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Morningstar | AREIT Ventures Into the U.K. With Acquisition of Logistics Properties; FVE Raised to SGD 2.55

Ascendas Real Estate Investment Trust has announced that it will acquire a portfolio of 12 logistics properties in the U.K. for GBP 207.3 million, or approximately SGD 373.2 million. We have adjusted our forecasts accordingly and increased our fair value estimate to SGD 2.55 per unit (from SGD 2.50). Our no-moat and stable moat trend ratings are intact. The properties have an average occupancy rate of 92% spread over nine tenants, which includes DHL and wide-moat Amazon.com. If we include the two years of rental top-up provided by the vendors for the Rotherham property (currently vacant as the existing tenant is under administration), the occupancy rate of the portfolio would be at 100%. Management expects to lease out this vacant property within one year. The portfolio has a long weighted average lease expiry of 14.6 years which is longer than the 4.2 years at AREIT’s existing portfolio, and is on freehold land (including two of the 12 properties, which are on 999-year leasehold land). AREIT intends to fund this acquisition entirely by debt as a natural hedge to currency headwinds. The expected net property income yield for this portfolio is at 5.32%, which is lower than the net property income yield for AREIT’s logistics and distribution centres division of more than 6%.

We view this transaction positively as: (1) it is accretive in terms of distribution per unit to unitholders; (2) it provides the trust with an opportunity to diversify into the U.K. and acquires a portfolio of freehold assets; (3) it has a long weighted average lease expiry with rental step-up, which is predominantly linked to the market rate and the consumer price index; and (4) it could benefit from the growing e-commerce trend in the U.K., which could be less affected by Brexit.

This acquisition is in line with AREIT’s strategy to diversify its portfolio, as management has stated previously during its fiscal 2018 results announcement that it is looking at investment opportunities in the U.S. and Europe. Management also reiterated that this is just its first foray in the U.K. or the larger European market, and there could be more to come.