CGS-CIMB Analyst take
All of Singapore’s biggest REITs have concluded their Q2 and H1 2022 earnings reports. However, that doesn’t mean that news flow for these REITs has stopped.
That’s because REITs need to continue to grow – either organically or inorganically – by acquiring new properties.
That’s exactly what one of the country’s biggest REITs has been doing. Ascendas REIT (SGX: A17U) announced it would be acquiring a cold storage logistics property in Singapore.
The research team at CGS-CIMB Securities maintains our “ADD” call and lifts our target price for Ascendas REIT marginally to S$3.21 (from S$3.20).
Here’s what dividend and REIT investors need to know about Ascendas REIT’s latest proposed acquisition.
First buy in Singapore’s cold storage sector
Ascendas REIT plans to acquire a cold storage facility in Singapore for S$191.9 million. This will be the REIT’s first investment into the cold storage facility sector in Singapore.
Fortunately, the purchase price is 1.6% below the May 2022 independent valuation of S$195 million. The property itself is a Grade-A, five-storey ramp-up logistics distribution centre with chiller, freezer, air-conditioned and ambient storage space.
More broadly, it will cater to tenants from food producers and distributors right through to retailers and importers.
Right now, the property is fully occupied by five tenants, including a supermarket chain and leading distributors of fruits and vegetables.
Boost to logistics exposure
Ascendas REIT has been busy on the acquisition front lately. Just last month, the REIT announced a proposed purchase of the Philips APAC Centre in Singapore for S$104.8 million.
Both this, along with the newest proposed acquisition, could increase the REIT’s assets under management (AUM) to S$16.9 billion.
This cold storage buy will also see Ascendas REIT expand the logistics property sector’s share of its overall portfolio (by value) to around 26%.
Furthermore, the cold storage property has a weighted average lease expiry (WALE) of seven years. Its leases also have built-in rental escalations of 2-3% every three years. This will help Ascendas REIT improve its income stability.
Cold storage buy will likely boost the dividend
Ascendas REIT intends to fund the cold storage facility purchase consideration via its internal resources or existing debt facilities.
We estimate that the gearing ratio – post these latest two buys – will rise to around 39% from 36.7% at the end of June 2022.
Based on the net income yield of 6.9% for the cold storage property, when compared to the REIT’s average all-in funding cost of 2.1%, the acquisition should be distribution per unit (DPU) accretive.
Reiterate our Add rating
As for Ascendas REIT projections, we tweak our DPU estimates upwards by 0.13-1.41% to factor in contributions from these two new properties.
As a result, we lift our target price slightly to S$3.21. Ascendas REIT is trading at a 5.7% FY22 dividend yield. We continue to like Ascendas for its diversified and resilient portfolio as well as healthy balance sheet.
Potential upside catalysts could come from a faster-than-expected global recovery and accretive new acquisitions.
However, downside risks include a protracted economic downturn.
Disclaimer: CGS-CIMB Securities REITs Analyst Mun Yee Lock doesn’t own shares of any companies mentioned.
