Category: A-REIT
A-REIT – MayBank Kim Eng
Nearing End of Sweet Run; Cut to HOLD
Downgrade to HOLD. The industrial REIT run looks over and we downgrade A-REIT to HOLD on valuations. It was our last BUY among Industrial-REITS. A-REIT has been our conviction BUY since we initiated in June 2012 and the stock has risen 30%. We expect the current QE-inflated growth to run out of steam once the artificially compressed interest rates in the US, and hence Singapore, start normalising sometime next year or in early 2015. Industrial property prices in the physical market have almost doubled since 2009 whereas rentals are up only 44%. Further government cooling measures will put a lid on asset prices, while we are sceptical that rentals can scale up in the near term. We remain cautious on the mismatch between industrial rentals and physical prices and see no further catalysts for the sector at the current levels (refer to our S-REITs report, titled Rational Temperance, dated 22 Mar 2013).
Private placement. A-REIT conducted a private placement of 160m units (6.7% dilution post-placement) at SGD2.54/unit on 19 Mar 2013. An advance distribution of 2.70 cents is expected to be paid on 25 April. Of the gross proceeds of SGD406m, SGD126m has been used to acquire The Galen at Science Park II and SGD210m will be used to partly fund an integrated industrial mixed-use property, currently under construction, at Kallang Avenue (total value ~SGD490m). The rest of the money will be reserved for issue expenses, corporate/working capital purposes and debt repayments.
The Galen acquisition. We have factored into our model A-REIT’s private placement and purchase of The Galen (SGD538 psf on NLA basis), with initial NPI yields of 6.8% and passing rents of SGD4.10 psf/mth. This works out to ~SGD11m in revenue and ~SGD8.6m in NPI contributions. A six-storey multi-tenanted science park building, The Galen has a NLA of 234,384 sq ft and occupancy rate of 97.5%. Ascendas Land and the REIT manager occupy 52.7k sq ft, or 22.5%, of the lease space.
Moving up the value chain. Based on our estimates, A-REIT has 38% of its FY3/14F GAV in business/science parks and 23% in high-tech industrial/data centres. We expect these two segments to progressively increase in proportion as Singapore outsources its lower value-add activities to neighbouring countries (warehouse rents and asset values in Singapore are, respectively, 2.5x and 8.5x higher than in Iskandar Malaysia). We downgrade A-REIT to HOLD with a TP of SGD2.70.
A-REIT – OCBC
ACQUIRES PROPERTY FOLLOWING PLACEMENT
- Purchase price of S$126.0m
- NPI yield at 6.8%
- Bigger presence in Science Park vicinity
Proposed acquisition of The Galen
Ascendas REIT (A-REIT) yesterday announced the proposed acquisition of The Galen at 61 Science Park Road from Singapore Science Park Ltd, a wholly-owned subsidiary of Ascendas Land (S) Pte Ltd. The purchase consideration was S$126.0m, representing a marginal discount to the independent valuations of S$126.8m-S$127.0m by JLL and CBRE.
Details of transaction
The Galen is a six-storey multi-tenanted science park building located within Singapore Science Park II and has a NLA of 234,384 sqft. It is currently 97.5% occupied, with Ascendas Land and the REIT manager taking up c. 22.5% of the lease space. The property, we note, was first mentioned as a potential acquisition asset when it raised S$406.4m through a private placement of 160m new units on 8 Mar. According to A-REIT, the asset is expected to generate a NPI yield of 6.8% and add 0.052 S cents to its DPU on an annualised basis, assuming the acquisition is fully funded using the placement proceeds. This is in line with our initial assumptions made on the transaction.
Stronger footprint in Science Park segment
A-REIT expects the property to complement and strengthen its foothold in the science park segment in Singapore, and in turn allow A-REIT to enjoy enhanced operational efficiency and economies of scale. Upon completion of the acquisition (expected by end-Mar), we understand that a land lease of 66-year tenure will be granted to AREIT. As mentioned in our 11 Mar report, the upfront land premium is not applicable as the annual land rent payable has been waived by the Singapore government.
News factored in; maintain HOLD
We now make minor adjustments to our forecasts to factor in the projected time of completion and reported operating/property details. There is no change to our fair value of S$2.60. At current price level, we believe the acquisition news have been factored in. As such, we maintain HOLD on A-REIT.
A-REIT – OCBC
FIRST ACQUISITION IN THREE QUARTERS
- Raising S$406.4m via placement
- Acquisition yields at around 6%-handle
- Raising FV to S$2.60
Private placement of 160m new units
Ascendas REIT (A-REIT) has raised gross proceeds of ~S$406.4m through a private placement to institutional and other investors last Friday. The number of new units to be issued was up-sized from 140m units to 160m units (7.1% of total units outstanding) due to positive market demand. Issue price was fixed near the upper end of the indicative price range of S$2.50-S$2.55 at S$2.54 apiece. This represents a 35.1% premium to A-REIT’s NAV and a slight 4.2% discount to the last transacted price in its units. An advanced distribution of 2.70 S cents is expected to be paid on 25 Apr.
Proceeds to be used mostly for acquisitions
Management intends to use 31.0% (S$126.0m) of the gross proceeds to fund the potential acquisition of a property within Singapore Science Park II, another 66.4% (S$270.0m) to partially fund the potential acquisition of an integrated industrial mixed-use property at Kallang Avenue (currently under construction; value expected at ~S$490.0m), and the remaining amount for issue expenses and corporate/working capital purposes. We note that the upfront land premium introduced by JTC at the start of 2013 does not apply to both the Science Park II property (non JTC-leased site) and Kallang Avenue property (part of industrial government land sales). We project the initial NPI yields for both assets to come in at around the 6%-handle, comparable to A-REIT’s implied portfolio yield.
Maintain HOLD on valuation grounds
A-REIT anticipates its aggregate leverage to increase slightly from 32.8% as at 31 Dec 2012 to 34.6%, assuming that the potential acquisitions and committed investments are funded immediately after the placement. However, as the Kallang Avenue property is expected to obtain TOP only around mid-2014, we believe part of the proceeds may be used to repay debt pending its deployment. This is likely to improve its gearing to 30.3%, according to our estimates. We now factor in the proposed acquisitions and placement into our forecasts. This raises our fair value from S$2.43 to S$2.60. However, as A-REIT appears to be fairly priced, we maintain our HOLD rating.
A-REIT – CIMB
Good pricing
AREIT is placing out 140m new units to raise ~S$350m for acquisitions. We like the pricing of its proposed acquisitions and project long-term accretion of 3% on a stabilised basis. Acquisitions continue to reflect management’s disciplined approach.
We lower our FY14 DPU by 3% for dilution and raise FY15 DPU by 3%forcontributions from its acquisitions. Rolling forward our forecasts and with the above accretion, we raise our DDM-based target price (discount rate: 6.7%). Maintain Outperform with catalysts expected from stronger-than-expected rental reversions.
What Happened
AREIT is placing out140m new units to raise gross proceeds of no less than S$350m. The issue price is S$2.50-2.55, implyingFY13 yields of 5.5-5.6% and representing2.1-4.1% discounts to its adjusted VWAP. Proceeds will be used to fund potential acquisitions: i) S$126m for Singapore Science Park II; and ii) S$210m for the partial funding of business space and a white commercial property at Kallang Avenue from PLC8 (a Soilbuild-related entity). The latter is a property under construction which should be completed around mid-2014 with a value of around S$490m.Factoring in the acquisitions and placement, asset leverage should be about 34.6% (39% if the assets are fully debt-funded).
What We Think
We like the acquisitions for their attractive pricing. The placement also appears necessary and AREIT’s good share price YTD has just offered it an opportunity. Acquisition yields from Science Park II are attractive at high 6% while the Kallang Avenue property should have yields of 6%or so upon completion, translating to blended yields of 6.3-6.4%. With these, we project full-year stabilised accretion of 3%, assuming its remaining commitments for Kallang Avenue are funded at 2.0% costs. There will, however, be near-term dilution of 3% in FY13 before the Kallang Avenue property is ready. With this, our FY14 DPU will be flat before growing by+9.5% in FY15.
What You Should Do
We continue to like AREIT for its disciplined approach toa cquisitions. Any share-price weakness on the placement should offer good entry points. Maintain Outperform.
Industrial REITs – DMG
Change in game rule by JTC
Since the beginning of the year, JTC has indicated that property funds, such as REITs, have to pay land premium upfront for all industrial buildings acquisitions from sellers on JTC-leased sites, instead of paying in terms of a monthly land rental. Through this change in rule, REITs will have to set aside a sum of capital for the payment of upfront land premium; thus essentially raising the acquisition costs of industrial buildings. Having said that, we expect some of the REITs to counter this measure via i) lower acquisition price on the property to make up for the upfront land premium and/or ii) requesting the seller of the property to pay a higher leaseback rental to compensate for the land premium having been paid (i.e., a double net versus a triple net rental). Although the long term impact of this change in policy remains to be seen, we believe there will be pressure in the industrial property prices and rentals in the short term.
Minimal change expected to tenants expenditure. Before the change in policy, tenants of industrial properties have been paying the land rental through triple-net tenant agreements. We expect tenants that lease space in newly acquired industrial buildings will have to pay a higher rental rate to make up for the upfront land premium. However, on a net basis, there is little difference in the total amount of rental expenses incurred by tenants, as the amount previously paid for land rental in a triple-net tenant agreements forms part of the new double-net tenant agreements.
REITs may find it trickier to buy new properties. With the change in this policy, industrial REITs will be facing a hurdle in terms of future acquisitions as the capital involved in buying new properties rise. As REITs try to crawl back or offset a portion of these upfront charges (whether through lump sum pro rata basis or discount in acquisition price), there is a likelihood that building owners may choose to sell their buildings to industrialists since it is possible that they can sell the property at a higher price (given that industrialists can continue to pay a monthly land rental under the new policy). In our view, we believe this option to be limited to i) smaller buildings, as industrialists are unlikely to buy over a larger property than they require; ii) when owners of the buildings do not seek to sell and lease back the property for their own use.
Impact of change in policy may not be all bad. After the change in policy, REIT managers will have to factor in the additional capital expenditure into the IRR for any acquisitions. In our view, as long as the IRR can meet each REIT’s requirement, REITs will continue to acquire buildings; particularly on the back of low interest rate and relative ease in financing. In addition, although paying the land premium upfront may translate to a higher initial acquisition cost, this may prove to be cheaper in the long run as land rent paid on a monthly basis are subjected to a 5.5% annual escalation cap. Lastly, it is important to note that this change in policy do not affect BTS projects that some REITs plan to undertake this year.