Ascendas REIT - Phillip Securities 2018-07-30: Maiden Entry Into UK

Ascendas REIT - Phillip Securities Research 2018-07-30: Maiden Entry Into Uk ASCENDAS REAL ESTATE INV TRUST SGX:A17U

Ascendas REIT - Maiden Entry Into Uk

  • Maiden entry into UK through a portfolio of 12 logistics properties.
  • Acquisition cost of £207.27 mn (S$373.15 mn) expected to be fully funded by GBP- denominated debt.
  • Maintain ACCUMULATE; new target price of $2.96 (previously $2.91).

What is the news?

  • Ascendas REIT is expanding its footprint beyond Asia and Australia, through the proposed acquisition of a portfolio of 12 logistics properties in the UK. The properties will be acquired from two third-party vendors for £207.27 million (S$373.15 million). Completion is expected to take place in 3Q 2018. DPU accretion is expected to be about 0.194 cents, assuming acquisition is fully-funded by debt.

~ SGinvestors.io ~ Where SG investors share

How do we view this?

The Positives

Income visibility from UK portfolio with long WALE of 14.6 years.

  • This extends A-Reit's overall WALE from 4.2 years to 4.4 years (as at 31 March 2018). The first lease expiry in the UK portfolio is three years' time, in FY21/22. The quality of the tenants in the portfolio also mitigates credit risk.

Geographical and income diversification of overall portfolio with limited country risk.

  • Geographical diversification into the UK will increase investment in overseas markets from 15% to 17% by asset value, and overseas revenue from 13% to 15%. There will also be more quality tenants in diversified industries. 
  • The UK has a similar risk profile to Singapore and Australia; and the depth of the UK market provides scalability.

Strengthening of overall portfolio by increasing exposure to freehold properties.

  • 10 of the 12 properties are freehold, and the remaining two are virtual freehold (999 years leasehold). This increases A-Reit's exposure to freehold properties to 19% from 16% by asset value. 
  • In view of the freehold nature of the properties, we think that the lower NPI yield of ~5.2% for the UK portfolio, compared to the existing A-Reit yield of ~6.2% is reasonable.

The Negatives

A property (Unit 3, Brookfields, Rotherham) is currently vacant.

  • The tenant had vacated the space, but there is a 2-year rental top-up in place which will be deducted upfront from the purchase consideration.

Gearing increases to 36.1% from 34.4%.

  • With the acquisition expected to be fully- funded by debt, we estimate new debt headroom of S$700 mn, from existing S$1.0 bn. However, the GBP-denominated debt act as a natural hedge to the GBP assets. 
  • The cost of GBP-denominated debt will be between 2.6% and 2.8% for a five-year tenor – lower than existing all-in debt cost of 2.9% as at 31 March.

Maintain ACCUMULATE; new target price of $2.96 (previously $2.91)

  • We have adjusted our forecast to include the acquisition. Our FY19e/FY20e gross revenue is 1.5%/2.3% higher than previous, and DPU is 1.8%/2.1% higher than previous. 
  • We expect a stable ~6% yield and our target price gives an implied 1.39 times FY19e forward P/NAV multiple.

Richard Leow CFA Phillip Securities Research | https://www.stocksbnb.com/ 2018-07-30
SGX Stock Analyst Report ACCUMULATE Maintain ACCUMULATE 2.960 Up 2.910