Ascendas REIT - RHB Invest 2019-11-04: Making Its Foray Into The US


Ascendas REIT - Making Its Foray Into The US

  • Maintain NEUTRAL and SGD3.00 Target Price 5% downside. See Ascendas REIT Share Price; Ascendas REIT Target Price.
  • Ascendas REIT’s acquisition of 30 business parks in the US (28) and Singapore (two) is a positive move, with benefits including greater income/tenant diversification, organic rent growth, and increase in freehold assets. Our only concern is potential tenant dropout on the back of rising trade tensions.
  • We maintain our call for now on valuation grounds (1.15x P/BV) – we have yet to factor in the acquisition as the deal is pending unitholders’ approval.

Taking a big leap into the US market.

  • Ascendas REIT (SGX:A17U) announced the proposed acquisition of 30 business parks (28 in US, two in Singapore) for a total purchase price of SGD1.66bn from its sponsor. The 28 properties in the US are spread across tech-driven markets of San Diego (eight assets, 45% of US portfolio value), Raleigh (five, 32% of total) and Portland (15), priced at a total of SGD1.28bn. The US portfolio occupancy stands at 93.7%, and acquisition NPI yields of 6.4% (higher than portfolio yield of 5.8%). See Ascendas REIT Announcements.
  • In addition, Ascendas REIT will also be acquiring two business parks in Singapore – Nucleos (7% NPI yield) and FM Global Centre (5.7% NPI yield) for SGD380m.
  • The sizeable acquisition will give Ascendas REIT an immediate scale in the US market making it the third largest of its portfolio accounting for c.10% of total asset value (Singapore – 72%, Australia -12%, and the UK – 6%).
  • In the long term Ascendas REIT noted that it will remain Singapore-centric with overseas portfolio accounting for 30-40%.The transaction is subject to unitholders’ approval in the upcoming EGM.

Key merits.

  • The acquisition comes at a time when many SREITs are entering or deepening their US presence owing to reasonably high yields, freehold assets and built in rent escalations. Over 80% of its leases for its US portfolio have built-in rent escalation of 2.5-4%.
  • Post-acquisition, Ascendas REIT’s exposure to business parks should increase to 42% from 33%, which we believe is its forte. Portfolio Weighted Average Lease expiry (WALE) should also increase slightly to 4.1 years from 4.0 years. Ascendas REIT is likely to also benefit from tenant diversification and an increase in its exposure to financial, technology and medical sectors.

Deal accretive to NAV and DPU; to raise SGD1.3bn from rights issue.

  • In conjunction with acquisition, Ascendas REIT will be raising SGD1.3bn via a rights issue at SGD2.63/share (15% discount to TERP). Management noted that it chose this exercise due to the large deal size and to allow participation of all unitholders. The remaining amount will be funded by a combination of debt (predominantly onshore US debt). See Ascendas REIT Announcements.
  • Despite a high proportion of equity funding (76%), the deal should be accretive to pro-forma DPU yield and NAV by 3%.
  • Post-acquisition, gearing also ought to be reduced from 36.3% to 34.6% providing more than SGD 1bn in debt headroom for acquisitions.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-11-04
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