Adding Data Centres (DCs) in Europe

• Ascendas REIT (SGX:A17U) has accelerated its overseas diversification efforts with its latest acquisition of an 11-asset S$904.6m European data centres portfolio.
• Beyond the immediate DPU lift, we see strong tailwinds for data centres supporting Ascendas REIT’s plans to scale up in this asset class, now at 10% of its AUM (from 4%).
• Ascendas REIT's fundamentals are sound with its more resilient AUM profile, backed by rising DPU visibility, and growth levers from a strong balance sheet. BUY.

Acquires S$905m Portfolio at 6.0% NPI Yield

• Ascendas REIT will acquire a portfolio comprising 11 data centres (8 triple net powered shell and 3 colocation assets) from Digital Realty Trust. The properties are 97.9% occupied, and command a 4.6-year WALE, with ~83% of leases (by rental income) embedded with 1.0-3.0% pa rent escalations.
• The valuation implies a 6.0% NPI yield (pre-cost) and 5.7% (post-cost), with cap rates ranging between 5.6-6.5%, against market transactions at 4-7%. This likely reflects the assets’ location, with 9 in London, Amsterdam and Paris, (which together with Frankfurt, collectively referred to as FLAP), rank as Europe’s 4 largest colocation markets.

Assets Backed by Positive Fundamentals

• Data Centres remain an attractive asset class in our view and backed by favourable CBRE.
• We see tailwinds from rising consumption of market absorption at 2.4 years in 2020 (from 3.0 years in 2019) should support further improvement in vacancies in 2021 to 17% (from 19% in 2020 and 21% in 2019).

Deal Is Accretive, Strengthens AUM Profile

• The deal adds 1.3% to Ascendas REIT's DPU to S$15.0b. Contribution from UK/ Europe rises from 6% to 12 7.5%.
• Support from its sponsor’s local data centre team and a 1-year facilities management transition from vendor should mitigate near-term execution risks, given 42% of leases are for colocation assets.

Source: Maybank Kim Eng Research - 17 Mar 2021