Ascendas REIT: Mild dilution; sturdier balance sheet

Private placement to raise S$302m. A-REIT has announced a private placement for 185m new units at an issue price between S$1.63 and S$1.70 per unit to raise at least S$301.6m. The issue price range represents a 4% to 8% discount to VWAP on 7 Aug 09. Price target of S$1.72 remains, but stock downgraded to NEUTRAL (from BUY) given recent price rise. Our DDM-backed fair value is based on a cost-of-equity of 8.7% and 1.5% terminal growth rate.

58% of proceeds to fund SingTel BTS. A-REIT plans to utilize S$175.4m of the gross proceeds to fund the development of the hi-tech built-to-suit facility for SingTel. In May 09, A-REIT secured from SingTel the purchase of a site at Kim Chuan Road for the development of a 9-storey Built-To- Suit (BTS) hi-tech industrial building. SingTel will lease the entire property for an initial tenure of 20 years with annual rental escalation and an option to renew for another 10 years. The project is slated for completion in 1QCY10. Total development cost (incl. land cost, construction cost, electrical and mechanical enhancements) is S$175.4m, implying S$496/sqft for the 353,727 sqft GFA site. The remaining S$120.6m or 40% will be used partly or wholly fund potential acquisition of income-producing properties and built-to-suit development opportunities in the pipeline.

Mild DPU dilution but sturdier balance sheet with leverage below 30%. Pending the deployment of the net proceeds (totaling S$296m) to repay debt facilities, A-REIT’s gearing is expected to decline from S$1.64b to S$1.35b, resulting in the decline in leverage to 29.3% from 35.7%. We estimate annual interest expense savings of S$11m (~3.75% interest cost) on the back of a 10.9% increase in new units. The overall ramification from the placement works out to be mildly DPU dilutive of 0.3% to 5.6% between FY10-13. Stock currently trades at FY10 yields of 7.5%. We advise investors not to accumulate at current levels.

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