What analysts are saying about Ascendas REIT’s acquisition of properties from Capitaland

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AREIT’s proposed $1.66bn acquisition and fund raise

AREIT has announced the acquisition of a portfolio of 28 business parks in the US and two BPs in Singapore from its sponsor CapLand, for a combined S$1.66bn (S$1.71m incl transaction cost). 

The US portfolio makes up the largest portion at S$1.285bn.

The purchase will be partially funded by an S$1.3bn 16-for-100 unit Rights Issue at S$2.63 per unit, a 15% discount to the Theoretical Ex-Rights Price. 

The remainder will be largely funded by debt. An Extraordinary General Meeting is set on 27 Nov 2019. The transaction, if approved, is expected to complete by end-2019.

Low NPI yield, low DPU accretion

The US portfolio is located in suburban submarkets in San Diego (8 properties), Raleigh (5) and Portland (15). 

The acquisition implies a blended initial NPI (net property income) yield of 6.4%.

This is tight relative to recent transactions of Class A office properties at 6.9-7.2% by other S-REITs. 

The dilutive effect from the proposed Rights Issue also shaves off much of the distribution per unit upside despite low borrowing costs.

Pro-forma DPU accretion from this transaction is anticipated to be mild at just +0.2%, which compares poorly to recent S-REIT acquisitions at +1/+4%. 

Strategically, we are not convinced on the immediate synergies that the US portfolio will have on AREIT’s existing platform.

Offshore markets will make up 28% of AREIT’s GAV made up of the US (10%), the UK (8%) and Australia (12%). 

We think substantial scale needs to be built to have a network effect with tenants across geographies, a process that will take time.

Tech theme and step-ups to drive growth

The US properties are located in high growth/tech-driven cities, with >65% of the tenants in the information, medical and financial tech sectors. 

Blended occupancy rate is high at 93.7%, with the majority of the leases having annual rent step-ups of 2.5-4%.

These will help underpin stable and positive rent growth after year one. 

The SG assets are viewed favourably with their blended NPI yield of 6.7%, as the properties are relatively young and are located in the growing biomed/tech districts in SG. 

CAPL: crystallizing the imbedded value of ASB

On balance, CAPL is the beneficiary from this transaction, with the group expected to book a divestment gain of S$95m.

The recycled capital will bring CAPL’s net gearing down to below 65% by FY19E, one year ahead of its target. 

Deal summary

Marginal positive

We positively view the income growth prospects of the target US portfolio, despite AREIT’s lack of an established track record in the US.

While headline DPU accretion is a mild 0.6%, approx 95% of the US assets are on rental step-ups of 1-4% p.a., and passing rents are broadly 10-15% below market, suggesting further scope for rental uplift upon lease expiry.

After this transaction, further inorganic growth could be forthcoming in Singapore, where sponsor CapitaLand still has S$1bn in the pipeline, or continued footprint expansion in Australia and the UK, given management’s target overseas exposure of up to 40% by portfolio AUM (implying as much as S$2.5bn in incremental overseas acquisitions assets).

S$1.3bn rights Issue for S$1.7bn portfolio

AREIT announced plans to acquire S$1.7bn in business parks across the US (S$1.3bn) and Singapore (S$0.4bn), priced at 6.3% yield (we estimate 6% after <10% of tax leakage in US).

The acquisition is to be partially funded by a S$1.3bn rights issue which could add 16% to its equity base.

This follows several other large REIT acquisitions and fund raising exercises of late. 

The rights issue price of S$2.63 represents a c.15% discount to AREIT’s theoretical ex-rights price and a c17% discount to its last traded price, at a valuation of 1.2x P/B.

Overall, AREIT estimates the deal could add 0.6% to DPU and 3.3% to NAV on a pro forma basis, and expects the deal to complete in 4Q19, subject to shareholder approval. 

This acquisition also lowers AREIT’s gearing to 34.6% from 36.3%, on a pro-forma basis, implying hefty debt headroom of c.S$1bn, which could support future acquisitions.

Positive read-across for CapitaLand

AREIT’s sponsor and 19%-owner CapitaLand is the seller of the 30 properties, and it expects to realize a S$95mn gain on the sale, in addition to S$17mn in acquisition fees.

This could add 4% to EPS and add 40bps to ROE in 2019. The transaction is in line with management’s strategy of accelerating capital recycling and growing ROE.

Sources: BAML, MS, AREIT, Capitaland

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