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'Buy' Ascendas REIT for potential in proposed overseas acquisitions: analysts

Jovi Ho
Jovi Ho11/12/2020 10:34 AM GMT+08  • 4 min read
'Buy' Ascendas REIT for potential in proposed overseas acquisitions: analysts
AREIT’s assets under management (AUM) set to expand to $13.75 billion – 66% in Singapore and the remaining 34% overseas.
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Three brokerages are recommending ‘buy’ or ‘add’ on Ascendas REIT following news of proposed acquisitions in the US, Europe and Australia earlier this week, which are expected to be distribution per unit (DPU) accretive.

“AREIT has announced the proposed acquisition of two US office properties as well as potential purchase of a portfolio of data centres in Europe and a suburban office in Australia. The latter two are subject to completion of negotiations with vendors and satisfactory due diligence,” say CGS-CIMB analysts Lock Mun Yee and Eing Kar Mei in a Nov 10 note.

CGS-CIMB is maintaining ‘add’ on the REIT, with an unchanged target price of $3.20. Meanwhile, OCBC Investment Research and Maybank Kim Eng are recommending ‘buy’ on AREIT with target prices of $3.92 and $4.00 respectively.

To part fund these purchases, AREIT has announced a proposed equity fund raising of $1.2 billion, comprising a $800 million private placement of 256.329 million to 264.376 million new units priced at $3.026 to $3.121 per unit and approximately $400 million pro-rata non-renounceable preferential offering of up to 133.949 new units priced at S$2.96 to $3.05 per unit, note Lock and Eing.

Should the acquisitions not take place eventually, the manager says it will use the net proceeds of the equity fund raising for other purposes including funding future acquisitions and the repayment of existing debt. The manager, DBS Bank and JP Morgan are the joint global co-ordinators and bookrunners.

See: Ascendas REIT to raise $1.2 bil through equity fund raising

The US acquisition comprises two office properties – 510 Townsend St and 505 Brannan St, located in the South of Market (SoMa) submarket of San Francisco, note Lock and Eing. The two buildings have a total net lettable area of 41,372 sqm and are fully leased to two high quality technology tenants, Stripe and Pinterest, for a long weighted average lease expiry (WALE) of 9.1 years. The total acquisition cost amounts to US$572.1 million ($784.3 million).

See also: Ascendas REIT acquires two office properties in San Francisco for $768 mil

While the acquisition net property income (NPI) yield is 4.9%, management indicated that these properties are currently under-rented. The acquisition is in line with AREIT’s growth strategy and increases its exposure to a strategic location in San Francisco while strengthening its US portfolio with newly completed properties with high occupancies. Post-acquisition, we expect AREIT’s assets under management (AUM) to expand to $13.75 billion, of which 66% are in Singapore and the remaining 34% overseas.

AREIT is the largest listed industrial REIT on the Singapore Exchange based on asset size and market capitalisation. In December 2019, AREIT completed the acquisition of a portfolio of 28 business park properties in the US, which marks its maiden entry into this market. AREIT has a diversified pool of quality tenants and its sponsor is CapitaLand Limited.

OCBC Investment Research sees benefits from AREIT’s wide geographical footprint. These proposed acquisitions in different markets and asset classes would further diversify its income streams and build resiliency in its portfolio. “Overall aggregate leverage is expected to increase slightly from 35.1% to 37-38%, which we believe allows AREIT to keep its credit rating and also maintain sufficient debt headroom for future inorganic growth opportunities,” says OCBC.

Maybank Kim Eng analyst Chua Su Tye highlights AREIT’s plans to ready its war chest for a data centre expansion. The acquisition includes a portfolio of European data centres located within tier-1 data centre hubs involving a mix of triple net powered shells and turnkey data centres ($614.0 million) and its sixth suburban office asset ($180.0 million). All in, management expects its leverage to stay at 37-38%, says Chua.

As at 10.20am, units in Ascendas REIT are trading at 1 cent higher, or 0.33% up, at $3.04.

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