CFA Institute Singapore
SINGAPORE (Dec 15): DBS Group is maintaining ESR-REIT at 'buy' with 62 cents target price after making its largest acquisition to date.
ESR-REIT's manager on Wednesday night announced it had entered into an agreement to acquire an 80% stake in 7000 Ang Mo Kio Ave 5 for $240 million.
The property is a high-spec industrial property with ancillary office and development potential.
The acquisition is a yield-accretive deal and marks ESR-REIT’s largest transaction to date.
The agreement grants ESR-REIT the option to buy and the vendor to sell the remaining 20% of the underlying property at a price of no less than $60 million 12 months after completion.
"We understand the remaining 20% will highly likely be bought within a year once the REIT manager familiarises itself with the operations of the property," says analyst Derek Tan in a Friday report.
According to ESR-REIT's manager, the acquisition is yield accretive with initial NPI yield estimated to be 6.5%. The acquisition will also increase the REIT's investment properties by 17% from existing level.
After equity fund raising, ESR REIT's pro forma DPU could also rise 2.9% while the sponsor’s stake in the ESR REIT could potentially see an increase.
Tan says 7000 Ang Mo Kio has an un-utilised plot ratio of 0.8, translating into potential additional GFA of 495,000 sf.
The unutilised GFA can be developed as an extension block either on a multi-tenanted basis or a built-to-suit basis to be leased to data centre operators or high value-added manufacturers which will generate additional rental revenue and improve capital value. Management has expressed interest to develop the site after acquiring the remaining 20% stake, says Tan.
While DBS has not incorporated the new acquisition in its numbers, pending details of the equity fund raising, the research house believes the acquisition reaffirms the REIT’s asset reconstitution strategy and highlights its sponsor’s commitment to putting the REIT on a growth path.
Units in ESR REIT are trading at 56 cents or 7.1% yield based on FY18 forecast distribution.