Ascendas REIT - Further enlarging business-park presence (CIMB)

OUTPERFORM Maintained

S$2.15 Target: S$2.18

Mkt.Cap: S$4,477m/US$3,670m

Acquires Nordic European Centre for S$121.6m

Moderate DPU accretion. AREIT has acquired Nordic European Centre, its sixth property in the International Business Park (IBP) for S$121.6m. This translates to S$512 psf NLA and an initial yield of slightly above 6%, a slight premium to yields for its current portfolio. We are neutral on the acquisition with the improvement in its asset quality overshadowed by the small accretion and a slightly high acquisition price. Nevertheless, we recognise benefits through an expansion of AREIT’s leading market share in the business-park space, strong leasing and renewal expectations (with its proximity to the Jurong Lake District) and operational efficiencies (as AREIT’s sixth asset in IBP). We factor in the acquisition and adjust our FY12-13 DPU estimates by - 0.6% to +0.6% and our DDM target price to S$2.18 (from S$2.17) (discount rate 8.2%). We continue to like AREIT for its quality management and asset portfolio and see catalysts from higher-than-expected occupancy and rentals and accretive acquisitions.

The news

AREIT has acquired Nordic European Centre, its sixth property in IBP for S$121.6m from a fund managed by Alpha Investment Partners Ltd. This works out to S$398 psf GFA and S$512 psf NLA. The pro-forma annualised financial effect is estimated by management at 0.02 Sct (0.2% of FY12 DPU), assuming 40:60 debt:equity funding. After the acquisition, business and science parks will account for 39% of its portfolio (by asset value) from 37%. The acquisition will also bring in more quality tenants such as Merck Pte Ltd, Evonik Degussa (SEA) Pte Ltd and Thyseenkrupp Mannex Asia Pte Ltd.

Comments

Initial yield estimated at slightly above 6%. Pegging the property to rentals for its business-park assets, we estimate an initial yield of 6.2-6.3%, slightly below the NPI yield of 6.5% for its overall portfolio. At S$512 psf NLA, the acquisition is also priced at a 15% premium to AREIT’s business-park valuation of S$443 psf as at end-Mar 11. We believe AREIT paid the slight premium as it wants to expand its leading market share in the business-park space further and on expectations of strong leasing and renewals and operational efficiencies.

Expectations of strong leasing and operational efficiencies. The asset is located in the Jurong Lake District, which will be developed into a major commercial and leisure hub. This could allow AREIT to ride rental upside as the hub develops. Notwithstanding a lower occupancy of 83% currently, we do not foresee difficulty in leasing out the remaining space in view of its quality specifications. As AREIT’s sixth asset in the IBP, AREIT is also likely to extract operational efficiencies and cost savings with economies of scale in managing its assets.

Accretion could be enhanced by debt funding. Notwithstanding management’s plans to redeploy the net proceeds from its previous placement (previously to fund development and AEI projects in Shanghai and Singapore) for this acquisition, we expect management to draw down its borrowings eventually for development and AEI projects with its current low gearing of 32-33%. We have thus factored in full debt funding. There could be upside to management’s annualised DPU accretion of 0.02 Sct from this acquisition in view of current low interest rates.

Valuation and recommendation:

Moderate DPU accretion on full-year contribution in FY13. Overall, we are neutral on the acquisition. We adjust our FY12/13 DPU forecasts by -0.6% to +0.6%, assuming full debt funding. Accordingly, our target price rises to S$2.18 (discount rate: 8.2%) from S$2.17. We continue to like AREIT for its quality management and asset portfolio. We see catalysts from higher-than-expected occupancy and rentals and accretive acquisitions.