Analysts from RHB Group Research and Phillip Securities Research are divided on their recommendations for Ascendas Real Estate Investment Trust (A-REIT) following its acquisition of data centres in Europe.
RHB analyst Vijay Natarajan has maintained his ‘neutral’ rating with a higher target price of $3.20 from $3.15 previously.
He states that the acquisition will help A-REIT “gain a foothold in one of the most in-demand industrial asset classes” and has increased forecasted distribution per unit (DPU) for FY2021 - FY2023 by 1% - 2% to factor in better-than-expected net property income (NPI), which underpins the higher target price.
Natarajan notes that the data centre portfolio has an average NPI yield of 6%, which is higher than A-REIT’s FY2020 ended December 2020 portfolio NPI yield of 5.6%.
SEE:Ascendas REIT to acquire 11 data centres in Europe for $904.6 mil
“The acquisition is yield-accretive (+1.3%) to pro-forma FY2020 DPU, based on an equity-/debt-funding mix of 64%/36%,” he adds.
The data centres have an occupancy rate of 97.9% comprising high-quality tenants such as HSBC and EntServUK, with a weighted average lease to expiry of 4.6 years, with 9.5% of leases by rental income due in FY2021. Given management’s guidance that rental rates are in line with market rates, Natarajan does not anticipate a significant rental rate uplift in the near term, though he notes potential occupancy rate increases.
“There is room for occupancy rate improvements at Cressex Business Park in the UK (now at 62.4%) and Croydon Data Centre (89.5%), as the vendor had slowed down on marketing efforts due to its plan to sell the portfolio,” he says.
With the new data centres, A-REIT’s portfolio now comprises 40% overseas assets, though Natarajan believes future purchases will be in Singapore.
“We expect near-term acquisitions to be Singapore-focused, with options that include Galaxis (75% stake) and science park redevelopment opportunities from its sponsor. Post-acquisition, its gearing remains comfortable at 37.1%, providing >SGD1bn of debt headroom for acquisitions,” he says.
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Overall, while positive on A-REIT’s larger data centre portfolio, Natajaran is retaining his ‘neutral’ rating for A-REIT. “We maintain our call on valuation grounds (current P/BV is 1.4 times), with near-term investors preferring to shift their attention towards undervalued cyclical sectors – office, hospitality and retail – on the back of an economic recovery,” he says.
Meanwhile, Phillip Securities analyst Natalie Ong is retaining her 'buy' rating but with a lower target price of $3.64 from $3.73 previously.
While Ong believes that the acquisition will strengthen A-REIT's portfolio and notes that it came four months earlier than expected, she states that it is below her projection of $1.5 billion.
"Our target price is lowered from $3.73 to $3.64 as we raise FY2021 DPU by 0.3% to reflect the sooner-than expected acquisition but lower FY22-25e DPUs by 2.2% - 2.7% as the portfolio is smaller than expected," she says in a March 23 note.
Nonetheless, A-REIT remains her top pick for the sector in view of its scale and diversification. "AREIT also continues to futureproof its portfolio by increasing its exposure to growth sectors of the economy: knowledge economies, technology and e-commerce," she adds.
Ong also points out that the acquisition deploys the remaining 52.1% or $612.5 million of equity funds out of the total $1.2 billion A-REIT raised in November 2020. Besides the funds earmarked for the European purchase, the rest of the proceeds have been used for two Class A office buildings in San Francisco and a suburban office in Sydney, Australia, which were were completed on 21 November 2020 and 13 January 2021 respectively.
"We forecast DPU growth of 10.6% for FY2021 as acquisitions and redevelopment/AEI start contributing," she says.
As at 4.15pm, shares in A-REIT are 1 cent of 0.33% higher at $3.08.
