SINGAPORE (Nov 4): OCBC Investment Research is keeping it’s “hold” call but raising its fair value estimate for Ascendas Real Estate Investment Trust by over 9% to $3.25 on the back of strong long-term prospects from an enlarged scale.

Already the largest listed industrial REIT on the Singapore Exchange based on asset size and market capitalisation, Ascendas REIT on Nov 1 announced the proposed acquisition of a portfolio of 30 business park properties from CapitaLand for $1.66 billion.

Post-transaction costs, the proposed acquisitions are expected to generate a first year net property income yield of 6.3% for Ascendas REIT.

The transaction is also expected to be distribution per unit (DPU) and DPU yield accretive for the REIT. On a pro forma basis, the proposed acquisitions estimated to add 0.101 cents to Ascendas REIT’s FY18/19 DPU, translating to a DPU yield accretion of approximately 3.0%.

The REIT manager intends to fund the total acquisition cost of $1.71 billion from the net proceeds of a proposed rights issue, as well as a drawdown of loan facilities, and the issuance of the acquisition fee units.

The manager has proposed to undertake an underwritten and renounceable rights issue of some 498 million new units in Ascendas REIT at an issue price of $2.63 per unit to raise gross proceeds of around $1.31 billion.

See: Ascendas REIT to acquire 30 business park properties from CapitaLand for $1.66 bil; launches rights issue at $2.63 per unit to raise $1.31 bil

OCBC notes that the proposed acquisition marks Ascendas REIT’s maiden entry into the US market.

“Although there are uncertainties over the penetration into a new market, we like the fact that majority of the US property leases have annual rental step-ups of 2.5-4%,” says OCBC’s research team in a Nov 4 report.

“The properties are also under-rented by 10-15%, leaving room for potential positive rental reversions in the future,” the team adds.

However, the brokerage frowned on Ascendas REIT’s plans for a renounceable rights issue.

“We are slightly surprised and disappointed at the equity funding structure, as we believe AREIT might be better off doing a placement and preferential offering exercise to extract more value – higher DPU and NAV accretion – given the still strong demand for good quality REIT equity offerings,” OCBC says.

However, it acknowledges that “a rights issue does give existing unitholders the opportunity to participate in this accretive deal at a steeper discount than a preferential offering”.

OCBC is raising its terminal growth rate assumption for Ascendas REIT to 2%, from 1.5% previously, to account for it larger diversified platforms in four key markets as well as enhanced longer-term growth potential from the enlarged CapitaLand-Ascendas-Singbridge entity.

For the 2Q19 ended September, Ascendas REIT announced a 2.3% increase in distribution per unit (DPU) to 3.978 cents, from DPU of 3.887 cents a year ago.

Total income available for distribution grew 7.6% y-o-y to $123.8 million in 2Q19, as gross revenue rose 5.3% to $229.6 million on the back of full-quarter contribution from the 38 logistics properties in the UK that were acquired between August and October 2018.

Consequently, net property income rose 12.0% to $177.9 million in 2Q19, from $158.9 million a year ago.

See: Ascendas REIT posts 2.3% rise in 2Q DPU to 3.978 cents

As at 1pm, units in Ascendas REIT are trading 1 cent higher at $3.18. According to OCBC valuations, this implies an estimated price-to-earnings (PE) ration of 18.2 times, a price-to-book (PB) ratio of 1.4 times, and a dividend yield of 5.1% for FY20F.