Ascendas REIT - UOB Kay Hian 2015-12-10: Equity fund raising overhang removed

Ascendas REIT - UOB Kay Hian 2015-12-10: Equity fund raising overhang removed ASCENDAS REAL ESTATE INV TRUST ASCENDAS REIT A17U.SI 

Ascendas REIT- Equity fund raising overhang removed. 

  • A-REIT’s equity fund raising on the back of the proposed acquisition of business park One@Changi City removes the overhang on the stock while bringing leverage to more palatable levels to maintain credit ratings. 
  • The acquisition seems more strategic than yield accretive, given the relatively rosier outlook in the business park space amid the gloomy outlook in the industrial sector. 
  • Maintain BUY with a reduced DDM-based target of S$2.64 (from S$2.68). 



WHAT’S NEW 

  • Ascendas REIT (AREIT) announced S$407.9m in equity fund raising on the back of the proposed acquisition of One@Changi City for S$420m (total purchase cost of S$438.9m) from vendor Ascendas Frasers Pte Ltd, a 50:50 JV between parent Ascendas Development Pte Ltd and Frasers Centrepoint Ltd. 
  • The equity fund raising comprises the following: 
    1. Private placement of 90m new units at S$2.223-2.29 each to raise S$200.1m- 206.1m. 
    2. A 3 for 80 rights issue, or 93.7m new shares, at S$2.218-2.285 each to raise S$207.9m-214.2m 
  • Use of Proceeds: 
    1. S$224.7m (55.1% of proceeds) to partially fund the proposed acquisition of One@Changi City. 
    2. S$82.0m (20.1% of proceeds) to partially fund a potential acquisition of a logistics property in Australia. 
    3. S$98.5m (24.1% of proceeds) to be used for debt repayment and future acquisitions. 
  • The proposed acquisition is expected to be funded through a combination of units issued to the vendor (S$210m via 94.5m new units at S$2.223 each) and equity fund raising (S$224.7m). 


STOCK IMPACT 


• Equity fund raising overhang removed, gearing down to 36%. 

  • AREITs S$1.01b acquisition of 26 industrial properties in Australia had raised concern of a dilutive equity fund raising due to the increased gearing of 39.3% as of 30 Nov 15. Taking into account the proposed acquisition and a likely Australian acquisition, aggregate leverage is expected to reach 36.3%.

• Acquisition expected to be marginally yield dilutive in the near term. 

  • Taking the property’s expected NPI yield of about 5.9% against forward trading yields of 6.6% would result in a 1.1% dilution from the acquisition in the near term as the transaction is fully equity funded. However, management has noted a positive DPU accretion of 0.067 cents assuming a 40:60 debt-to-equity funding structure. 

• Purchase consideration of S$420m comes at a 4.1% discount to the average independent valuation...

  • ... of S$437.8m by DTZ and Knight Frank. The property is 97.1% occupied, with anchor tenants including JP Morgan and Credit Suisse. 

• Leveraging on equity market, bringing gearing down. 

  • We reckon the REIT manager has opted to tap on equity as a means to expand debt headroom and safeguard its credit rating. This would leave the REIT manager with about S$611m of potential fresh debt to tap upon for further expansion, assuming a comfortable debt headroom of 40%. Management also highlighted ongoing capital recycling strategies to aid in managing debt headroom. We note AREIT’s recent divestments of the BBR building and 26 Senoko Way at S$13.9m and S$24.8m respectively. 

• Strategic expansion of business park footprint. 

  • The segment remains a bright spot with tighter supply and high pre-commitments. Business parks will comprise 18% of AREIT’s portfolio by asset value post acquisition completion, from its current 14%, and the segment is poised to remain resilient in the face of muted supply and high pre-commitments. 
  • With no incoming supply of business park and science park space from 2017 onwards, we reckon the worst of an oversupply overhang could be behind us in the near term. 
  • The business park segment may also continue to welcome IT firms in the near term before the bulk of the upcoming office supply kicks in come 4Q16. For example, Google and tech heavyweight Microsoft could be venturing towards Mapletree Business City (MBC) and have reportedly signed a lease at MBC Phase II in Alexandra, a business park development by the Mapletree group. 

EARNINGS REVISION/RISK 

  • We trim our FY17 and FY18 DPU estimates by 1.1% and 1.5% respectively to account for the expansion in share base. 
  • Key risks include the inability to ensure master tenants occupy 70% of GFA. 

VALUATION/RECOMMENDATION 

  • Maintain BUY with a reduced target price of S$2.64 (previously S$2.68), based on DDM (required rate of return: 6.9%, terminal growth: 1.5%). 

SHARE PRICE CATALYST 

  • Positive rental reversions, back-filling of vacant space. 
  • BTS and AEI opportunities; yield-accretive acquisitions in the sector.

Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2015-12-10
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.64 Down 2.68


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