SINGAPORE (Oct 4): Phillip Capital is reiterating its “accumulate” recommendation on Ascendas REIT (A-REIT) with a lowered target price of $2.82, from $2.96 previously.
The REIT has had an active quarter of acquisitions and fund raising. It recently acquired its second portfolio of 26 logistic properties in the UK for $459 million.
See: Ascendas REIT enlarges UK portfolio with $459 mil acquisition of logistics properties
Following this acquisition, the REIT’s portfolio composition by asset value will be about 78% Singapore, 14% Australia and 8% UK. It will be diversified across three countries, with Singapore remaining as the core market.
The weighted average lease expiry (WALE) for the REIT’s first UK portfolio of 12 logistics properties is 12.6 years, while the second UK portfolio is 9.1 years. This compares favourably over A-REIT's existing portfolio WALE of 4.1 years as at end-June 2018.
Both the UK portfolios have a high physical occupancy of 92%.
In a Thursday report, analyst Richard Leow says, “This compares favourably over A-REIT's existing portfolio WALE of 4.1 years as at end-June 2018.”
In addition, the REIT in September issued a placement of 178 million new units at $2.54 each, to raise $452.1 million to partially fund the second UK portfolio. The analyst reckons that this will have minimal impact to distribution to existing shareholders.
A-REIT pays its distributions semi-annually, and an advanced distribution of 7.25 cents per unit for the period from Apr 1 to Sept 17 has been declared for existing unitholders, which will be paid on Oct 17.
This corresponds to the period up to the day immediately prior to the issue of the new units from the placement.
However, the second UK portfolio will only be DPU accretive, if funded with excessive debt. The management expects a pro forma DPU accretion of about 0.0223 cents, if funded by 52.5% equity and 47.5% GBP-denominated debt.
The 47.5% debt-funding exceeds the statutory 45% ceiling and exceeds the manager's target capital structure of <40% gearing. Acquiring through over-leverage would eventually necessitate an equity fund raising to pare down debt.>less than 40% gearing. Acquiring through over-leverage would eventually necessitate an equity fund raising to pare down debt.
“We have assumed 40% gearing for the acquisition to be in line with the target capital structure, effectively tempering expectation on DPU accretion,” says Leow.
In addition, with larger exposure to overseas assets, bring about higher exposure to foreign currency fluctuations.
Nonetheless, Leow believes that the outlook is stable for A-REIT.
“The leases are substantially in Singapore; and the asset types that are most exposed to renewal risk are Logistics & Distribution Centres, Business and Science Parks, and Hi-Specifications Industrial and Data Centres. With the exception of Logistics & Distribution Centres, rental reversions are expected to be positive for the other two asset types,” says Leow.
As at 4.30pm, units in A-REIT are trading 3 cents lower at $2.57 or 16.5 times FY19 book with a distribution yield of 6.0%.
