After the market closed last Friday, Ascendas REIT (AREIT) announced the acquisition of Aperia, a newly completed integrated industrial mixed-use development in Kallang iPark for S$458m. The following trading day (11 Aug), Macquarie Equities Research (MER) released a research report with an ‘Outperform’ rating on the stock and a 12-month price target of $2.57

Impact
Aperia details. Aperia is located at the fringe of the CBD, within five minutes walk to the Lavender MRT station and the upcoming Bendeemer MRT station. The vendor is PLC 8 Development Pte Ltd, where AREIT invested in its CBs back in 1Q2012. The amount payable was negotiated based on the development costs of the property in 2012. The asset was valued by DTZ at S$488m. Aperia has land tenure of 60 years, expiring 21 Feb 2072, and was completed on 16 June 2014. The property is zoned ‘Business 1 – white site’ with a plot ratio of 3.0x and GFA of 86,696 sqm comprising two Business-1 towers (GFA 72,290 sqm) and three levels of retail and amenity space (GFA 14,406 sqm). Based on net lettable area (NLA) of 69,465 sqm, the acquisition price works out to circa S$612.53 per sq ft.
 
Funding via March 2013 private placement proceeds and new debt. AREIT will fund the acquisition via S$270m from the March 2013 private placement, which raised gross proceeds of S$406.4m. With this, the proceeds from this private placement is fully utilised (acquisition of Galen in Mar 2013 for S$126.0m and issue expenses and other working capital purposed totalling S$10.4m). AREIT’s gearing will rise from 31.6% to 34.0% after the acquisition.
 
Yield estimated at 5.5%. MER estimates that the net property income (NPI) yield on Aperia to be circa 5.5%. The asset is 46% pre-committed, with another 15% under advanced negotiation. Current tenants include Intel, Roche Diagnostics, Audi, Cardinal Health, McDonald’s and popular retailers like Cold Storage, Tim Ho Wan and Old Town Coffee.

Price catalyst
12-month price target: S$2.57 based on a discounted cashflow (DCF) methodology.
 
Catalyst: Lowering vacancy rates in its portfolio, positive rental reversions.

MER’s action and recommendation
AREIT’s 104 properties in Singapore and 2 business parks in China reflect a well-diversified rental income stream, with no single property accounting for more than 4.4% of total income. MER believes there is further upside if AREIT manage to reduce the current portfolio vacancy rate of 11.9%. Distribution per unit (DPU) growth of circa 7% per annum over the next two years is above the SREIT sector average of 4%.

Source: Macquarie Research - 13 Aug 2014