Ascott Reit raises $453m from private placement

ASCOTT Residence Trust (Ascott Reit) has concluded one part of its equity fund-raising exercise, collecting $453.2 million from a private placement of 419.7 million new units.

The new units were priced at $1.08 apiece – at the lower end of the $1.07-$1.13 range indicated on Monday.

Of the 419.7 million new units placed out, 203.2 million went to CapitaLand, parent of the Reit’s sponsor The Ascott Ltd.

The remaining 216.5 million units for institutional and other investors were three times subscribed. Demand came from investors in Asia, Australia and Europe.

The placement has enabled Ascott Reit to enlarge its institutional investor base, said Lim Jit Poh, chairman of Ascott Residence Trust Management Ltd, the Reit’s manager. The new units are expected to start trading on Sept 22 at 2pm.

The second part of the equity fund-raising exercise involves a non-renounceable preferential offering that could raise $72.6 million. Ascott Reit will issue 67.9 million new units at $1.07 each – at the lower end of the indicated $1.07-$1.11 range. The offer, on the basis of one new unit for every 10 existing ones, opens on Sept 24 and closes on Sept 30.

CapitaLand will subscribe for new units in the preferential offering. This, together with the subscribed 203.2 million placement units, will enable it to maintain its pre-preferential offering stake of 47.74 per cent in the Reit.

Ascott Reit units, in which trading was halted on Tuesday, resumed trading yesterday, closing two cents up at $1.17 on a ‘cum trading’ basis. Today is the last day of the cum trading for the preferential offering and an advance distribution (estimated at 1.6 cents per existing unit), which the trust manager intends to declare in conjunction with the equity fund-raising.

The entire equity fund-raising exercise could bring Ascott Reit $525.8 million – to part-fund its $969.6 million purchase of 28 service residence properties in Europe and Asia from The Ascott Ltd.

According to Reuters yesterday, UOB-Kay Hian has maintained its ‘buy’ rating and share price forecast of $1.40 for Ascott Reit.

Equity Fund Raising Completed

• The placement tranche, comprising 419.66 mln units, has been priced at $1.08 a unit. This compares with:

– the indicative range of $1.07-1.13 as per the offer document;

– $1.15 that management had used for illustration when announcing the major deal with CapitaLand on Aug 20th; and

– $1.07 for the 1-for-10 non-renounceable preferential offering, comprising 67.858 mln units, to existing unit-holders.

• The discount to the last traded price is 6-7%.

• This: pricing and discount, is fair given:

– the 1.5x subscription rate, taking into account the 203.168 mln shares taken up by CapitaLand to maintain its percentage holding at 47.74% (3x excluding CapitaLand’s); and

– the estimated 1.6 cents DPU only the existing units would be entitled to for the period starting from July 1st to Oct 7th, the issuance date of the new units.

• The new units will commence trading on Friday Oct 8th.

• Although the news is likely “neutral” to ART’s unit price, we are maintaining our BUY call.

Ascott Reit to raise up to $550m from new units

ASCOTT Residence Trust (Ascott Reit) is looking to raise up to $549.5 million by issuing 487.5 million new units.

It lodged its offer information statement with the Monetary Authority of Singapore yesterday, after getting unitholders’ approval for the equity fund-raising exercise early this month.

There are two parts to the exercise. Ascott Reit will issue 67.9 million new units at $1.07-$1.11 apiece through a non-renounceable preferential offering. Unitholders stand to receive one new unit for every 10 existing ones held.

The trust closed unchanged at $1.15 yesterday. Based on this price, the preferential offering issue price carries a discount of 3.5-7.0 per cent.

Ascott Reit will also issue 419.7 million new units at $1.07-1.13 each in a private placement to institutional and other investors.

Based on the range of issue prices indicated, Ascott Reit could raise $521.6 million to $549.5 million in total. Credit Suisse and DBS Bank, the joint lead managers, bookrunners and underwriters, will determine the final issue prices after a book-building process.

Ascott Reit is seeking funds to support the purchase of 28 properties in Europe and Asia from its sponsor, The Ascott Limited. The latter is CapitaLand’s service residence arm.

Apart from issuing new units, Ascott Reit also plans to take on more debt to fund the acquisition.

Doubling Asset Base & Going Beyond Asia; Raise PT

Raise PT on reduced earnings volatility: ART on Friday announced the acquisition of 28 serviced residence properties from sponsor The Ascott Limited (TAL) valued at S$1.2bn (S$0.8bn net of debt and current assets). Management plans to fund this via divestment of Ascott Beijing to TAL; proposed equity fund raising of ~S$561mn; and S$116mn in debt financing. If completed, we see improved earnings stability from diversification into Europe and from greater earnings contribution from master leases and guaranteed income contracts. We believe the resulting value accretion more than offsets the dilution from lower growth properties in Europe. We lower our growth assumptions and adjust WACC by -0.75% to account for reduced growth but improved stability in the earnings profile, lowering 2010/11/12e DPU by 7%/6%/7% and raising ART’s PT by 10% to S$1.30.

Asset base doubles: In an environment where acquisition opportunities are few, we like that ART has managed to double its asset base, and believe that the growth in scale has clear benefits on visibility and investibility of the stock. Retaining a pipeline of up to 5,900 serviced residence units in Asia, and expanding the right-of-first-refusal grant to include Europe, sponsor TAL also continues to show support by undertaking its 47.7% pro-rata share of the share offering, and we expect the overhang of dilution to be limited.

Investment thesis: We maintain our Equal-weight weighting on ART. While variable income is largely derived from Asia, providing positive exposure to Asian growth, ART’s new fixed income base is substantial. Furthermore, marginal earnings accretion despite the scale of the transaction and the impending equity raising could also cap any near term positivity in sentiment.

Extending its geographical footprint

Event

• ART announced the proposed acquisition of a S$1.39bn portfolio of 28 Asian and European assets from sponsor The Ascott Limited (Ascott), doubling its portfolio from S$1.59bn to S$2.85bn. With this transaction, ART transforms to an International REIT from a Pan-Asian one previously, becoming the sixth largest SREIT by asset size. Maintain Neutral.

Impact

• Divests Ascott Beijing to unlock value, part fund acquisition. ART will divest Ascott Beijing at S$301.8m (66% above June valuation) to Ascott, with net proceeds of S$168.7m to part fund the acquisition. The estimated gain from the divestment is ~S$106.2m. The balance consideration less assumed debt, minority interests and intra-group debt set-off, will be funded by an equity fund raising of~S$560.5m and S$116.3m in debt.

• Equity fund-raising; CapitaLand to maintain a 47.7% proportionate stake. ART is to issue 487.5m units (78.7% of current asset base) comprising a nonrenounceable preferential offering and a placement, with ultimate parent CapitaLand undertaking to maintain its 47.7% proportionate stake. ART’s free float will increase by 73% to S$665.3m, improving liquidity. Gearing post transaction is not expected to be higher than the current 40.7%.

• Income stability increases. The 26 European assets are subject to master lease or guaranteed income management agreements, and will increase ART’s proportion of EBITDA under such arrangements to 47.2% from 3.9%. The weighted average lease term (WALE) to expiry of these arrangements is about 8 years, and will extend portfolio WALE to 2 years, from 7 months previously.

• Key risks are credit and currency. In acquiring the European assets under their master lease/guaranteed income arrangements, ART is essentially taking on the credit risk of ultimate parent CapitaLand, which we view as very low given its strong financial position. A weakening of the EUR and GBP may impact ART negatively, though management could hedge partially the income from Europe to mitigate this risk. In the past, ART has managed its forex exposure well and earnings have not been significantly impacted by forex movements.

Earnings and target price revision

• No change. Based on our estimates, FY11 DPU accretion is ~2%. Our DCF valuation is estimated to rise marginally to S$1.22 from S$1.20 after the equity fund raising.

Price catalyst

• 12-month price target: S$1.20 based on a DCF methodology.

• Catalyst: The potential acquisition of more Pan-Asian assets in its sponsor’s pipeline of ~S$1.2bn under development.

Action and recommendation

• The negative initial reaction to the proposed transaction as proxied by the 5% fall in ART’s share price suggests investors are concerned by the increase in exposure to Europe. Given that the DPU accretion from the deal is not significant on our estimates, we remain Neutral and prefer parent CapitaLand or retail REITs such as CapitaMall Trust.