A-REIT : BT

Published August 5, 2005 in BT

A-Reit manager refutes talk it overpaid for assets
It says disclosures adequate for investors to form own judgement

(SINGAPORE) The manager of Ascendas Real Estate Investment Trust (A-Reit) yesterday refuted market comments that the trust has been overpaying for its asset acquisitions and then leasing back buildings to sellers at higher-than-market rents.

In the market, these are called sale-and-leaseback deals. And A-Reit suggested one reason why its purchase price and rentals for such deals are seen to be higher than market values. Its deals, said A-Reit, often comprise not only the real estate but also equipment like automated storage and retrieval systems (ASRS) in the case of logistics facilities.

ASRS allow the tenant to make full use of their space, by stacking goods right up to the ceiling. 'Given these features, we can achieve a 10 per cent higher per square foot monthly rental for such space compared with conventional warehouse space rental of $1 to $1.20 psf,' said Ascendas-MGM Funds Management CEO Tan Ser Ping. On account of this, A-Reit would pay the vendor a higher price and in return, the Reit is able to command a higher rental from leasing back both the property and ASRS to the seller.

Mr Tan also emphasised yesterday in an e-mail response to BT's queries that to minimise the business risks from such sale and lease-back (SLB) deals, Ascendas-MGM has stringent evaluation criteria.

'We look at the location and quality of the property, as well as building specifications. It's important that the building isn't highly specialised so that it will allow for alternative uses by other tenants if the existing one vacates,' he said. A-Reit also evaluates the credit-worthiness of the SLB tenant and typically requires either security deposits or bankers' guarantees for up to 24 months from the tenant, Mr Tan noted. 'In fact, there have been instances where we rejected investment opportunities on grounds that we were not comfortable with the credit-worthiness and long-term sustainability of the proposed tenant's business, but were subsequently picked up by another investor,' he added.

A-Reit has come under scrutiny following Temasek chief executive Ho Ching's speech last week, in which she warned investors of the potential hazards in the Singapore Reit market. Without naming any Reit, she pointed, among other things, to the potential dangers when a Reit manager agrees to buy assets at highly inflated prices and the seller or vendor agrees to lease back the asset, also at inflated rents which are well above market rates. Such an arrangement enables both buyer and seller to meet their respective financial targets, but may prove dangerous to Reit unit holders. Said Ms Ho: 'Imagine what happens if the economy takes a nose dive, and the troubled vendor goes belly up. The trust manager would have to scramble to find replacement tenants. Rentals would realistically be much lower than the previously inflated level. 'The unit holders would be hit with a drop in distribution yield. The value of the asset in the trust will similarly take a serious beating.'

Not everyone is convinced with A-Reit's answers yesterday. 'The point about getting a higher price and rent because of the ASRS is, I think, a red herring. How many properties in A-Reit's total portfolio have ASRS?' said a seasoned industry observer. He may have a point. An Ascendas-MGM Funds spokeswoman told BT that it had only two logistics assets with ASRS. The trust's portfolio also includes light industrial, high-tech and business park space.

Industry sources told BT that A-Reit bought IDS Logistics Corporate HQ, TT International Tradepark, C&P Logistics Hub, Fedex Building and 7 Changi South at prices ranging from $140 to $217 psf of net lettable area. This represents premiums of 75 to 97 per cent above the current replacement costs of the buildings.

A veteran property valuer told BT an ASRS system in a logistics facility would account for about 5 per cent of the facility's real estate value. So that would not account for the big spread between A-Reit's purchase price of the assets and the buildings' replacement costs. 'Perhaps they are counting on property rental and capital values appreciating in the future. So it depends on the view you take of the market,' he suggested.

In a similar vein, Ascendas-MGM's Mr Tan said: 'Price and value are essentially based on business judgement on a willing buyer, willing seller basis. 'Price at a point in time is one's perception of not only the current intrinsic value of an asset, but more importantly, also of its future potential. 'Every asset has a price. The questions are: Where is the benchmark, and what is the right price? 'We've acquired some income-producing investment properties at prices which we think represent fair value based on our investment criteria and assessment of the market.' At the end of the day, it's up to investors to decide whether they want to invest in A-Reit. 'We are very transparent and our disclosures are certainly adequate for discerning investors to evaluate and form their own judgement on our performance,' said Mr Tan.

A-Reit has delivered total returns to unitholders of 192 per cent since its listing in November 2002. This comprises 166 per cent from capital gains from appreciation of A-Reit's unit price, and another 26 per cent from distributions paid out to unitholders. Its property portfolio has increased from eight properties worth about $607 million at listing to 44 worth $2.3 billion.

Comments - BT shifts focus fm Suntec to A-REIT. Time to monitor A-REIT price and pick up bargains when the yield hits above 5%. Based on the latest quarter DPU, that would be $2.37. I started to buy today at $2.38.

A-REIT is in the midst of new acquisitions which should bring their yield up even further. Based on recent SGX announcements, they'd done a new revaluation (higher) of their existing properties which shld be a precursor to increasing their debts for the new acquisitions. So, either they are planning the new acquisitions without issuing new shares or likely, issuing fewer new units.

Disclaimer : The above is just my opinion, do not rely on it to make your investment decisions