• Dilutive impact from equity issuance
• Proposed business park property acquisition
• Lower forecasts and FV; keep BUY

Proposed equity financing expected to be dilutive

Ascendas REIT (A-REIT) has proposed an equity fund raising exercise comprising a private placement of 90m new units and a pro-rata and non-renounceable preferential offering of ~93.9m new units on the basis of three new units for every 80 existing units.

The issue price of the private placement was confirmed at S$2.223, which came in at the lower end of its indicative price range of S$2.223 and S$2.29 announced yesterday. This represents a discount of 6.6% to A-REIT’s last closing price prior to its trading halt. The issue price of the preferential offering was set at 0.5 cents lower than the private placement price.

In total, A-REIT would raise gross proceeds of ~S$408.3m. A-REIT also proposed to acquire a business park named One@Changi City located at Changi Business Park. The purchase consideration is S$420m (total acquisition cost of S$438.9m), of which ~S$210m would be satisfied by the issuance of consideration units (CU) to the vendor, which is a 50:50 joint venture between Ascendas Pte Ltd and Frasers Centrepoint Ltd.

The issue price for the CU will be the same as the issue price for the private placement. The remaining S$210m would be funded by proceeds from A-REIT’s equity fund raising exercise. The balance of the proceeds would be largely used to partially fund a potential logistics property acquisition in Australia (~S$82m) and for funding debt repayment and future acquisitions (~S$98.8m).

We take these events into account, and lower our FY16 and FY17 DPU forecasts by 1.3% and 3.2%, respectively, due to the dilutive impact of the equity financing.

Seeking more inorganic growth opportunities

One@Changi City has a high occupancy of 97.1%, as at 30 Sep 2015, and anchor tenants include Credit Suisse and J.P. Morgan. Some positive points of this acquisition is the property’s relatively long WALE of 4.58 years, close proximity to the Expo MRT station and the fact that 92% of the property’s NLA is ~14% below current market rent. One@Changi City is expected to generate a NPI yield of 5.9% (post transaction costs) in the first year.

Maintain BUY; albeit with a lower FV

Following the reduction in our forecasts, we correspondingly lower our fair value estimate from S$2.58 to S$2.50, but maintain our BUY rating.

Source: OCBC Research - 10 Dec 2015