Ascendas Real Estate Investment Trust - Acquiring a choice business park, but raising equity

Picture Credits : spacetobe.com.sg
■ One@Changi City looks like a sound, core acquisition to us

■ SGD408m equity fundraising appears to be a recapitalisation exercise

■ Cutting our DPU forecasts and TP; reiterating Outperform (2)

What’s new:
During a full-day trading halt on 9 December, AREIT announced:

1) the acquisition of One@Changi City, a modern business park for SGD420m, and

2) a SGD408m equity fundraising (EFR) exercise.

What’s the impact:
We have no issue with the One@Changi City acquisition at a net-property income (NPI) yield of 5.9-6.0%. The asset was completed in November 2012 and is well-located in Changi Business Park with strong transportation connectivity and nearby amenities (it is part of the mixed development which includes Changi City Point [shopping mall]). The price appears reasonable to us (slightly below the average valuation of SGD438m by 2 independent valuers) and the vendor is a jointly owned entity of AREIT’s sponsor. The occupancy rate is respectable at 97.1% and the property has a remaining leasehold tenure of 53 years.

We regard the EFR as largely a recapitalisation exercise because it will be DPU-dilutive, but improve AREIT’s gearing from 39% before the announcement to 36% after equity fundraising and all acquisitions. The SGD408m equity fundraising consists of a 90m placement at an issue-price range of SGD2.223-SGD2.29 per unit and a preferential offering (3-for-80) at an issue-price range of SGD2.218-2.285 per unit. About SGD225m of proceeds from the equity fundraising will be used to fund the One@Changi City acquisition, about SGD82m will be used to partially fund a ‘potential Australian acquisition of a logistics property, and SGD99m will be used for debt repayment or future acquisitions.

We revise down our DPU forecasts by 1.3-4.3% for FY16-18 after incorporating all aspects of the announcement into our financial forecasts. We also correspondingly lower our DDM-derived 12-month target price to SGD2.45 from SGD2.54.

Technical Analysis
Daily Chart
What we recommend:
We reiterate our Outperform (2) rating. We do not welcome the DPU dilution from this deal, taken in isolation, but acknowledge that AREIT’s gearing has been drifting up from its recent acquisition and development activities and the EFR will place AREIT’s gearing on firmer footing against its industrial S-REIT peers. By our forecasts, AREIT’s DPU growth outlook for FY16-17 is still one of the strongest in the S-REIT sector. A risk to our call would the onset of a prolonged and severe recession in Singapore and the Asia region.

How we differ:
With about 67% positive ratings and 33% hold ratings according to Bloomberg, there could be post-announcement analyst downgrades for the stock. Despite the EFR, we believe AREIT’s DPUgrowth trajectory is still clearly positive for FY16-18. (Read Report)

Read Related Reports
1) Ascendas REIT - Placement to fund growth‏ by DBS Group Research, published on 10 December 2015

2) Ascendas REIT - Equity fund raising exercise and proposed acquisition‏ by OCBC Investment Research, published on 10 December 2015

3) Ascendas REIT - It Is Business This Time‏ by RHB Research, published on 10 December 2015

4) Ascendas Real Estate - A defensive move - proposing equity fund raisings and acquisition by Deutsche Bank Markets Research, published on 9 December 2015

Source : Daiwa Capital Markets

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