SINGAPORE (Oct 11): CGS-CIMB Research believes investors should “look for a lower entry point” when buying into Ascendas REIT (AREIT), despite being bullish on its growth prospects.
“While we are positive on AREIT due to its dominant market position and visible growth profile, we think valuations are expensive at 5.3% yield and 1.4x P/BV,” says lead analyst Lock Mun Yee in a Thursday report.
The research house is keeping its “hold” call on AREIT, but raising its target price by 1.3% to $3.12.
Lock notes that ARIET’s recent peak valuations of 5.2% yield were last seen in 2013, when the sentiment was more positive.
The REIT had then also seen positive rental reversions of between 9.6% and 18.5%, she says. In contrast, AREIT has guided for flattish rental growth for 2019.
Since 2013, AREIT’s assets under management (AUM) is up close to 60% – from $7 billion to $11.2 billion – implying acquisitions have to be larger to move the needle for AREIT’s inorganic DPU growth,” Lock adds.
However, the analyst is optimistic that the completion of CapitaLand’s acquisition of Ascendas and Singbridge could speed up the injection of assets into AREIT.
“We think AREIT would be a natural vehicle for the sponsor’s industrial property assets due to their complementary nature with AREIT’s existing assets within the same vicinity,” Lock says. “We thus price in $500 million of acquisitions from the sponsor at 5.5% yield and 40:60 debt equity funding ratio.”
At the same time, Lock believes that AREIT’s recent accretive acquisition in Australia will improves its income stability.
AREIT earlier this month announce the acquisition of a freehold land in Melbourne and the subsequent development of a suburban office building for A$110.9 million ($104.4 million).
Expected to be completed in 2Q20, the property is 65.2% pre-committed for 10 years by Nissan Motor Co with a rental escalation of 3.0% per annum.
Net property income yield for the first year is estimated to be 5.8% and 5.7% pre-transaction costs and post-transaction costs respectively.
To be funded via internal resources and existing debt facilities, the annualised pro forma financial effect of the acquisition on FY18/19 distribution per unit would be an improvement of 0.014 cent.
See: Ascendas REIT acquires suburban office in Australia for $104.4 mil
Meanwhile, Lock also notes that AREIT has four ongoing asset enhancement initiatives (AEI) and redevelopment projects worth an estimated total value of $56.5 million.
These include the $35 million redevelopment of two existing light industrial buildings at 25 & 27 Ubi Road 4 into a single high-specification building with an enlarged floor plate and higher ceiling height.
“We expect the pace of such projects to continue especially for older assets with stubborn vacancies,” Lock says.
“With debt headroom of close to $500 million to 40% gearing ratio, we think AREIT could comfortably fund such projects via debt or internal resources without the need for additional fund raising,” she adds.
Units in Ascendas REIT closed 2 cents higher at $3.17 on Friday.
