Ascendas REIT

Kim Eng on 4 Apr 2013

Downgrade to HOLD. The industrial REIT run looks over and we downgrade A-REIT to HOLD on valuations. It was our last BUY among Industrial-REITS. A-REIT has been our conviction BUY since we initiated in June 2012 and the stock has risen 30%. We expect the current QE-inflated growth to run out of steam once the artificially compressed interest rates in the US, and hence Singapore, start normalising sometime next year or in early 2015. Industrial property prices in the physical market have almost doubled since 2009 whereas rentals are up only 44%. Further government cooling measures will put a lid on asset prices, while we are sceptical that rentals can scale up in the near term. We remain cautious on the mismatch between industrial rentals and physical prices and see no further catalysts for the sector at the current levels (refer to our S-REITs report, titled Rational Temperance, dated 22 Mar 2013).

Private placement. A-REIT conducted a private placement of 160m units (6.7% dilution post-placement) at SGD2.54/unit on 19 Mar 2013. An advance distribution of 2.70 cents is expected to be paid on 25 April. Of the gross proceeds of SGD406m, SGD126m has been used to  acquire The Galen at Science Park II and SGD210m will be used to partly fund an integrated industrial mixed-use property, currently under construction, at Kallang Avenue (total value ~SGD490m). The rest of the money will be reserved for issue expenses, corporate/working capital purposes and debt repayments.

The Galen acquisition. We have factored into our model A-REIT’s private placement and purchase of The Galen (SGD538 psf on NLA basis), with initial NPI yields of 6.8% and passing rents of SGD4.10 psf/mth. This works out to ~SGD11m in revenue and ~SGD8.6m in NPI contributions. A six-storey multi-tenanted science park building, The Galen has a NLA of 234,384 sq ft and occupancy rate of 97.5%. Ascendas Land and the REIT manager occupy 52.7k sq ft, or 22.5%, of the lease space.

Moving up the value chain. Based on our estimates, A-REIT has 38% of its FY3/14F GAV in business/science parks and 23% in high-tech industrial/data centres. We expect these two segments to progressively increase in proportion as Singapore outsources its lower value-add activities to neighbouring countries (warehouse rents and asset values in Singapore are, respectively, 2.5x and 8.5x higher than in  Iskandar Malaysia). We downgrade A-REIT to HOLD with a TP of SGD2.70.