Ascendas REIT - CIMB Research 2016-12-06: Increasing exposure in business and science parks

ASCENDAS REAL ESTATE INV TRUST A17U.SI

Ascendas REIT - Increasing exposure in business and science parks

AREIT has proposed to acquire three build-to-suit buildings at Singapore Science Park 1 for S$420m or 6.3% initial NPI yield (6% post-acquisition cost).
Acquisition is expected to be DPU-accretive. We raise FY3/17-19F DPU by 0.2- 0.8%, assuming S$100m equity funding and remaining amount from internal funds. Post-acquisition, we expect gearing to increase to 36.5%.
AREIT’s WALE would improve from 3.7 years to 4.4 years, with Singapore business and science parks comprising 36% of its AUM (previously 33%).

We are positive on the acquisition but maintain Hold due to limited share price upside potential.

AREIT has proposed to acquire three build-to-suit buildings at Singapore Science Park 1 (comprising two DSO National Laboratories buildings and DNV GL Technology Centre) from the sponsor for S$420m. This translates into an initial NPI yield of 6.3% (vs. FY16 NPI yield of 5.8%) or 6% if we include the S$17.5m associated acquisition cost. DSO is Singapore’s national defence R&D organisation and DNV is a Norwegian risk management company. The buildings have a weighted average age of two years.

Subject to unitholders’ approval, AREIT plans for S$100m of purchase consideration to be paid in the form of new units to the vendor. The issue price will be determined by 10- day VWAP starting on the first day of Ex-date.
Factoring in this S$100m equity funding and the remainder from internal funds/borrowings, we raise our FY17-19F DPU by 0.2- 0.8%. We assume the acquisition will be completed by 4QFY17F.
We expect gearing to rise to 36.5% (including divestment of AREIT City @ Jinqiao) from 34.2% as at 1HFY17.

Post-Jingqiao divestment, we estimate the acquisition will add 2.5% (78.9k sq m) to AREIT’s NLA or 13.8% to NLA of its Singapore business and science parks. The purchase would expand AUM by 4.5%. The buildings are fully leased to DSO and DNV, and have a WALE of 16.5 years with weighted average built-in step-up of 2.2-2.5% p.a.
Post-acquisition, we estimate AREIT’s portfolio WALE will improve from 3.7 years to 4.4 years, with Singapore business and science parks comprising 36% of AUM (from 33%).

We are positive on AREIT’s increased exposure to higher value-added activities and the long lease expiries of the acquisition. However, we maintain Hold on the stock due to limited share price upside potential.
Our DDM-based target price is nudged up slightly to S$2.25 on the back of higher DPUs.
At this juncture, upside/downside risks mainly stem from interest rate outlook.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2016-12-06

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 2.25 Up 2.23