Ascendas REIT - RHB Invest 2017-09-26: Another Accretive Acquisition “Down Under”

Ascendas REIT - RHB Invest 2017-09-26: Another Accretive Acquisition “Down Under” ASCENDAS REAL ESTATE INV TRUST A17U.SI

Ascendas REIT - Another Accretive Acquisition “Down Under”

  • A-REIT’s accretive acquisition of CBD fringe office property is in line with management’s strategy of increasing its exposure to quality freehold assets in Australia. 
  • The asset’s NPI yield of 7.1% is superior to its existing portfolio yield and also comes with in-built rent escalation of 3-4% pa. Post transaction, the gearing remains comfortable (< 35%) offering more room for yield accretive acquisitions. 
  • We continue to like A-REIT for its efficient capital recycling strategy, favourable business park exposure and nimble management. 
  • A-REIT is our Top Pick among big-cap REITs. Maintain BUY with Target Price of SGD 2.90 (9% upside). 

What is new? 

Acquisition of central business district (CBD) fringe office property in Queensland. 

  • Ascendas REIT (A-REIT) announced acquisition of No. 100 Wickham Street (100WS), Fortitude Valley, in Queensland, Australia, from 100W Pty Ltd. 
  • The total purchase consideration including acquisition fees, stamp duty and other transaction cost is AUD83.8m (SGD90.3m). 
  • The freehold property is a 14-storey CBD fringe office building with 2-levels of basement car park and it has a total lettable floor area of 13,131 sqm. 100WS is located 450m from Brisbane’s CBD and offers an excellent transport connectivity.

Our view 

Accretive acquisition with an in-built rent escalation. 

  • The property offers an underlying net property income (NPI) yield (post- transaction cost) of 7.1% higher than A-REIT’s (FY17) portfolio yield of 6.2%. 
  • The acquisition is DPU accretive with a FY17 (pro-forma) accretion of a 0.3% yield, based on a 60%/40% equity and debt funding structure. In addition, there is an in-built rent escalation of 3% - 4% pa which would further enhance the yield.
  • Fully occupied by quality tenants which include the State of Queensland (Department of Health) and three data centre operators who, in our view, are sticky in nature and thus providing earnings stability. 
  • The property’s weighted average lease to expiry (WALE) of 4.8 years is also higher than portfolio’s WALE of 4.3 years. 
  • Post transaction, the sub-urban office (Australia) would account for about 3% of its total assets (currently 2%).

Increasingly favourable Australian exposure. 

  • Post acquisition, the exposure to Australia accounts for 15% of A-REIT’s total asset value. Brisbane would become the second biggest market in its Australia portfolio accounting with about 26% of its asset value of SGD 1.4bn. Other key markets are Sydney (47%) and Melbourne (24%). 
  • We like A-REIT’s strategy of increasing exposure to Australia as the assets are mainly freehold in nature, provide stability with their triple net lease structure and have in-built annual rental escalations.

Gearing remains comfortable at 34.4%. 

  • The transaction is fully funded from debt and internal resources. A-REIT still has a headroom of c.SGD1bn for additional acquisitions (assuming a comfortable gearing of 40%).

Our Top Pick among big-cap REITs, maintain BUY, with an unchanged TP of SGD2.90. 

  • We may further adjust our earnings post discussion with management. Our DDM-derived TP is based on a cost of equity (COE) of 7.1% and terminal growth (TG) of 1.5%. 
  • A-REIT is our Top Pick in the industrial sector and offers a good proxy to the favourable business park segment in Singapore. 
  • The stock currently offers FY18F -19F yields of 5.9%/6.0% respectively.

Vijay Natarajan RHB Invest | http://www.rhbinvest.com.sg/ 2017-09-26
RHB Invest SGX Stock Analyst Report BUY Maintain BUY 2.900 Same 2.900