RHB Group Research analyst Vijay Natarajan has maintained his “buy” call on Ascendas REIT (AREIT), with a target price of $3.60 representing a 25% upside from the current price of $2.89 as management fee savings from newly inked agreements mitigate rising utility charges.
“AREIT, Singapore’s largest and most well-diversified industrial REIT, offers a good mix of defensiveness and growth potential amid a volatile macroeconomic environment,” writes the analyst.
“Recent refined fee structures will save costs and alleviate some of the pressures from rising utility charges. The REIT has also been boosting its logistics exposure, by acquiring seven logistics assets in the US. Its valuation is attractive at 1.2x FY2022 ending December P/B, offering a 5.5% dividend yield,” Natarajan adds.
Part of AREIT’s new Singapore property management agreement, that takes effect from October for the next 10 years, will see it taking charge of all cap park management site staff costs, opex and capex. It previously paid car park management fees of $2.16 million and 40% of hourly car park income.
“The new structure will result in additional revenue of $3.9 million per annum, based on FY2021 numbers, and cost savings of around $1.6 million per annum. These savings should mitigate the impact of the rising utility charges at 8% of opex and expected to rise around 50% this year as a result of higher electricity tariffs,” says the analyst.
Additionally, AREIT’s acquisition of seven freehold logistics assets in Chicago for US$99 million ($133 million) will improve income stability. The assets are fully occupied with no single tenant accounting for more than 20% and a weighted average lease expiry (WALE) of five years. They come with an initial net property income (NPI) yield of 5.3% and a built-in rental step-up rate of 2%to 3% per annum for the leases.
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“The acquisition comes on the heels of its October 2021 acquisition of 11 last-mile logistics assets in Kansas City for US$156 million. Post-transaction logistics assets account for 25% of its portfolio, with the US becoming the largest market outside of Singapore, accounting for 15% of its portfolio. The transaction will be funded by debt, and is yield-accretive with a post-acquisition gearing still at a modest 37%,” writes Natarajan.
Rental growth continues to offset interest rate impacts with AREIT’s portfolio assets seeing a 1QFY2022 positive rental reversion rate of 4.6%, up from 4.5% for FY2021. All segments and markets leased saw rental growth in 1QFY2022, with Australia posting the highest growth of 16.5%, US slightly behind at 14% and Singapore rounding up its markets at 3.9% growth.
“This, in our view, should more than mitigate rising interest rates. 79% of loans are on fixed terms with an average tenure of 3.7 years, and every 20 basis points (bps) increase in interest rates will have a marginal 0.4% impact on distribution per unit (DPU),” says the analyst, adding that the REIT also has a high natural hedge of 75% for its overseas property income, with local currency borrowings mitigating recent volatilities in foreign exchange rates.
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AREIT’s committed ESG efforts over the years has also seen it rewarded with the highest ESG score among the industrial REITs based on RHB’s in-house methodology, as the research house scored AREIT a 3.3 out of 4.0. With a score three notches above the country median, RHB has applied a 6% premium to its intrinsic value to derive the target price.
As at 2.00pm, shares in AREIT are trading at 2.90 or 0.35% up.
