ASCENDAS REAL ESTATE INV TRUST (SGX:A17U)
Ascendas REIT - Kick-Starting Redevelopment Of Science Park I Soon
- We expect Ascendas REIT to kick-start the long-awaited redevelopment of Science Park I, starting with the TÜV SÜD PSB Building. Assuming construction costs at S$350psf, average rents at S$5.50psf pm and occupancy rate at 95%, we estimate that the potential redevelopment could provide ROI of about 7.5%. The enhancement to 2022 distributable income is in the range of 1.5-4.6% depending on the plot ratio approved by the authorities.
- Ascendas REIT provides 2022 distribution yield of 5.5%. Re-iterate BUY. Target price: S$3.83.
WHAT’S NEW
Potential redevelopment of TÜV SÜD PSB Building.
- Ascendas REIT (SGX:A17U) plans to redevelop Science Park I in Singapore, starting with the TÜV SÜD PSB Building. The lease with German testing, inspection and certification specialist TÜV SÜD has expired, and the tenant had relocated to International Business Park in early-21. The building contributed gross revenue of S$4.2m in FY20, which represents rental of only S$1.52psf pm.
- The 342,895sf site located next to Kent Ridge MRT Station and National University Hospital has a plot ratio of just 1.2 compared to 3.5-4.0 for nearby One-North business park (within five minutes’ drive). Assuming construction costs at S$350psf, average rents at S$5.50psf pm and occupancy rate at 95%, we estimate that the potential redevelopment could provide ROI of about 7.5%. The enhancement to 2022 distributable income of the property ranges from 1.5-4.6%, depending on the plot ratio approved by the authorities.
Redevelopment of Science Parks I and II a long-term undertaking.
- Besides TÜV SÜD PSB Building, Ascendas REIT owns older buildings Cintech I, II, III & IV (GFA: 582,000sf) and The Rutherford & Oasis (GFA: 292,960sf) at the 30ha Science Park I. Its sponsor CapitaLand (SGX:C31) owns The Chadwick, The Curie and The Cavendish (GFA: 262,550sf), which are located between Ascendas REIT’s buildings. The nine properties sit on a contiguous plot of land along Science Park Drive.
- Ascendas REIT could jointly redevelop Science Park I with sponsor CapitaLand. It is in constant dialogue with relevant government agencies to push ahead with the redevelopment, which is likely to be spread over many phases due to its huge scale.
STOCK IMPACT
Refocusing on expansion in Singapore with acquisition of Galaxis.
- Ascendas REIT has proposed to acquire the remaining 75% stake in Galaxis from sponsor CapitaLand for S$534.4m. The business park property is located above One-North MRT station and within a 15-minute drive from the CBD. Together with its existing 25% stake, Ascendas REIT will have full ownership of Galaxis post-acquisition.
- The acquisition will expand Ascendas REIT’s business & science park portfolio in Singapore by 17.6% to S$4.9b. Its NLA of 655,900sf comprises business park space (73%), office space (17%), retail and F&B space (7%) and work lofts (3%). One-North business park has a large cluster of biomedical and infocom companies. Key tenants include Sea Ltd, Canon and Oracle.
Acquisition largely funded by equity. NPI yield is 5.3% post transaction costs.
- The acquisition is accretive to DPU by 0.4%. NAV per unit would increase 0.9% to S$2.23. The funding mix between equity (private placement and consideration units) and debt is 94:6.
- Ascendas REIT completed a private placement of 142.7m new units at an issue price of S$2.944 per unit to raise S$420m on 14 May 21. We assume that Ascendas REIT will issue 28.2m consideration units to sponsor CapitaLand at the same price of S$2.944 per unit.
More acquisitions are forthcoming in 2021.
- Ascendas REIT secured acquisitions worth S$1.4b in Singapore, Australia and the US in 2020. It has an optimal asset mix 60:40 between Singapore and overseas markets. Having expanded overseas at a frantic pace over the past five years (investment mandate extended to overseas properties in Aug 15), Ascendas REIT could refocus on expanding within Singapore in 2021.
- Besides Galaxis, another potential acquisition from sponsor CapitaLand is Ascent at Science Park I (GFA: 555,030sf). Key tenants at Ascent are Johnson & Johnson, Dyson, Merck and Prestige Biopharma.
Took profit in Australia.
- Ascendas REIT has entered into two sale agreements to divest three logistics properties in Australia to third-party buyers:
- sale of 82 Noosa Street and 62 Stradbroke Street located in Brisbane for S$104.5m (A$101.6m), and
- sale of 1314 Ferntree Gully Road located in Melbourne for S$24.2m (A$23.5m).
- The total sale price of A$125.1m is 16.8% higher than the total market valuations of the properties of A$107.1m as at 31 Dec 20. The proposed divestments are expected to complete by 3Q21.
Opportunistic divestments to recycle capital.
- Ascendas REIT divested the three logistics properties at exit NPI yield of 3.9%. We estimated divestment gains at S$16.2m. Aggregate leverage will be further reduced from 38% to 37.5%.
Ready to pounce when opportunities arises.
- Ascendas REIT has debt headroom of S$4b based on regulatory limit on aggregate leverage of 50%. The conservative gearing enables Ascendas REIT to respond quickly when opportunities arises.
EARNINGS REVISION/RISK
- We raise our 2022 DPU forecast for Ascendas REIT marginally by 0.4% after factoring in the acquisition of a 75% stake in Galaxis and divestment of three logistics properties in Australia.
VALUATION/RECOMMENDATION
- Maintain BUY call on Ascendas REIT. Our target price of S$3.83 is based on DDM (cost of equity: 6.0%, terminal growth: 1.8%).
- See
SHARE PRICE CATALYST
- Resiliency from business parks, logistics and data centres segments.
- Contributions from development projects and AEIs.
Jonathan KOH CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2021-06-14
SGX Stock
Analyst Report
3.83
UP
3.820
