Ascendas REIT - OCBC Research 2015-10-09: Making big waves in Australia

Ascendas REIT - OCBC Research 2015-10-09: Making big waves in Australia ASCENDAS REAL ESTATE INV TRUST ASCENDAS REIT A17U.SI 

Ascendas REIT: Making big waves in Australia 

 Acquiring 26 freehold Australian assets 
 Low single-digit DPU accretion 
 Stock valuations more appealing 

Recent proposed acquisition of Australian logistics portfolio 

  • Ascendas REIT (A-REIT) recently announced its proposal to acquire a portfolio of 26 logistics properties in Australia for a purchase consideration of A$1,013m (~S$1,013m). Out of these 26 properties, nine are located in Melbourne, the largest industrial property market in Australia in terms of land stock, another nine are in Sydney, seven in Brisbane and one in Perth. 
  • All the properties are sitting on freehold land, and total GFA amounts to 630,946 sqm, implying a purchase price of S$1,606 psm GFA. This would be financed with Australia onshore loans and perpetual securities. 
  • Management recently priced S$300m of subordinated perpetual securities at a fixed rate of 4.75%. We estimate A-REIT’s gearing to reach 37.6% post acquisition completion. 

To become the eighth largest industrial landlord in Australia 

  • With an expected first year pre-transaction cost NPI yield of 6.4% (or 6.0% yield post transaction expenses), we opine that the acquisition does not come cheap. However, we see some positives from this deal, as the portfolio’s long WALE (6.1 years) would add stability to A-REIT, while also diversifying its income streams and tenant base. 
  • A-REIT will also adopt the appropriate risk management strategies. The acquisition is expected to propel A-REIT to become the eighth largest industrial landlord in Australia, giving it the scale to benefit from the long-term growth prospects of the ecommerce industry. 

Upgrade to BUY with higher S$2.58 FV 

  • Taking into account this development, we raise our FY16 revenue forecast by 3.1% and DPU estimate by 0.9%. Our revenue and DPU projections for FY17 are increased by a more significant 9.7% and 2.7%, respectively, when a full-year contribution from the portfolio kicks in. Consequently, our DDM-derived fair value estimate is bumped up from S$2.49 to S$2.58. 
  • At current price level, A-REIT is trading at 6.6% FY16F distribution yield. Although this is in-line with its 5-year average forward yield, FY17F distribution yield of 7.0% appears attractive, in our view. On a P/B basis, A-REIT’s FY16F P/B ratio of 1.05x comes in favourably at ~1.5 standard deviations below its 5-year forward mean of 1.19x. 
  • Given an expected potential total return of 17%, we are upgrading A-REIT from ‘Hold’ to BUY.

Wong Teck Ching Andy OCBC Securities | http://www.ocbcresearch.com/ 2015-10-09
OCBC Securities SGX Stock Analyst Report BUY Upgrade HOLD 2.58 Upgrade 2.49