Ascendas REIT - DBS Research 2020-09-24: Shifting To Higher Gear

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ASCENDAS REAL ESTATE INV TRUST (SGX:A17U)

Ascendas REIT - Shifting To Higher Gear

• Acceleration in DPU growth to drive Ascendas REIT's share price rally.
• Acquisition momentum reactivated, more to come as the REIT looks to diversify its earnings base.
• Redevelopment of science park an interesting prospect that is overlooked by the market.
• Attractive yield compared to peers; BUY!

Underperformance in share price is unwarranted.

• Ascendas REIT's share price is up 8% year to date but is noted to have underperformed its industrial large-cap S-REIT peers by 15%. We believe this is unwarranted given its similar growth profile of 3-12% compared to peers, coupled with an attractive acquisition pipeline that will continue to propel its earnings growth going forward.

What are investors missing?

• Ascendas REIT (SGX:A17U) is trading at an implied cap rate of c.4.6%, which positions Ascendas REIT in a virtuous growth cycle where it can acquire accretively. This ability to deliver upside in earnings is not appreciated by the market at current prices.
• We believe that investors are also not pricing in the potential upside from the redevelopment and repositioning of its older science park properties (c.20% of its asset value), which brings about accretion in net asset values (NAVs) and income when executed upon.

Restarting its growth engines.

• We believe the COVID-19 pandemic has opened up opportunities for Ascendas REIT to continue to grow its footprint, and diversifying its exposures and resilience against future economic downcycles. The manager has delivered on its strategy to deepen its presence in overseas markets - UK and Australia.

Proposed acquisition of a “green” suburban office building in Macquarie Park, on track to meet our estimates.

• Ascendas REIT continues to deepen its presence in Australia through the proposed acquisition of a suburban office property (MQX4) under development located in 1 Giffnock Avenue, Macquarie Park Sydney for A$167.2m (S$161.0m).
• MQX4 is located within the heart of Macquarie Park Innovation District and is within 100m to the metro station. The developer of the property is a joint venture between Frasers Property Industrial and Winten Property Group. The property will offer 19,384 sqm of NLA (17,752 sqm of offices and 1,631sqm of retail space) over nine storeys (ground floor retail and eight storeys of office space). The property is targeted to achieve 6 Star Green Star Design and 5.5 Star NABERS Energy rating, and is expected to complete in mid-2022.

Cash consideration and returns in line with market transactions.

• Total cash consideration is estimated to be A$166.0m after accounting for coupon received (5.75% on progressive payment over construction period). The first year NPI yield is estimated to be 6.1%, which is derived based on the rental guarantee provided by the developers on the vacant space.
• We view the acquisition positively as it fits Ascendas REIT’s strategy of gaining a foothold within the suburban office space in Australia, whose property attributes are similar to the Business Parks in Singapore.
• Rents within Macquarie Park provide an attractive alternative to CBD space and are 60% cheaper than Sydney CBD. The park is also home to many multinational companies in the pharmaceutical, technology and electronics industry. While the targeted yield of 6.1% is higher than the recently announced acquisition by Keppel REIT (SGX:K71U) within the same park (5.25% yield for Pinnacle Office Park, see Keppel REIT Announcements), the difference could be due to leasing risks that Ascendas REIT will have to undertake upon completion of both its office and retail spaces. On a psm basis, both deals are transacted at fairly close numbers with Ascendas REIT’s being a notch lower.

Acquisitions a key share price driver to watch.

• In our analysis of the various factors driving share price, we found a close correlation between share price and DPU growth, which shows that investors are willing to accord a tighter yield for the stock. Ascendas REIT has continued to deliver and there is a possibility of beating our estimates.
• We believe that the sponsor’s pipeline of business parks in Singapore is an attractive prospect, given the long tenures and growing tenant base. We estimate an acquisition value of up to S$1.0bn that may be available for injection in the medium term.

Offering an FY21F yield of 5.0%

• See Ascendas REIT Share Price; Ascendas REIT Target Price; Ascendas REIT Analyst Reports; Ascendas REIT Dividend History; Ascendas REIT Announcements; Ascendas REIT Latest News. 
• Offering an FY21F yield of 5.0%, Ascendas REIT is trading at the industrial S-REIT sector’s mean of 4.8%, which we believe to be attractive.
• Growth in DPU is projected to be c.8.3% in FY21, driven by a mix of rebase in income (ex rental rebates) coupled with contributions from assumed acquisitions.
• On an absolute DPU basis, Ascendas REIT and its peers are projected to deliver DPUs that are 1.5-4.5% higher than pre-COVID levels, which implies that their premiums to NAVs can be maintained over time.

Derek TAN DBS Group Research | Dale LAI DBS Research | https://www.dbsvickers.com/ 2020-09-24

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