• Maintain BUY and TP of SGD3.60, 28% upside with c.6% FY22F yield. Ascendas REIT’s recent yield-accretive acquisition of two good quality Singapore assets adds resilience to its portfolio, with further room for upside. Overall metrics are trending in the right direction, with higher occupancy and double-digit rental rate reversions (recorded in 2Q) – this is expected to continue in 2H and outpace cost pressures. The impact of rising interest rates on borrowing cost is manageable, at -2% for every 100bps increase. This stock remains our sector Top Pick.

• Maiden foray into promising Singapore cold storage logistics sector via the proposed third-party acquisition of 1 Buroh Lane, a modern Grade- A 5-storey cold storage ramp-up logistics facility. The asset has 21 years left on its lease, while the purchase price of SGD191.9m (reflecting a 2% discount on its latest valuation) translates into an attractive 7% NPI yield. It is fully occupied by five well-established tenants, with a long WALE of seven years, and built-in rental rate escalations of 2-3% every three years. We see this asset as a good fit for its portfolio, as it offers good long-term growth potential, with strong demand for cold storage logistics facilities outpacing the limited supply in the market. The asset is also well located – it is close to major sea ports, Jurong Port and Tuas Mega Port, and benefits from the megatrend of Singapore’s focus on long-term food security.

• Acquisition of Phillips APAC Centre for SGD104.8m, at a 6% discount to the asset’s latest valuation, with an initial NPI yield of 7.2%(pre-transaction costs). The high-tech campus serves as the Asia-Pacific headquarters for Phillips, which will rent back c.66% of the space on a multi-year lease. The overall occupancy rate of the asset stands at 95.7%, from a total of four tenants and a WALE of 4.5 years. We expect its occupancy rate to pick up in the near term, in view of the asset’s central location within Toa Payoh town, along with the potential for positive rental rate reversions.

• To be funded by debt and DPU accretion of 1%. With these acquisitions AREIT’s YTD acquisitions amount to SGD520m, ie about 50% of managements guidance of c.SGD1bn for the full year – which indicates that there may be more new assets to come in 4Q. Singapore will account for c.62% of assets by value, with the rest of the markets being the US (15%), the UK (14%) and Australia (9%). Its post-acquisition gearing remains comfortable at c.37%, providing c.SGD1bn in debt headroom (assuming a 40% cap). Both the acquisitions are expected to be completed by 4Q.

• We lift FY22-23F DPU by c.1% to factor in the acquisitions. AREIT has the highest ESG score of 3.3 out of 4.0, among the industrial REITs (based on our proprietary in-house methodology). As this score is three notches above our country median, we applied a 6% premium to our intrinsic value to derive our TP.

Source: RHB Research - 21 Sep 2022