Ascendas REIT - DBS Research 2020-01-10: Looking For Its Next Billion


Ascendas REIT - Looking For Its Next Billion

  • ASCENDAS REIT (SGX:A17U) to remain on the acquisition trail.
  • Recent acquisition of a portfolio of office parks in the US and Singapore accelerates DPU growth.
  • Lower gearing implies higher debt-funded headroom.
  • Look out for potential Singapore-based asset injections in 2020.

Maintain BUY, Target Price raised.

  • ASCENDAS REIT (SGX:A17U) continues to take sizeable steps on the acquisition front, acquiring close to S$2.6bn in new properties over the past two years. While these acquisitions introduced new geographies of UK and US for Ascendas REIT, we believe this diversification will be beneficial to Ascendas REIT in the longer term as it accelerates the REIT’s organic growth profile.
  • Incorporating the recent acquisitions and rights issues, our estimates are adjusted higher. See Ascendas REIT Share Price; Ascendas REIT Target Price.

Investing another billion

  • Ascendas REIT recently completed the acquisition of S$1.8bn worth of properties from its sponsor CAPITALAND (SGX:C31), which propels the group to become the largest S-REIT in Singapore with an asset base of over S$12.8bn. This brings the total acquisition by Ascendas REIT to over S$3.0bn in the past two years.
  • The proposed acquisition comprises 28 office parks located in the US and two business parks properties in Singapore worth US$937.6m (S$1,285.3m @ US$1 to S$1.3708) and S$380m respectively.
  • The combined initial yield (pre-cost) basis for the portfolio is 6.5% with the US portfolio acquired at a c.6.4% yield while the Singapore properties are acquired at 6.7%.

US – Diversifies portfolio earnings

Offers diversification with in-built escalations.

  • The US properties offer diversification to the portfolio and improve the portfolio’s proportion of freehold assets, providing stability to NAV in the longer term. This has been a consistent strategy for the S-REITs, especially the industrial REIT peers which face a shorter land lease tenure of c.30+ years on average when compared to other sub-sectors.
  • With a majority of the leases on triple-net basis with 2.5- 4.0% escalation, this provides improved in-built organic growth for Ascendas REIT in the medium term.

Exposure in “technology hubs”.

  • In terms of NPI, the target assets are split between San Diego (45% of value, 42% of NPI), Raleigh (32% of value, 35% of NPI) and Portland (23% of value, 23% of NPI). These cities are located within the technology corridor in the US where technology and healthcare sectors are seeing an increasingly dominant contribution to the cities’ GDP growth, employment and leasing demand.
  • Underlying occupancy rates at 93.7%, which is high by US standards. We note that among the cities – Portland has the lowest occupancy rate of 88.3%, which the manager intends to work on leasing out the empty space in the coming quarters in order to bring it towards the 90-95% level in the longer term.
  • The strong leasing demand for the cities of Raleigh, Portland and San Diego is expected to result in a 5-6% CAGR in asking rents from 2014-2019F, according to Cushman & Wakefield research.

Quality tenant base.

  • The tenant trade sector breakdown is also weighted heavily towards the Information technology (42.2%) and Medical precision (22.1%) and healthcare (6.0%) sectors. We believe they are seeing structural growth drivers which bode well for Ascendas REIT’s longer-term leasing prospects as expansionary demand will likely remain robust in the medium term.
  • A well-spread expiry of having only c 9% and c.11% of leases expiring in FY20 and FY21 will provide an upside to rentals when they come due.

Singapore Business Parks – Improving Singapore’s core

A young portfolio with modern specifications.

  • The acquisitions of Necleos and FM Global Centre anchor Ascendas REIT’s dominance in the business and science park market in Singapore. Newly completed and located within these hubs and with long land lease tenures of 52 years and 73 years respectively, they improve the REIT’s Singapore core. With this acquisition, the Singapore industrial property portfolio will have 45% of its asset value in the Business & Science Park space.
  • The properties have a long weighed average lease expiry of 6.9 years, pulled up by the 25-year lease to FM Global, the anchor tenant for one of the properties. While there is vacancy at Nucleos, we believe that it can be filled over time given its prime location within the One North precinct.

Revising estimates

  • We update our estimates to account for the fund-raising of S$1,294.8m through a rights issue at S$2.63 unit and additional term loan facilities to fund the target acquisitions. Our DPU estimates are raised marginally to account for this funding structure. Our Target Price is raised. See Ascendas REIT Share Price; Ascendas REIT Target Price.
  • After incorporating the new equity raised, Ascendas REIT’s gearing is reduced to c.35% post deal.
  • Click on view full report button below for complete analysis.

Where is the next billion?

Singapore business park portfolios could be the next target.

  • Looking ahead, we believe that Ascendas REIT will remain on the growth hunt in 2020 and will continue to look to deepen its exposure within its markets of US, UK, Australia and Singapore. The next sizeable acquisition will likely come from Singapore, in our view, with the Sponsor having more than S$1.0bn worth of properties that are generating stable cashflows and may be injected over time.
  • We believe properties like The Galaxis (One North), The Ascent and 5SPD (both at Science Park1) remain near-term opportunities for Ascendas REIT to pursue at an opportune time in the future. These potential acquisitions are quality modern-specification business parks located within the Science Park and One North precinct – and we believe that investors will warm up to them if acquired by Ascendas REIT.
  • See Ascendas REIT Dividend History; Ascendas REIT Announcements; Ascendas REIT Latest News.

Derek TAN DBS Group Research | Singapore Research Team DBS Research | Rachel TAN DBS Research | https://www.dbsvickers.com/ 2020-01-10
SGX Stock Analyst Report BUY MAINTAIN BUY 3.45 UP 3.33