Ascendas REIT - OCBC Investment 2017-01-06: Deepening its science park presence

ASCENDAS REAL ESTATE INV TRUST A17U.SI

Ascendas REIT - Deepening its science park presence

Ascendas REIT (A-REIT) recently proposed to acquire the leasehold interest in the property located at 12, 14 and 16 Science Park Drive from its sponsor.
The property comprises three builtto-suit Science Park buildings held under a single land title. Two of the buildings are leased to DSO National Laboratories, Singapore’s national defence research & development organisation, while the third building is leased to DNV GL Singapore Pte Ltd, a Norwegian risk management company, for its South East Asia regional headquarters. The purchase consideration of S$420m comes in below the two independent valuations of S$428.8m and S$430.0m.
Including acquisition fees, stamp duties and other professional fees, the total acquisition cost is estimated to be S$437.5m. Of this, the acquisition fee (S$4.2m) would be funded by the issue of units, S$100m would be satisfied by the issue of Consideration Units to the vendor and the balance would likely be debt funded.

We are positive on this transaction as it would boost A-REIT’s portfolio WALE to 4.4 years from 3.7 years and the triple-net leases also have weighted built-in rental escalations of 2.2% to 2.5% per annum. The property is expected to generate a NPI yield of approximately 6.3% (before acquisition costs) and 6.0% (post-acquisition costs) in the first year of ownership.
In addition, we believe demand and supply dynamics for the Science Park segment (classified under Business Park category by URA) are relatively more positive within the industrial sector.
According to statistics from the URA, out of the 3.0m sqm of upcoming industrial supply from 4Q16 to end 2017, only ~0.6% will be contributed by business parks.

Maintain BUY on A-REIT, but with a higher fair value estimate of S$2.72 (previously S$2.67) as we raise our FY18 DPU forecast by 1.9%.
We find current valuations attractive, as its blended forward FY17/18F distribution yield of 6.8% is approximately 0.7 standard deviations above its 5-year average of 6.5%.

Andy Wong Teck Ching CFA OCBC Investment | http://www.ocbcresearch.com/ 2017-01-06

OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 2.72 Up 2.670