
Recent 4Q results show still firm organic rental growth and resilient income, which should shift focus from slowing acquisitions. With a few exceptions, balance sheets are sound and refinancing risk manageable. Following a 30% decline since mid 2007, 3/4 of the REITs are trading below book (which could drive M&A or capital mgt) and we find valuations compelling at an avg FY08 yield of 6.4% (a 400bps spread above the 10-year gov bond), a level not seen since mid-2003.
Acquisitions not the only DPU growth driver; organic growth still firm
While weak equity markets have made the acquisition growth model difficult, organic growth remains intact as reflected by robust DPU growth in the recent quarter. Passing office rents still lag market rents, retail rents continue to firm, and industrial rents are 40% below the peak. Cash flows are defensive with secured leases (min 3 years) and rental deposits (in the event of tenant default).
Balance sheets resilient, refinancing risk manageable
Average gearing for the sector is 30% with a few exceptions such as K-REIT, MLT, and Allco which have above-average gearing. Refinancing costs have not risen substantially despite weak credit markets as a significant widening of spreads has been offset by 30-110bp decline in swap offer rates. Most REITs can sustain more than 15% decline in asset values without breaching the statutory gearing limit.
NAV discounts unsustainable once capital markets stabilise
Equity issuance is likely to be moderate until discounts to NAV narrow, and M&A or value unlocking exercises (REITs have started share buy backs) could help narrow discounts to NAV. Similar to Australia and US, SREITs could be takeover targets if discounts remain. Private equity real estate funds raised US$79bn last year with a US$21.6bn focusing on Asia/ROW. Despite the uncertainty, two S$0.8- 1bn physical market transactions have been completed in the last month.
Valuations attractive – transparency, strong balance sheets a premium
The SREIT index has declined by nearly 30% since June 07, underperforming both the STI and the developers. Valuations are generally attractive at 5.5% FY07 and 6.4% FY08 yield representing a 400bps FY08 spread on the LT bond and 12% average discount to NAV. Amid uncertainty over acquisition growth, we focus on REITs with stronger organic growth profiles and/or discounts to NAV, with transparent structures and sound balance sheets without funding risk. REITs which have mismatch in overseas assets and S$ denominated liabilities may face NAV erosion given the appreciation in the S$.
Top picks for REIT sector – CapitaMall Trust, A-REIT and Suntec REIT
We continue to recommend CMT for its strong retail franchise and its track record in extracting value from assets through asset enhancements (even during SARs), A-REIT for its leverage on the rising business & science park and hi-tech industrial segments and Suntec REIT for a high yield and discounts to NAV. Risks: protracted economic slowdown affecting leasing demand, further deterioration in credit markets and the inability to refinance.
Some tables are extracted and posted here
AREIT – BT
A-Reit buys Acer Building for $75m
It also bags warehouse in CBP, announces completion of HansaPoint
ASCENDAS Real Estate Investment Trust (A-Reit) has bought the Acer Building at International Business Park in Jurong East for $75 million or $344 per square foot of lettable area.
Market sources say the price reflects an initial yield of 6.5-6.8 per cent.
A-Reit yesterday also announced the purchase of Sim Siang Choon Building, on the fringe of Changi Business Park (CBP), from Sim Siang Choon Hardware for $31.89 million.
This is a four-storey warehouse with a first-storey showroom and a separate single-storey warehouse.
In addition, A-Reit said HansaPoint@CBP received a Temporary Occupation Permit on Jan 22 and has achieved full occupancy.
The $28.6 million project’s major tenants include Rohde & Schwarz Systems & Communications Asia, Credit Suisse and Citco Fund Services (Singapore).
The completion of HansaPoint@CBP and acquisition of the Acer and Sim Siang Choon buildings will have a positive effect on A-Reit’s distribution per unit (DPU).
A-Reit is buying Acer Building from Acer Computer International.
The deal involves Acer’s local subsidiaries Acer Computer (Singapore) and Logistron Services leasing back 23 per cent of the current net lettable area for five years with an option to renew for a further 3+2 years.
The building’s current occupancy is 97 per cent.
Acer Building’s sale was handled by DTZ through an expression of interest exercise that drew five offers.
The other bidders are believed to have been two other Singapore Reits, Frasers Centrepoint and a private fund managed by Mapletree.
The property, a high- tech business park development, was completed in May 1996 on a site leased from JTC Corp for 30 years with an option to renew for a further 30 years. It has a total lettable area of 20,231 sq metres.
A-Reit’s manager says there is potential to create a further 1,200 sq metres of lettable space.
According to a report last year, Acer is paying JTC an annual land rent of $715,469 with escalation of 4 per cent a year as of Q3 2007.
The new owner is expected to pay JTC a slightly higher land rent each year, according to the report.
BT understands that A-Reit should enjoy considerable upside from positive rental reversion, as a number of leases in the building are up for renewal in the next one to two years.
Some of these tenants are paying monthly rent of $2 to $2.60 psf, whereas current rents for similar properties in International Business Park are $3.20 to $3.60 psf.
Besides Acer, other tenants in the building include Jacobs Engineering, Converge Asia and Nortrans Shipping.
AREIT – CIMB
Record occupancy lifts DPU
• 3Q08 results exceed expectations. Gross revenue rose 12.8% yoy to S$80.2m in 3Q08 while distributable profit grew 15.1% yoy to S$47.2m. 3Q08 DPU of 3.56 cts represents 26% of our full-year forecast and consensus and fulfils 76% of our FY08 DPU forecast. This could be attributed to higher occupancy levels in its multitenanted buildings (97% vs. 96.2% in 2Q08). A-Reit’s portfolio occupancy reached a record high of 98.7%, up from 96.1% a year ago. Renewal rates for the Business Park and Hi-Tech segments also grew by double digits (+46.1% and +71.5% over previous transacted rates respectively).
• Upcoming acquisitions. A-Reit announced MOUs amounting to S$201m for the acquisition of income-producing properties. In addition, it has completed the acquisition of Goldin Building at Pioneer Walk for S$22.5m. To date, A-Reit has invested S$299m in new acquisitions and S$338m in development projects, which would be completed over 2009-10. We believe it is on track to achieve its target asset size of S$5bn by end-2010.
• HansaPoint @ CBP fully pre-committed. Scheduled for completion in 1Q08, Hansa Point, a multi-tenanted business park building, is now 100% pre-committed with more than 50% of the pre-commitment coming from financial institutions as the office crunch persists.
• Large impending warehouse supply may dampen rents. According to URA statistics, some 6.7m sf of gross warehouse space is due for completion in 2008-09. We estimate this could translate to an average 2.7m sf of net warehouse space p.a., more than double the last five years’ average net new supply of 1.3m sf p.a. This is likely to have a negative impact on A-Reit’s income stream as the logistics segment is its income largest contributor.
• Downgrade to Neutral from Outperform; target price lowered to S$2.83 from S$2.89. In view of the impending warehouse oversupply, we have moderated our income estimates for the logistics segment. This lowers our FY09-10 DPU forecasts by 1.2-1.8%. Accordingly, our DDM-derived target price has been trimmed from S$2.89 to S$2.83 (cost of equity unchanged at 6.2%). Downgrade to Neutral as we believe that the stock will track the STI’s performance in the near term.