Ascendas REIT - DBS Research 2016-12-06: Takes three at a go!

Ascendas REIT - DBS Vickers 2016-12-06: Takes three at a go! ASCENDAS REAL ESTATE INV TRUST A17U.SI

Ascendas REIT - Takes three at a go!

  • Proposed value-accretive acquisition of 12, 14 and 16 Science Park Drive.
  • Lengthens REIT’s earnings visibility and protects REIT from downside.
  • Conservative capital management enables REIT to stand tall in the face of rate hikes.



Maintain BUY, TP maintained at S$2.65. 

  • Ascendas REIT (A-REIT) offers attractive yields of close to 6.6% to investors looking for steady returns in the current volatile market. 
  • A low leverage of 35% supports any potential M&A activities which the REIT has the ability and access to deliver on.


Acquisition that ticks the right boxes. 

  • A-REIT continues to deepen its exposure to the Business Parks/Science Parks Space with an acquisition of three properties at a price of S$420m.
  • The acquisition ticks most of the boxes – long lease tenure (16.5 years with annual escalations of 2.0%-2.5%), long unexpired land lease tenure (65.7 years) and offers investors a deeper exposure to a sector (R&D) that continues to grow. 
  • The yield of 6.0% (all-in cost) appears low at first glance but we believe it reflects the properties’ relatively young age (2.0 years) and long land lease tenure. 
  • Accretion is projected to be marginal at 0.5%. We have yet to factor in the acquisition, pending EGM. 


Conservative capital management. 

  • A-REIT stands tall in the face of rising interest rates going into 2017 with a spread-out debt expiry profile of 3.8 years, implying that the REIT does not face any major refinancing in any one year. 
  • The manager adopts a prudent interest rate risk management strategy with a weighted average cost of debt of 3.0% with 78.0% hedged into fixed rates.


Valuation

  • Our DCF-based TP is maintained at S$2.65 as a result of additional contribution from acquisitions. 
  • Maintain BUY on the back of total potential returns of c.15%. 


Key Risks to Our View

  • Interest rate risk. An increase in lending rates will negatively impact dividend distributions. However, A-REIT's strategy has been to actively manage its exposure and it currently has c.70% of its interest cost hedged into fixed rates.




Derek TAN DBS Vickers | Melvin SONG CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2016-12-06
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.65 Up 2.610






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