What is the news?
Ascendas REIT (A-REIT) had an active quarter of acquisitions and fund raising. We list here the various activities during the quarter in chronological order.
Acquisition was completed on Aug. 16. The properties are located across the United Kingdom (UK) with gross internal area of 242,633 sq m and are sited on freehold and 999-year leasehold land. The acquisition was funded with GBP-denominated loans. Initial NPI yield of 5.22%.
Divestment was completed on Aug. 20. The sale price was 0.6% higher than the original purchase price of S$13.5mn and 17.0% higher than last valued at S$11.6mn. Will recognise a divestment gain of S$2mn.
Acquisition was completed on Sept. 7. The asset is on freehold land and acquired at an initial NPI yield of 6.5%. The acquisition was funded by internal resources and existing debt facilities.
Acquisition was completed on Sept. 17. The asset is on freehold land and acquired at an initial NPI yield of 6.8%. The acquisition was funded by internal resources and existing debt facilities.
Approximately S$250mn to partially fund the second UK logistics portfolio, ~S$109mn to partially fund the development of a build-to-suit facility in Singapore, ~S$87.1mn to repay debt, and ~S$3.9mn to pay the estimated fees and expenses. An Advanced Distribution of 7.25 cents/unit for the period from April 1 to Sept. 17 will be paid to existing unitholders. There are 3,108,438,055 Units in issue after the Placement.
The properties are located across the UK with gross internal area of 266,184 sq m and are sited on freehold and 999-year leasehold land. The acquisition will be funded with proceeds from the Placement and GBP-denominated loans. Initial NPI yield of 5.39%.
How do we view this?
+ Increasing geographical diversification. Post-acquisition of the second UK portfolio, A-REIT portfolio composition by asset value will be approximately 78% Singapore, 14% Australia and 8% UK. The portfolio will be diversified across three countries, with Singapore remaining as the core market.
+ WALE of UK portfolio is higher than existing, thus improving income visibility. The weighted average lease expiry (WALE) of the first and second UK portfolios are 14.6 years and 9.1 years respectively. This compares favourably over A-REIT’s existing portfolio WALE of 4.1 years as at end-June 2018.
+ Both UK portfolios have high physical occupancy of 92%. This is in line with the existing Singapore-Australia combined portfolio occupancy of 91.6% as at end-June 2018.
+ Placement has minimal impact to distribution to existing unitholders. A-REIT pays its distributions semi-annually, and an Advanced Distribution of 7.25 cents/unit for the period from April 1 to Sept. 17 has been declared for existing unitholders. This corresponds to the period up to the day immediately prior to the issue of the New Units from the Placement. The Advanced Distribution will be paid on Oct. 17. Recall that DPU for 1Q FY18/19 was 4.002 cents.
– Proposed second UK portfolio is DPU accretive, only if funded with excessive debt. Management expects a pro forma DPU accretion of about 0.0223 cents, if funded by 52.5% equity and 47.5% GBP-denominated debt. The 47.5% debt-funding exceeds the statutory 45% ceiling and exceeds the manager’s target capital structure of <40% gearing. Acquiring through over-leverage would eventually necessitate an equity fund raising to pare down debt. We have assumed 40% gearing for the acquisition to be in line with the target capital structure, effectively tempering expectation on DPU accretion.
– Higher exposure to foreign currency fluctuation. With the larger exposure to overseas assets, A-REIT also takes on foreign currency risks. AUD and GBP have depreciated ‑5.3% and ‑1.4% 9M-YTD respectively, relative to SGD.
– Effective occupancy of 100% for both UK portfolios is supported by rental guarantees on five assets. The first portfolio has one asset (Unit 3, Brookfields, Rotherham) with rental guarantee, and the second portfolio has four assets (Unit 5, Unit 8, Unit 13 and Unit 18 at Wellesbourne Distribution Park) with rental guarantee.
– Aggregate leverage to creep up. Following the completion of the acquisition of the second UK portfolio, pro forma gearing would be 37.7%, compared to 35.7% as at end-June 2018.
The outlook is stable. Post-acquisition WALE of 4.5 years offers income visibility. Tenancy risk profile has 8.8% of leases by gross rental income expiring in the remainder of FY18/19. The leases are substantially in Singapore; and the asset types that are most exposed to renewal risk are Logistics & Distribution Centres, Business and Science Parks, and Hi-Specifications Industrial and Data Centres. With the exception of Logistics & Distribution Centres, rental reversions are expected to be positive for the other two asset types.
Maintain Accumulate; new target price of $2.82 (previously $2.96)
We expect the yield of ~6% to remain stable and our target price gives an implied 1.32 times FY18/19e forward P/NAV multiple. Our lower target price is mainly due to changes in our cost estimates from previous.