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Simons Trading Research

Author: simonsg   |   Latest post: Tue, 13 Jul 2021, 12:12 PM

 

Ascendas REIT - Powering Ahead With Entry Into Europe’s FLAP Markets

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  • Acquisition of S$960m European data centre portfolio in line with our projections.
  • Attractive initial yield of 6.0% for highly sought-after data centre properties.
  • Ascendas REIT is trading at forward yields of 5.4%; one of the highest among the large-cap industrial REITs.

Ascendas REIT's Acquisition of European Data Centre Portfolio

Entry into the FLAP markets with a ~ S$1bn deal

  • Acquisition of 11 data centres mark Ascendas REIT (SGX:A17U)’s entry into 3 of the 4 FLAP markets (Frankfurk, London, Amsterdam and Paris) - the top-tier data centre markets in Europe that are expected to benefit from large populations and their connectivity and infrastructure.
  • Total purchase price of S$904.6m (S$960.0m including all other costs and fees):
    • 4 in UK: S$460.3m (two triple-net powered shell, two colocation)
    • 3 in Netherlands: S$232.2m (two triple-net powered shell, one colocation).
    • 3 in France: S$172.3m (three triple-net powered shell)
    • 1 in Switzerland: S$40.12 (one triple-net powered shell)
  • NPI yield of 6.0%: yield of 5.7% (post-costs).
  • Occupancy rate of 97.9% with a WALE of 4.6 years.
  • Of the 11 data centres, 6 are freehold, 2 on perpetual leasehold basis, and 3 on leasehold (between 39 – 104 years). Weighted average land lease expiries for the 5 properties on leasehold is 42.9 years.
  • Purchase consideration is at a slight ~0.03% discount to valuation.

Attractive NPI yield of 6.0%

  • The overall portfolio NPI yield of 6.0% appears very attractive, given that nine of the 11 properties are in London, Amsterdam and Paris, which are ranked as 3 of the top 4 largest colocation markets in Europe.
  • 83% of this portfolio will have rental escalations of between 1.0% and 3.0% per annum.
  • More than half of leases are on 3% annual rental escalations.
  • Digital Realty will provide property and facility management services for the first year. Thereafter, a team from Ascendas REIT’s Sponsor will oversee operations.

Attractive NPI yield of 6.0%

  • The overall portfolio NPI yield of 6.0% appears very attractive, given that 9 of the 11 properties are in London, Amsterdam and Paris, which are ranked as 3 of the top 4 largest colocation markets in Europe.
  • 83% of this portfolio will have rental escalations of between 1.0% and 3.0% per annum. More than half of leases are on 3% annual rental escalations.
  • Digital Realty will provide property and facility management services for the first year. Thereafter, a team from AREIT’s Sponsor will oversee operations.

Well-staggered lease expiry profile

  • Minimal lease expiries in the near term: 9.5% in FY21 (London and Manchester) and 12.3% in FY22 (Amsterdam and Manchester).
  • Only major lease expiry in 2024, accounts for 39.6% of the portfolio revenue. We believe that the majority of the expiries will be from the Croydon in the UK. Given its location and the strong demand in the UK, we believe that the tenant is likely to renew.
  • Potential for portfolio occupancy to improve given the continued strong demand for data centres in Europe, particularly in the FLAP markets.

Age of properties between 10 and 20 years old

  • Some capex may be required for the older assets that are close to 20 years old. Replacement and update of M&E may be capex intensive, especially if they must be upgraded to comply with emission standards in Europe. However, we understand that provisions have been made.
  • Another concern is the leasehold status of several properties, especially Cateringweg in Paris, France (remaining tenure of 39 years). European assets are typically on freehold land. However, the remaining land tenures of these properties are still relatively long and will not be a concern in the near future.

Optimal funding structure: 64% equity and 36% debt

  • Remaining S$612.5m from Ascendas REIT's fund-raising in December 2020 will be utilised to fund the acquisition.
    • S$347.5m will be funded with debt.
    • EUR and GBP debt is expected to create ~1.3% accretion to DPU (S$0.00189).

Our Thoughts

  • The total acquisition of ~ S$960m is in line with our earlier projections (S$1.0bn). The post-cost NPI yield of 5.7% is slightly higher than our assumptions of a 5.25% yield in our models. This acquisition will bring Ascendas REIT’s AUM to older properties and these may be significant if they include the upgrading and replacement of M&E services. However, no further details were shared on these capex requirements and we understand that management has a plan as soon as tomorrow. As such, our revenue projections remain largely unchanged and FY21 DPU forecast is maintained at S$0.161 per share. This implies a forward yield of 5.4%, one the most attractive yields among the large-cap industrial REITs.
  • We are maintaining our BUY recommendation on Ascendas REIT with a target price of S$4.00.

Source: DBS Research - 18 Mar 2021

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