A-Reit raises $317 million on the back of yet another acquisition

Singapore-listed Ascendas Real Estate Investment Trust, better known as A-Reit, late Thursday raised S$400 million ($317 million) from a placement of new units. The money will be partly used to fund its two latest acquisitions, partly to cover planned enhancements to its existing properties and to fund the construction of a built-to-suit logistics facility.

The most recent acquisition – two seven-storey science park buildings located in Singapore’s biomedical research hub Biopolis – was announced after the market closed on Wednesday and will cost A-Reit S$125.6 million. The addition of the Neuros & Immunos properties to its portfolio will be marginally accretive straight off – the acquisition would have added 0.03 Singapore cents to the dividend per unit for the fiscal year to March 2010 -- but according to a source they are estimated to add significantly to A-Reit’s distributable income by 2013.

Hence, the acquisition was well-received and investors, including existing A-Reit unitholders, were happy to participate in the new issue as well. According to an A-Reit statement, the deal was two-and-a-half times covered and attracted 77 investors.

The initial demand came primarily from hedge funds, but once the bookrunner had convinced the management to open the deal to on-shore US investors, the number of long-only funds increased significantly and in the end they accounted for about 60% of the demand. The US buyers included funds specialising in the real estate and Reit sectors and their participation allowed the price to be pushed above the mid-point, resulting in a yield of about 7%.

Aside from the attractive yield and the potential growth promised by the recent acquisitions, investors were also drawn to the offering because an approximate 10% increase in A-Reit’s net asset value resulting from an annual revaluation of its property assets, which was announced in connection with the placement. A-Reit, which focuses on the operation of industrial and business properties, said its NAV per unit at the end of December had increased to S$1.73 from S$1.57 thanks to the revaluation of its portfolio.

The trust offered up to 209.425 million new units at a price between S$1.91 and S$1.96, which translated into a discount between 3.9% and 6.4% versus Wednesday’s closing price of S$2.04. The trust was suspended from trading on Thursday to carry out the placement.

After about 12 hours of bookbuilding, the final price was fixed at S$1.94 for a 4.9% discount versus the latest close, a 5.3% discount versus Wednesday’s volume-weighted average price, or a 3.5% discount versus the adjusted VWAP of S$2.0113. The latter is adjusted to take account of a dividend of 3.69 cents per unit that will be paid to existing unitholders on April 11. The investors buying into A-Reit through the placement will not be entitled to that dividend.

Since A-Reit set out to raise no more than S$400 million, the decision to price above the bottom of the range meant it didn’t need to sell the maximum number of units. The final deal size comprised 206.186 million units, which corresponded to 11% of the existing share capital.

In addition to the strong demand from long-only funds, the deal also attracted a lot of interest from private banks, who are looking at Reits as an alternative to the high-yield bonds that they have been strong buyers of in the past year. A key selling point for Reits is the fact that they pay out virtually all of their distributable income as dividends, making them interesting for investors focusing primarily on yield. They also have quite stable revenues and their unit prices tend to be less volatile than other stocks.

However, the Singapore Reit sector has been under pressure this year amid expectations of rising interest rates. Still, A-Reit has rebounded slightly after hitting a 2011 low of S$1.89 on March 18. Before Thursday’s placement, it was down 6.8% from the high of S$2.19 in mid-January, but flat for the year so far.

The unit price also held up well on Friday following the placement, falling only 2% to S$2.00, as the revaluation gains would have partly compensated for the dilution. The issue of additional units should also help improve the liquidity in the trust, A-Reit noted in its announcement of the deal.

Another positive for the trust is that the placement will result in a slight reduction in its gearing levels to 30.1% from 34.7%, which will improve its financial flexibility with regard to the funding of future acquisitions.

In a ratings note issued on Thursday, Moody’s associate analyst Alvin Tan noted that the ratings agency “views positively A-Reit’s use of equity to fund its expansion”. The company is currently negotiating the acquisition of a portfolio of properties, which is expected to be concluded within the next three to six months. “Assuming that the potential S$200 million acquisition is fully debt funded, debt/total assets will remain below 40%, (which is) still in line with its current A3 corporate family rating,” the Moody’s note said, adding that the outlook on A-Reit’s rating remains stable.

While A-Reit didn’t do a full roadshow ahead of the placement, the management did two calls with investors in Asia and in US/Europe to present the Neuros & Immunos acquisition and to answer questions about its portfolio revaluation and its growth plans outside Singapore, including China. Prior to this latest acquisition, A-Reit had a portfolio of 92 properties in Singapore with a total value of S$4.9 billion ($3.9 billion).

In February it also announced that it has agreed to buy a business property in Shanghai’s Pudong district for S$117.6 million, marking its first investment in China. The acquisition was described as “a yield accretive investment with potential for capital appreciation”.

Meanwhile, Neuros & Immunos is being acquired from a subsidiary of its ultimate sponsor, the Ascendas Group. The two buildings have multiple tenants and are 100% occupied. The purchase price is equal to the valuations carried out by Jones Lang LaSalle and CB Richard Ellis. Biopolis is a research hub focusing on biomedical sciences that is located within a 200-hectare government-initiated development in central Singapore that is intended to house research facilities and business parks to support the growth within biomedical sciences, infocomm technology, media, physical sciences and engineering.

The placement was arranged by Citi.

Photo provided by AFP.