ASCENDAS REAL ESTATE INV TRUST (SGX:A17U)
Ascendas REIT - Business Parks Make Good Business
- The proposed acquisition of 30 business park properties - 28 in the US and 2 in Singapore - will expand exposure to business & science parks from 33% to 42% of portfolio valuation, and overseas markets from 21% to 28%. We assume that the proposed acquisition will be completed in Dec 19 and have factored in the impact of the rights issue.
- We forecast DPU of 16.0 S cents for 2020 (revised down 2.4%) and 16.7 S cents for 2021 (unchanged).
- Upgrade to BUY. Target price: S$3.25.
WHAT’S NEW
Acquiring high-quality business park properties in the US and Singapore.
- Ascendas REIT (SGX:A17U) has proposed to acquire 28 business park properties in the US (located in top-10 tech-cities of Raleigh, San Diego and Portland) and two business park properties in Singapore (Nucleos and FM Global Centre located in biomedical R&D hub of Biopolis) from wholly-owned entities of sponsor CapitaLand (SGX:C31) at S$1.66b. See Ascendas REIT Announcements; Ascendas REIT Latest News.
Growth from technology and life science in the US.
- Raleigh (5 properties) is the capital city of North Carolina and its Research Triangle is one of the largest life science hubs in the east coast.
- San Diego (8 properties) is the second largest city in California and a key hub for wireless, life science and defence industries.
- Portland (15 properties) is the largest city in Oregon and houses the global headquarters for Nike and Columbia Sportwear and design centres for Adidas, Under Armour and Mizuno. The supply under construction in Raleigh, San Diego and Portland is benign and largely pre-committed.
- Majority leases for the 28 US properties are tripe net leases with 2.5-4.0% annual escalation. All US properties sit on freehold land. NPI yield for the US properties is 6.4%.
Growth from R&D activities in Singapore.
- The weighted average land lease to expiry for the two Singapore properties is 56.7 years (Nucleos: 52 years, FM Global Centre: 73 years). Nucleos is located near one-north MRT station and Buona Vista MRT station. Its tenants include DuPont and Takeda. The lease expiry for FM Global Centre is more than 25 years. Tenant FM Global is a US-based property insurance company.
- NPI yield for the Singapore properties is 6.7%.
Enlarging scale in business parks.
- The acquisition will increase investments in business & science parks by 46%, and expand exposure from 33% to 42% of portfolio valuation. Exposure to freehold properties will expand from 21.6% to 29% of portfolio valuation. Exposure to overseas markets will increase from 21% to 28% of portfolio valuation (UK: 6%, US: 10% and Australia: 12%).
- Ascendas REIT has a Singapore-centric strategy and intends to have overseas properties in developed markets account for 30-40% of portfolio valuations over time.
Acquisition is DPU accretive.
- Assuming an 60% equity 40% debt mix, the acquisition will increase pro forma FY18 DPU by 3% and NAV/share by 3.3%. Aggregate leverage is expected to increase marginally from 36.3% to 36.7%.
- The acquisition is subject to approval from unitholders to be held on 27 Nov 19.
STOCK IMPACT
Launches rights issue.
- Ascendas REIT has launched a rights issue of 498m rights units at the rights ratio of 16 rights units for every 100 existing units of AREIT to raise gross proceeds of S$1,310m (net proceeds at S$1,295m after deducting related issue cost of S$15m). The rights issue allows existing unitholders to participate in the equity fund raising or monetise their right entitlements.
- The sponsor CapitaLand intends to subscribe for its pro-rata entitlement so as to maintain its stake at 19%, while the balance of the rights issue will be fully underwritten by banks. The remaining acquisition cost will be funded by loan facilities of S$394m.
- The equity fund raising (EFR) funded 76% of the total acquisition cost of S$1,705.7m.
EARNINGS REVISION/RISK
- We assume the proposed acquisition will be completed in Dec 19 and have factored in the impact of the rights issue. We forecast DPU of 16.0 S cents for 2020 (revised down by 2.4%) and 16.7 S cents for 2021 (unchanged). See Ascendas REIT Dividend History.
VALUATION/RECOMMENDATION
- Upgrade to BUY. Our target price of S$3.25 is based on DDM (required rate of return: 6.0%, terminal growth: 1.0%). See Ascendas REIT Share Price; Ascendas REIT Target Price.
- Ascendas REIT's share price has corrected 8.3% from its recent peak in early September (adjusted for rights issue).
SHARE PRICE CATALYST
- Resiliency from business parks and high-specifications industrial segments.
- Contributions from development projects and AEIs.
Jonathan KOH CFA
UOB Kay Hian Research
|
Peihao LOKE
UOB Kay Hian
|
https://research.uobkayhian.com/
2019-11-11
SGX Stock
Analyst Report
3.25
DOWN
3.280
