ASCENDAS REAL ESTATE INV TRUST (SGX:A17U)
Ascendas REIT - Building Yet Another Platform
- Ascendas REIT's 2QFY19 DPU +2.3% y-o-y.
- Proposed acquisitions in US and SG.
- Enlarged scale and strong long-term prospects.
2QFY19 results in-line with our expectations
- ASCENDAS REIT (SGX:A17U)’s 2QFY19 results met our expectations. Gross revenue and NPI increased 5.3% and 12.0% y-o-y to S$229.6m and S$177.9m, respectively, while DPU grew 2.3% y-o-y to 3.978 S cents. See Ascendas REIT Announcements.
- 1H19 DPU rose 1.2% to 7.983 S cents and formed 48.9% of our full-year forecast. See Ascendas REIT Dividend History.
- Rental reversions were robust at +4.0% in 2QFY19 for Ascendas REIT’s Singapore portfolio.
Penetrating the US business park market
- More notably, Ascendas REIT separately announced the proposed acquisition of a portfolio of 28 business park properties in the US and two business park/science park properties in Singapore from its sponsor CapitaLand (SGX:C31). The total purchase consideration is ~S$1.66b, which translates into a pre-cost NPI yield of 6.5% (6.4% for US and 6.7% for Singapore). This would mark Ascendas REIT’s maiden entry into the US market.
- Although there are uncertainties over the penetration into a new market, we like the fact that majority of the US property leases have annual rental step-ups of 2.5- 4%. The properties are also under-rented by 10-15%, leaving room for potential positive rental reversions in the future.
Mildly positive on transaction
- Management intends to partially fund the proposed acquisitions partially with debt and partially with a renounceable rights issue to raise gross proceeds of S$1.31b (16 rights for every 100 existing units at S$2.63 per unit, or 17% and 15% discount to its last closing price and theoretical ex-rights price prior to the announcement). The expected pro forma FY19 DPU and NAV accretion is +0.6% and +3.3%, respectively, while aggregate leverage is expected to decline from 36.3% to 34.6%.
- We are slightly surprised and disappointed at the equity funding structure, as we believe Ascendas REIT might be better off doing a placement and preferential offering exercise to extract more value (higher DPU and NAV accretion) given the still strong demand for good quality REIT equity offerings.
- That said, we do acknowledge that a rights issue does give existing unitholders the opportunity to participate in this accretive deal at a steeper discount than a preferential offering.
- After adjustments (incorporating this and other prior acquisitions) and also raising our terminal growth rate assumption from 1.5% to 2% to account for Ascendas REIT’s larger diversified platforms in four key markets and enhanced longer-term growth potential from the enlarged CapitaLand-Ascendas-Singbridge entity, we raise our fair value estimate from S$2.98 to S$3.25. See Ascendas REIT Share Price; Ascendas REIT Target Price.
- HOLD.
OCBC Research Team
OCBC Investment Research
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https://www.iocbc.com/
2019-11-04
SGX Stock
Analyst Report
3.25
UP
2.980
