ASCENDAS REAL ESTATE INV TRUST
A17U.SI
Ascendas REIT (AREIT SP) - Scaling It Up Down Under
- A-REIT’s proposed acquisition of 26 Australian logistics properties for an aggregate of S$1.01b marks the REIT’s maiden foray into Australia. The acquisition is expected to be yield accretive through the usage of debt and perpetual securities.
- We note that the move abroad is also a strategic one for management, given the depressed domestic outlook, and is in line with other REITs such as MLT, ART and, most recently, CDREIT.
- Maintain BUY with an unchanged DDM-based target of S$2.62.
WHAT’S NEW
- Ascendas REIT (AREIT) announced on Friday its proposed AS1.01b (approximately S$1.01b) acquisition of 26 industrial properties in Australia from GIC and Frasers Centrepoint. This marks its maiden foray into Australia. The proposed portfolio acquisition is expected to be funded through an approximate 60:40 split of debt and perpetual securities.
STOCK IMPACT
• Acquisition expected to be yield accretive through leverage.
- Taking the expected NPI yield of approximately 6% post transaction cost (6.4% pre-transaction), we estimate the property’s leveraged yield at 10.2% assuming a debt-to-equity split of 80:20 (we treat perps as half debt, half equity).
- Taking into consideration Australia’s hedge costs, we derive a property hedged levered yield of 9.67%, translating into a new hedged yield of 6.96%. This implies a 34bp improvement over its hedged trading yield pre-acquisition.
• Acquisition is in line with management's strategy for overseas markets to account for 20-30% of the portfolio as domestic headwinds loom.
- The transactions extends AREIT’s footprint in Australia to about 11% by asset value and total overseas exposure to 14%. Overall portfolio asset value would also increase by about 13% to approximately S$8.96b.
- We think the move is likely a strategic one as prospects within the domestic industrial sector continue to look gloomy. Management has previously highlighted the increased likelihood of muted rental growth in the near term, citing the challenging domestic leasing environment to contend with.
• Scaling up in Australia almost immediately.
- Post the proposed acquisition of nearly 6.8m sf of industrial space by GFA, AREIT could see its emergence as the 8th largest industrial landlord in Australia, granting it almost immediate scale. This would likely give the REIT possible opportunities in further expansion through local partnerships.
• Management guidance for the perp cost at >4%.
- We understand that including the swap costs, the overall perp cost would be around ~5%. Management has deemed the maiden use of perps as appropriate as this would further diversify their funding sources.
• Transacted price comes at a 6.6% premium to the independent valuation of A$950.64m (S$950.64m) by Jones Lang Lasalle (JLL).
- However, JLL has also opined that taking into consideration past Australian portfolio transactions, a portfolio premium of 7.5-10% above market valuation is line with industry standards. The book value will increase by the agreed transacted price and be subject to annual impairment tests.
• Resultant aggregate leverage to increase by 2.6 ppt from 34.7% to 37.3%, through the combined use of perps and onshore debt.
- The onshore debt to be taken on comes up to A$600m (approximately S$600m) at a borrowing cost below 4%. This leaves AREIT with an estimated S$390.3m in debt headroom to further expand, assuming maximum debt of 40%.
- Management has also highlighted ongoing capital recycling strategies to aid in managing debt headroom. We note AREIT’s recent divestments of both the BBR building and 26 Senoko Way for sale prices of S$13.9m and S$24.8m respectively.
• Operational burden lessened with triple net lease arrangements for most of the lease agreements with existing tenants in the target portfolio.
- As triple net leases require tenants to bear responsibility for statutory outgoings and operational costs ie security, this should ease the REIT’s transition into an untried market. The overall occupancy of the target portfolio in Australia stands at 94.4%.
• Desire to expand A-REIT’s overseas footprint not likely to extend toward its sponsor pipeline’s foreign assets.
- JTC has little else to offer the company apart from incubator warehouses. In addition, management is unlikely to acquire Singbridge assets in China, except perhaps the logistics sector.
- We think there is greater likelihood that AREIT might continue to acquire Science Park assets from its parent Ascendas Group, as in the case of The Kendall. We do not rule out the potential domestic acquisitions of Science Park sites The Aquarius (32,970sf), Fleming/Faraday (114,711sf), Mendel & Maxwell (107,424sf), Chadwick/Curie/Cavendish (221,736sf).
EARNINGS REVISION/RISK
- None. We will adjust our earnings once the perps have been finalised. Key risks include inability to ensure that master tenants occupy 70% of GFA.
VALUATION/RECOMMENDATION
- Maintain BUY with an unchanged target of S$2.62 based on DDM (required rate of return: 6.9%, terminal growth: 1.5%). We will adjust our target price once the perps have been finalised.
SHARE PRICE CATALYST
- Positive rental reversions, filling of vacant space at Aperia.
- BTS and AEI opportunities; yield-accretive acquisitions in the sector.
Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2015-09-21
UOB Kay Hian
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