Ascendas REIT: New acquisition in International Business Park (DMG)

(NEUTRAL, S$2.14, TP S$2.09)

More acquisition in FY12. Ascendas REIT (A-REIT) has completed the acquisition of Nordic European Centre (Nordic) in International Business Park for S$121.55m. According to A-REIT, the latest acquisition will add 0.02S¢ to DPU based on 40:60 debt:equity funding and 83% occupancy rate. After factoring in this latest acquisition as well as tweaking our number to reflect latest published operating figures per A-REIT’s annual report, we revised our FY12-13 DPU upwards by 1.6-3.6% respectively. Consequently, our TP is raised upwards to S$2.09 based on DDM (COE: 8.5%; TGR: 1.0%). Maintain NEUTRAL.

YTD FY12 announced acquisitions and developments total S$291m. With the latest purchase, A-REIT’s total value of acquisitions announced in YTD FY12 is already more than those announced in FY11 at ~S$250m. In addition to the announced acquisitions and developments, our current estimates assume potential acquisition worth S$100m in 2HFY12 with a NPI yield on cost of ~6-7%.

Ample debt headroom to fund announced acquisitions and developments. Following the private placement which raised a net proceeds of S$393m in Apr 2011, we estimate A-REIT has a debt headroom of ~S$700m. Based on 50:50 debt: equity funding, we estimate the total debt amount required for announced and assumed potential acquisitions and developments is ~S$370m, which is more than covered by the available debt headroom.

Valuation is rich without more near term accretive acquisitions. A-REIT is currently trading at a spread of 3.8%, which is on par with its mean spread of 3.9% from May 04-Jul 11. Although its current yield spread is still 0.8ppt higher than pre-crisis yield of 3.0%, we believe there has to be more immediate yield accretive acquisitions before A-REIT can hit its heyday valuation. Within the S-REIT sector, we reiterate our preference for 1) Frasers Centrepoint Trust (BUY/TP S$1.77) due to its reasonable valuation against its potential growth, as well as 2) CDL Hospitality Trusts (BUY/TP S$2.46) which is a beneficiary of Singapore’s multi-year tourism boom.