Ascendas REIT - OCBC Investment 2020-11-10: Proposed Acquisitions And More To Come


Ascendas REIT - Proposed Acquisitions And More To Come

  • Proposed acquisition of two office buildings in San Francisco.
  • Potential acquisitions of data centre portfolio acquisition in Europe and suburban office in Australia.
  • Equity fund raising exercising to raise S$1.2b.

Initial NPI yield of 4.9% for two proposed office acquisitions in San Francisco

  • Ascendas REIT (SGX:A17U) has proposed the acquisition of two freehold Class A office properties located in San Francisco’s South of Market (SoMa) in the US. The first property is located at 510 Townsend Street, and is 100% leased to Stripe, the third most valuable start-up in the US, with a WALE of 7.0 years. The second is located at 505 Brannan Street and is fully leased to Pinterest with a WALE of 12.4 years.
  • Given the long WALEs of the two properties with no termination clauses, we believe this would mitigate any concerns of the impact and trend of employees working from home.
  • The aggregate purchase consideration amounts to US$560.2m (~S$784.3m), and this translates into a decent initial NPI yield of 4.9% (pre-transaction costs). San Francisco’s SoMa is the epicentre of the city’s technology industry, and is expected to benefit from the expected increase in tech employment.
  • Vacancy rates are also tight, as SoMa’s Class A office market has maintained an average occupancy rate of 96.5% since 2Q13.
  • While market rental rates have declined 3-5% year-to-date because of the COVID-19 pandemic, we understand that the two properties are currently under-rented by ~15%, and both leases also have built-in annual rental escalations of 2-3%.

Potential acquisitions in Europe and Australia

  • Besides the proposed acquisitions in the US, Ascendas REIT also announced that it is currently in negotiations for
    1. a potential acquisition of a portfolio of data centres in Europe. If successful, this would increase AREIT’s data centre AUM exposure from 4% to 10%;
    2. a suburban office property located in an established business precinct in a prime Tier-1 city in Australia.
  • Taking these into account, Ascendas REIT announced an equity fund raising exercise to raise gross proceeds of S$1.2b, comprising S$800m from a private placement, and S$400m from a preferential offering. The expected discounts from Ascendas REIT’s last closing price would be 2.2-5.1% and 4.4- 7.2%, respectively.
  • Based on an illustrative issuance price of S$3.05, and that S$390m, S$614m and S$180m of the gross proceeds would be used to fund the US, Europe and Australia acquisitions, respectively, the estimated DPU accretion would be 2-2.5%.

Benefits of having a wide geographical footprint

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2020-11-10
SGX Stock Analyst Report BUY MAINTAIN BUY 3.920 SAME 3.920