CFA Society Singapore
SINGAPORE (Oct 2): Ascendas REIT is buying another portfolio of 26 logistics properties in the United Kingdom for $461 million despite Brexit-linked uncertainty.
The portfolio consists of 26 properties with gross internal area of 2.8 million sf located in key distribution centres in UK. Properties are located on freehold and 965-year leasehold land.
Initial operating yield is 5.54%. The transaction will be funded by 52% equity and 48% debt and is DPU-accretive.
In a Tuesday report, Jefferies analyst Krishna Guha says the newly acquired portfolio along with previous acquisitions will boost A-REIT's UK investment from 4% to 8% of total asset.
Following this transaction, A-REIT will have 30% exposure to logistics and increased presence in key logistics micro-market of West Midlands in UK.
Proportion of freehold properties will grow from 19% of asset base to 23%. In addition, the portfolio is relatively new with average of 16 years.
According to the REIT manager, the first year pre- and post-cost NPI yield is 5.54% and 5.39% respectively. Given the acquisition will be funded by mix of equity and GBP-denominated debt, it will be 0.022 cent accretive to pro-forma FY 17/18 DPU of 15.988 cents.
Debt funding cost, including hedging, is similar to previous acquisition or about 2.6%-2.8%, according to management. Income will be hedged on a rolling one-year forward basis. Earlier, management had highlighted intention to increase AUM to $2 billion in UK and EU. Currently, it stands at $847 million.
“While we are mindful of Brexit-related risks, sector such warehousing which is linked to domestic consumption and is experiencing strong demand and constrained supply, is likely to be bit more sheltered than office/retail sub-sectors,” says Krishna.
Further, structural shift towards online retail sales, which accounted for an average logistics take-up of 20% between 2015 and 2017 compared to an average take-up of approximately 7% between 2009 and 2013, is expected to continue to benefit the logistics sector.
“We also note that GBP has depreciated against the SGD (-33% over the last 10 years and -9% over the last two years), which perhaps suggest better entry opportunity and pricing in of some of the Brexit-related risks,” adds Krishna.
These transactions are likely to help the REIT build network which can help in deal sourcing and capital recycling in future.
According to Cushman and Wakefied, prime yields for logistics assets in UK were stable at 5.2% as of 2Q while annual rental growth of 4.4% as of June, for large distribution units, have reverted to 5-year averages.
According to 2Q JTC statistics, Singapore business park rents are up 0.5%, growing for five straight quarters. A-REIT has the largest exposure to business parks. Back filling of vacant space and positive rental reversion should provide DPU upside.
Year to date, units in A-REIT are down 5.5% to $2.60 and trades at 1.3x P/B with 5.9% yield.