Ascendas REIT - UOB Kay Hian 2021-03-18: Enlarging Scale In Fast-Growing Co-Location Markets In Europe

ASCENDAS REAL ESTATE INV TRUST (SGX:A17U)

Ascendas REIT - Enlarging Scale In Fast-Growing Co-Location Markets In Europe

The acquisition of 11 data centres in Europe has injected new dimension for growth with exposure to data centres expanding from 4% to 10% of Ascendas REIT's AUM. London, Amsterdam and Paris are key co-location markets in Europe with vacancy rates projected to fall due to strong take-up for co-location data centres. The expansion increases tenant base, asset type and geographical diversification.
Ascendas REIT provides a resilient distribution yield of 5.4% for FY22. Maintain BUY with target price at S$3.82.

Ascendas REIT (SGX:A17U) has acquired 11 data centres located across the UK (four), Netherlands (three), France (three) and Switzerland (one) from vendor Digital Realty Trust for S$904.6m. The acquisition provides an initial net property income (NPI) yield of 6%.

9 data centres, representing 93% of the acquired portfolio's assets under management (AUM), are located in London, Amsterdam and Paris, which are the top co-location data centre markets in Europe. These three co-location markets have a combined size of 1,383MW as of 31 Dec 20. They are located close to large population centres and have good connectivity and infrastructure.
According to CBRE, the take-up of co-location data centres has outstripped new supply across the FLAP markets (Frankfurt, London, Amsterdam and Paris). The FLAP markets’ vacancy rate has improved from 21% in 2019 to 19% in 2020 and is expected to fall further to 17% in 2021, driven by strong demand as companies accelerate digital transformation and increase their consumption of cloud services.

Ascendas REIT currently owns three data centres in Singapore. The acquisition would expand Ascendas REIT's exposure to the fast-growing data centre market from 4% to 10% of AUM. The exposure to UK/Europe would expand from 6% to 12% of AUM.
Data centres in Europe are expected to benefit from data sovereignty laws, as companies would store data within Europe to serve the large domestic markets. 67% of the AUM is located on freehold land.

The 11 data centres have a high occupancy rate of 97.9%. It has 14 established tenants, including HSBC, Entserv UK, Bouygues Telecom, British Telecom, Equinix, euNetworks Data Centre and various IT services providers. The portfolio has a long WALE of 4.6 years by rental income. 83% of the leases by rental income have embedded annual rent escalations of 1-3% per year.
58% of the portfolio by rental income is leased on a triple net basis where all property outgoings, such as maintenance, tax and insurance, are borne by the tenants. The remaining 42% are co-location data centres.

The acquisition of 11 data centres in Europe has injected a new dimension of growth for Ascendas REIT. There is room for asset enhancements for the 11 data centres via:
- repositioning some powered shell data centres into co-location data centres, and
- converting ancillary office space into data halls.

Ascendas REIT has deleveraged and lowered its aggregate leverage by 2.1ppt q-o-q to 32.8% in 4Q20 after completing a private placement and preferential offering to raise S$1.2b in Nov and Dec 20. It has completed the equity fund raising ahead of acquisition and our existing forecasts have already factored in the full dilution from private placement and preferential offering. Thus, we have assumed that the acquisition is fully funded by additional borrowings.
Management expects the cost of debt to be below 2%.

We raised our Ascendas REIT's 2022 DPU forecast by 4.1% after factoring in full-year contributions from the acquisition of the 11 data centres in Europe.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-03-18

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