Ascendas REIT - Our Top Pick In The Industrial Segment
- 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 amidst a challenging industrial market.
- We are also positive on its strategic moves of divesting its China properties and increasing Australia exposure.
- Despite headwinds facing Singapore’s industrial sector, we expect it to post positive rental reversions of 2-5% in FY17F.
- AREIT is our Top Pick, offering a good proxy to the favourable business park segment. Maintain BUY, with a SGD2.65 TP.
Recent science park acquisition demonstrates Ascendas REIT’s (AREIT) superiority.
- AREIT announced recently 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 the following:
- The properties are newly-completed buildings with long underlying weighted average lease expiry (WALE) periods of 16.5 years;
- Triple net-leases with in-built rental escalations of 2.2-2.5% pa;
- They are DPU-accretive and further increase AREIT’s exposure to the 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 acquisitions despite cyclical challenges facing Singapore’s industrial sector.
Strategic re-allocation of overseas assets is a positive move.
- During 2016, AREIT divested all of its three industrial properties in China. The properties were divested above book value despite challenges (especially in Tier-2 and Tier-3 cities) in China’s industrial property segment.
- Management has also increased exposure to Australian industrial properties, which currently account for nearly 13% of its portfolio. We think this is a good opportunistic move by the REIT as Australian assets provide 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 allow it to engage in favourable yield- accretive acquisitions in future.
Tail-end of its single-tenant to multi-tenant buildings conversion cycle.
- Only 4.3% of its Singapore portfolio consists of single-tenant user buildings, which are due for renewal in the next three years. We believe AREIT's Singapore portfolio is at the tail-end of the conversion cycle. 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 FY17F. Nearly 43%/42% of expiring leases in FY17F-18F (for its Singapore portfolio) are in the business and science park segments, which we are positive on. This should mitigate the slight negative rental reversions expected in the REIT’s logistics and warehouse segments.
Maintain BUY with a TP of SGD2.65.
- Our DDM-derived TP is based on a CoE of 7.5% and TG of 1.5%.
- AREIT offers a FY17F dividend yield of 6.6% at its current levels.