Ascendas REIT - Our Preferred Pick In The Industrial Space
- AREIT’s recent DPU accretive acquisition of a science park building with a long WALE and rental escalations once again demonstrates its ability to grow amid a challenging industrial market.
- We are also positive on its strategic moves of divesting its China properties and increasing Australia exposure.
- Despite SG industrial sector headwinds, we expect it to post positive rental reversions of 2-5% in FY17.
- AREIT is our Top Pick offering a good proxy to the favourable business park segment. Maintain BUY with a slightly higher SGD2.65 TP (from SGD2.63, 10% upside).
Recent Science Park acquisition demonstrates
- Ascendas REIT’s (AREIT) superiority. AREIT last week announced the acquisition of the DSO National Laboratories buildings and DNV GL Technology Centre from sponsor Ascendas Land for SGD437.5m (including fees and transaction costs). The acquisition stands out amid a challenging industrial market due to: i. The properties are newly completed building with long underlying weighted average lease expiry (WALE) of 16.5 years; ii. Triple net-leases with in-built rental escalations of 2.2-2.5% pa; iii. DPU accretive and further increases AREIT’s exposure to favourable Business And Science Park segments.
- We believe AREIT with its strong sponsor, operational track record and market leader position would continue to grow and enhance yields through such acquisition despite cyclical challenges facing the SG industrial sector.
Strategic re-allocation of overseas assets a positive move.
- During current calendar year, AREIT divested all of its three industrial properties in China. The properties were divested well above book value and is positive amid current challenges (especially in Tier-2 and Tier-3 cities) in China’s industrial property segment.
- On the other hand management has increased its exposure to Australian industrial properties, which currently accounts for nearly 13% of its portfolio. We think this is a good opportunistic move by the REIT as Australian assets provides stability, with their triple net lease structure and a built-in annual rental escalation of 3-4% pa. The high cap rates (~7%) of Australian industrial properties also allows it favourable yield accretive acquisitions in future.
Tail-end of its single-tenant to multi-tenant buildings conversion cycle.
- Only a mere 4.3% of its SG Portfolio constitutes single tenant users buildings for renewal in next three years.
- Increasingly, we believe AREIT's SG portfolio is at the tail-end of conversion cycle and thus we do not expect this to drag its EBIT margins and rents.
Rental reversions to remain positive in FY17.
- Despite the challenging industrial climate we are expecting positive rental reversions of 2-5% for FY17. Nearly 43%/42% of expiring leases in SG FY17/18 are in Business And Science Park segments, which we are positive on and should mitigate the slight negative rental reversions expected in the Logistics and Warehouse segments.
Still the best proxy to Business Parks; Maintain BUY with a slightly higher TP of SGD 2.65.
- We have revised up our FY17/18F DPU estimates by 2-5% factoring in contributions from AREIT’s recent acquisitions.
- Our DDM-derived TP is adjusted accordingly (COE - 7.5%, TG 1.5%)