Ascendas REIT - CIMB Securities 2015-09-21: Maiden venture into Australia


Ascendas REIT Maiden venture into Australia 

  • Becomes Australia’s 8th largest logistics property owner with A$1.013bn acquisition. 
  • Well located (within 40km of the central business districts), with strong tenant base including blue chip names. 
  • To be funded via 60/40 combination of onshore debt and perpetual securities. 
  • Visible, sustainable organic growth from longer blended WALE, built-in rental escalation and room for GFA expansion. 
  • Upgrade from Hold to Add with revised DDM-based target price of S$2.57 . 

Maiden foray into Australian logistics properties market 

  • A-REIT is proposing to acquire A$1.013bn worth of prime grade logistics properties in Australia from vendors GIC and Frasers Property Australia. The portfolio comprises 26 properties with 603,946sm GFA spread across Sydney (33% of GFA), Melbourne (42%), Brisbane and Perth (25%). 
  • The portfolio is 94.4% occupied, with WALE of 6.1 years. All the properties are located within 40km of the respective central business districts. The portfolio has quality tenants such as Wesfarmers, CEVA Logistics, Nestle and Linfox. 

Acquisition NPI yield of 6.4% 

  • The purchase price of A$1.013bn (total cost A$1.073bn) is at a 6.6% premium over independent valuation and translates into 6.4% post-tax NPI yield. 
  • It will be funded by a combination of onshore debt (60%) and perpetual securities (40%). This will increase the group’s net gearing from 34.7% to 37.3%. A-REIT intends to keep its aggregate leverage ratio below 40%. The trust also plans to hedge the net cash flow from this portfolio. 

Extending reach and diversification, with visible organic growth 

  • The acquisition propels A-REIT to the eighth-largest logistics property owner in the country and gives it strong foothold in a deep and mature market with strong population growth, rising consumption and a well-organised logistics sector. 
  • Market occupancy is also expected to stay high, given low incoming supply. 
  • The deal will diversify A-REIT’s portfolio (14% of asset value located overseas), provide sustainable income with longer blended WALE of four years and inbuilt 3.3% pa rental escalation structure. 

Further earnings uplift from occupancy and GFA expansion 

  • There is also potential for further earnings upside from boosting occupancy to 98.3%, when the 62 Stradbroke St property is leased. Furthermore, there is room to enhance portfolio GFA by 28,430sm (c.5%) in the medium term, should existing tenants exercise the option of expanding their floor space. 

Upgrade from Hold to Add 

  • We raise FY16 and FY17 DPU by 1.9-5.5% on acquisition accretion, based on an assumed interest cost of 4.5% for the perpetual securities. We view A-REIT’s transaction positively, as this provides the trust with scale and a platform to expand through partnerships with real estate partners in Australia. 
  • Our revised DDM-backed target price of S$2.57 (cost of equity raised to 8%) offers potential upside of 15%.

LOCK Mun Yee CIMB Securities | http://research.itradecimb.com/ 2015-09-21
CIMB Securities Analyst Report ADD Upgrade HOLD 2.57 Up 2.52