Upside from US portfolio, network effect and potential acquisition to underpin higher unit price
As at Jan 14, the market cap of Ascendas Real Estate Investment Trust (Ascendas REIT) stood at $11.1 billion, making it Singapore’s largest REIT.
Pro forma assets under management as at Dec 31 were $12.8 billion, including the recently acquired US portfolio of 28 properties, Nucleos and FM Global which cost $1.8 billion. Because of its size and high A3 rating by Moody’s, Ascendas REIT is a constituent of many indices such as MSCI, FTSE EPRA/NAREIT Developed Market Index and The Straits Times Index.
To fund the acquisition, Ascendas REIT raised $1.31 billion through an accretive rights issue. The REIT’s unit price is up 5.8% since mid-December, following the completion of the rights issue (results were announced on Dec 2) and the acquisition of the properties announced on Dec 11.
The REIT took on US$400 million ($539 million) of five-year US dollar debt at under 3% to partly fund the US portfolio. In a briefing in Nov last year, Yeow Kit Peng, head of capital markets and investor relations at Ascendas REIT’s manager had said the REIT planned to achieve a high level of natural hedge by funding US dollar assets with US dollar liabilities to minimise any adverse currency volatility. Furthermore, because the REIT is taking onshore debt, the tax impact of the portfolio is limited to single digits as distributions from the US properties are largely shielded by on-shore interest and tax allowances on depreciation.
Despite the large size of the rights issue, the acquisition was DPU accretive. Based on FY2019 financials, the accretion is 1.7% to DPU and 3.3% to NAV. Since the portfolio is under-rented, there is upside to DPU because the accretion announced does not include the uplift if new leases are included with market rents that are 10% to 15% higher than the new US portfolio’s current rent.
“Most of the properties in [the markets we are in] have market rents that are much higher than [our] passing rent, so we believe we can benefit from higher rents at renewals,” William Tay, CEO of Ascendas REIT’s manager said during a November briefing. He added that the US portfolio had very high cash flow visibility.
Post-acquisition, Ascendas REIT now has 200 properties across a diversified portfolio of industrial properties such as warehouses, business parks and suburban office. Out of the $12.8 billion portfolio, 42% comprise of business parks and suburban office, 25% in logistics and distribution centres, and the remaining 33% is in industrial property.
Ascendas REIT is likely to benefit from the network effect with its size and geographical spread of 72% in Singapore, 12% in Australia, 10% in the US and 6% in the UK by valuation. “[A] customer can be with the REIT in the US, Australia, and UK, while we are able to offer them solutions across the larger platform, whether is it China, South East Asia or other countries that CapitaLand is in. Within this [US] portfolio per se, there are some synergies in a sense that we are meeting customers who also are our tenants in Australia. For example Northrop Grumman are with us in US as well as in Australia,” Tay explains.
In an update on Jan 10, DBS Group Research says the next sizeable acquisition will likely come from Singapore. These include properties such as Galaxis (One North), The Ascent and 5SPD (both at Science Park 1). “These potential acquisitions are quality modern specification business parks located within the Science Park and One North precinct,” the DBS report says.
Following the rights issue, gearing is likely to be lower at 35% from 36.2% as at Sept 30, 2019. At a pro forma DPU of 16.3 cents, Ascendas REIT is trading at 5.29%, and at 1.4 times its post-acquisition book value. DBS Research reckons that built in rental escalation, coupled with new leases and acquisitions would support a valuation of $3.45. —