Ascendas REIT - DBS Vickers 2015-09-21: A serious contender in Australia


A serious contender in Australia 

 Acquiring A$1.01bn logistics portfolio in Australia. 
 3.0%-3.5% uplift to DPU ; further earnings diversification. 
 Upgrade to BUY on valuations, TP raised to S$2.45. 

8th largest industrial landlord in Australia. 

  • Ascendas REIT is proposing to acquire a portfolio of 26 logistics properties in Australia for A$1,013m (S$1.013m, based on AUD-SGD exchange rate of 1.0) from the real estate arm of GIC and Frasers Property Australia Pty Limited through their controlled subsidiaries/ affiliates. This represents a 6.6% premium above the open market value as per JLL. 
  • The purchase consideration implies an initial yield of 6.4% (6.0% after transaction costs) which appears tight but we believe is a reflection of the portfolio’s young property age, prime location and quality tenant profile, which are mainly 3PLs and end users and lastly, a long WALE of 6.1 years. 
  • Upon completion of this deal, A-REIT will benefit immediately through having operational scale and earnings, and tenant diversity. With average rental escalations of 3.3% p.a., A-REIT is able to derive steady earnings growth in the medium term. 

3% DPU accretion assumed (vs guidance of 3.0%-3.5%) helped by attractive funding rates. 

  • A-REIT intends to fund the acquisition through a mix of debt and new perpetual securities (60%:40% ratio); the latter is likely to be opportunistic, given the current appetite for yield in the capital markets. We assume debt funding cost of 3.5% and a coupon of 5.0% for the perpetual securities, which we believe are attractive. 
  • While returns from this acquisition is likely to be stable, upside will be driven by the Manager’s ability to raise occupancy (94.4% currently) from completion of discussions for 4 leases totalling 28k sqm of space, which could add another 0.2ppt to returns. 
  • In addition, we believe that a stabilisation in the current low AUD-SGD exchange rate will further enhance returns in the medium term. 

Upgrade to BUY, TP raised to S$2.45. 

  • We see value emerging after recent stock retracement. While the market may frown on the prospects of A-REIT losing its pure-Singapore play status with this acquisition, we believe in the execution ability of the Manager and that the Manager will maintain a conservative stance towards forex hedging with overseas exposure (expected to be growing faster than SG) will be limited to within 20%-30% of its portfolio. 
  • With total returns of >15%, we upgrade A-REIT to BUY on a higher TP of S$2.45 as we factor in this acquisition.

Derek Tan DBS Vickers | Rachael TAN DBS Vickers | http://www.dbsvickers.com/ 2015-09-21
DBS Vickers Analyst Report BUY Upgrade HOLD 2.45 Up 2.30