• Maiden entry into UK through a portfolio of 12 logistics properties
• Acquisition cost of £207.27 mn (S$373.15 mn) expected to be fully funded by GBP-denominated debt
• Maintain Accumulate; new target price of $2.96 (previously $2.91)

What is the news?

Ascendas Reit is expanding its footprint beyond Asia and Australia, through the proposed acquisition of a portfolio of 12 logistics properties in the UK. The properties will be acquired from two third-party vendors for £207.27 million (S$373.15 million). Completion is expected to take place in 3Q 2018. DPU accretion is expected to be about 0.194 cents, assuming acquisition is fully-funded by debt.

How do we view this?

The Positives

+ Income visibility from UK portfolio with long WALE of 14.6 years. This extends A-Reit’s overall WALE from 4.2 years to 4.4 years (as at 31 March 2018). The first lease expiry in the UK portfolio is three years’ time, in FY21/22. The quality of the tenants in the portfolio also mitigates credit risk.

+ Geographical and income diversification of overall portfolio with limited country risk. Geographical diversification into the UK will increase investment in overseas markets from 15% to 17% by asset value, and overseas revenue from 13% to 15%. There will also be more quality tenants in diversified industries. The UK has a similar risk profile to Singapore and Australia; and the depth of the UK market provides scalability.

+ Strengthening of overall portfolio by increasing exposure to freehold properties. 10 of the 12 properties are freehold, and the remaining two are virtual freehold (999 years leasehold). This increases A-Reit’s exposure to freehold properties to 19% from 16% by asset value. In view of the freehold nature of the properties, we think that the lower NPI yield of ~5.2% for the UK portfolio, compared to the existing A-Reit yield of ~6.2% is reasonable.

The Negatives

– A property (Unit 3, Brookfields, Rotherham) is currently vacant. The tenant had vacated the space, but there is a 2-year rental top-up in place which will be deducted upfront from the purchase consideration.

– Gearing increases to 36.1% from 34.4%. With the acquisition expected to be fully-funded by debt, we estimate new debt headroom of S$700 mn, from existing S$1.0 bn. However, the GBP-denominated debt act as a natural hedge to the GBP assets. The cost of GBP-denominated debt will be between 2.6% and 2.8% for a five-year tenor – lower than existing all-in debt cost of 2.9% as at 31 March.

Maintain Accumulate; new target price of $2.96 (previously $2.91)

We have adjusted our forecast to include the acquisition. Our FY19e/FY20e gross revenue is 1.5%/2.3% higher than previous, and DPU is 1.8%/2.1% higher than previous. We expect a stable ~6% yield and our target price gives an implied 1.39 times FY19e forward P/NAV multiple.

Note: Ascendas Reit will be releasing 1Q FY18/19 financial results on July 30 after market hours.

Source: Phillip Capital Research - 30 Jul 2018