ART – Macquarie
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.
ART – CIMB
Transformational acquisition
• Maintain Outperform. ART is acquiring 28 serviced-residence properties primarily in Europe at an enterprise value of S$1,394.7m from its sponsor, Ascott Group. Separately, it will be divesting Ascott Beijing for S$301.8m. With this, ART’s asset size will almost double to S$2.85bn and its Asian asset allocation will shrink to 55% from 100%. The acquisition will be funded by divestment proceeds, equity fundraising and debt financing. We anticipate moderate DPU dilution of 2-4% for FY11, to be compensated by increased stability for rental income and higher investor interest as the free float would increase by about 73%. However, we are neutral on the acquisitions due to increased forex risks in Europe and uncertainties in the degree of dilution for minority shareholders from the private placement. We maintain our DPU estimates, DDM-based target price of S$1.35 (discount rate 8.3%) and Outperform rating pending an EGM on 9 Sep. More clarity on a hedging of cash flows from Europe and unit issuance could provide catalysts for the stock, in our opinion.
• Expect stable contributions from Europe. Management will be taking on a triple net master lease or minimum rent lease structure for its European portfolio to counter risks of shorter stays in Europe, which are typically under one month. The lease tenures of the acquisitions will range between six and 19 years with the master tenant being ART’s sponsor, the Ascott Group.
ART – Lim and Tan
A Leaf From FCT / CDLHT
• Comments by analysts after Friday’s acquisitions / divestment announcement and picked up by the press, have been neutral at worst, eg ART should have bought more Asian assets (only 2 out of 28 are in Singapore and Hanoi, Vietnam) than European ones (4 in London, 17 in France, and 5 elsewhere in Belgium, Germany and Spain).
• Yet, after the recent euro crisis, that saw the euro drop sharply against major currencies (to a low of S$1.69 on June 7th vs S$2.01 at the start of 2010), we believe buying European assets at this time would appear to be a better bet.
• As noted in our report on Friday, there could be some short term uncertainty, as had been seen at CDL Hospitality and Fraser Centrepoint , which placed out new units after acquiring hotels in Australia; Northpoint and Yew Tee shopping malls respectively.
• These placements had also hit the 2 reits in the short period after the acquisitions / placements, only to rebound after the completion of the capital raising exercises.
• We would expect the same for ART, especially given that the proportion of ART’s ebitda from master leases and guaranteed income management agreements will rise from 4% currently to 47% after the acquisitions.
MLT – BT
MapletreeLog acquires second Korean warehouse
MAPLETREE Logistics Trust (MapletreeLog) is investing $32 million to buy a second warehouse in South Korea.
The company yesterday announced it has signed a conditional sale and purchase agreement with the property’s vendor Multi-Q Logistics.
The purchase consideration is 28 billion won or around $32 million Singapore dollars. This deal is expected to be completed at the end of the current quarter.
If the acquisition is fully funded by debt, MapletreeLog’s gearing level will increase to 44.2 per cent. the firm said.
The company’s latest buy is made up of two blocks of warehouses in South Korea’s Gyeonggi-do province.
The first block is a three-storey warehouse and office facility with a gross floor area (GFA) of around 20,800 square metres (sq m).
The second is a four-storey warehouse with ancillary cold storage facilities. Its GFA is 7,900 sq m, the firm said in a statement.
Under the deal, Multi-Q Logistics will lease back the property for five years at rental prices that provide for annual escalation.
‘Aside from its attractive net property yield, the property has unutilised plot ratio which can add an additional GFA of about 3,800 sq m when utilised. This acquisition continues our building of a stronger foothold in South Korea,’ said MapletreeLog’s chief executive Richard Lai.
This firm’s second acquisition in Korea is also its seventh regional buy since December last year.
To date, MapletreeLog has announced $460 million worth of acquisitions and some $260 million of these have been completed.
ART – BT
ART buys 28 properties from The Ascott
The $969.6m purchase will boost assets by 1.8 times; analysts surprised by size of transaction
ASCOTT Residence Trust (ART) is buying 28 properties from its sponsor, The Ascott Limited, for $969.6 million, and selling one to the latter for $214 million.
With the purchase, ART’s asset size will grow 1.8 times and its reach will stretch past Asia to Europe. But it will be borrowing more and issuing new units – possibly more than half the existing number in issue – to raise over $560 million for the deal.
The sales proceeds will help Ascott, CapitaLand’s service residence arm, in further expansion. The divestment will bring it a net gain of about $52.1 million.
Analysts had mixed reactions to the announcements yesterday morning, made after CapitaLand and ART asked to halt trading in their counters. Many expected ART to buy assets from Ascott, but not so much at a go. ‘What came as a surprise to us was the size and scale of the transaction,’ said OCBC Investment Research analyst Meenal Kumar.
Several also felt that the acquisition, while good for raising ART’s profile, had little impact on its portfolio yield. The purchase is ‘marginally accretive’ but the equity fund-raising will raise ART’s market capitalisation and put it on the radar of more institutional investors, said CIMB analyst Janice Ding.
According to ART, the assets it is buying have an annualised earnings before interest, taxes, depreciation and amortisation yield of 5.7 per cent, exceeding its existing portfolio’s 5.5 per cent.
For CapitaLand, the sale of the assets could be ‘motivated more by desire to grow ART than maximising profit’, according to Standard Chartered’s Regina Lim and Wong Yan Ling in a note.
With the acquisition, ART’s portfolio will grow to $2.85 billion from $1.59 billion, with properties in 23 cities across 12 countries. The trust will gain exposure to Europe – the region will account for some 45 per cent of its total asset value, up from zero.
Of the 28 service residence properties it is buying, 26 are in Europe, across France, the UK, Germany, Belgium and Spain. Just two are in Asia – Somerset Hoa Binh in Vietnam and Citadines Singapore Mount Sophia. Ascott will continue to manage all these assets.
The performance of service residences in key European cities has been stable, said Chong Kee Hiong, CEO of ART’s manager, at a briefing. He noted that occupancy rates reached 95-97 per cent in the last few years even during the financial crisis.
It has been challenging finding a large chain of properties to buy and future purchases are likely to be piecemeal, he added.
ART will hold an extraordinary general meeting on Sept 9 to seek shareholders’ approval for the acquisition, divestment and issue of new units.
The equity fund-raising – comprising a non-renounceable preferential offering to existing unitholders and a private placement – should be completed by year-end. Ascott will subscribe for new units to maintain its 47.7 per cent stake in ART.
Details have not been firmed up but ART suggested that it might raise $560.6 million from placing out 487.5 million new units at an illustrative price of $1.15 apiece. As at Monday, 619.6 million units of ART were in issue.
The illustrative issue price is 4.2 per cent below ART’s closing price of $1.20 yesterday. The counter lost six cents after trading resumed in the afternoon.
ART will also take on more debt, estimated at $116.3 million. On the whole, it does not expect its gearing of 40.7 per cent as at June 30 to rise.
ART’s sale of Ascott Beijing in China to Ascott will provide another source of funds. Home prices in Beijing have been rising and the 310-unit property at Chaoyang would be worth more in a strata-title sale but such a repositioning is not part of ART’s core business, Mr Chong said.
Ascott will realise the best value for Ascott Beijing even if it means converting the property to another use, said the group’s CEO Lim Ming Yan. It is evaluating options, but is likely to refurbish the building before selling it.
The divestment of assets to ART is in line with Ascott’s strategy to recycle capital for investment. Ascott will receive net cash proceeds of some $332 million after the sale, the purchase of Ascott Beijing, and the new unit subscription. It will have a capacity of over $700 million to fund growth, Mr Lim said.
Ascott said early this month that it aims to grow the number of service residence apartments in its portfolio to 40,000 by 2015, up from some 26,000 now.
It no longer owns assets in Europe with the sale to ART but it still holds the title to around 5,200 units in Asia Pacific. These units, together with new ones it buys, will form ART’s acquisition pipeline.
CapitaLand closed unchanged at $4.05 yesterday.