What You Should Know About Ascendas Real Estate Investment Trust Latest Assets Acquisition In The United Kingdom

Ascendas REIT (Areit), Singapore’s first and largest industrial REIT, recently announced a proposed acquisition of 26 logistics properties in the United Kingdom (UK).

This deal came hot on the heels of earlier acquisition deal on Jul 18, for 12 logistics properties in the UK that cost approximately S$360.11 million. In a span of 3 months, there is another pending acquisition. It seems that Areit is highly positive with the outlook of UK logistics sector, motivating the management to expand into the UK in a rather steadfast fashion.

However, should an investor be concerned about successive acquisition deals? Are the assets being acquired at a good price? Would the acquisition benefit Areit unitholders by boosting its Distribution per Unit without incurring excessive debts?

Let us find out more details about the proposed acquisition.

Freehold Assets With Quality Tenants

Overview of assets to be acquired. Source: Areit Proposed Acquisition presentation slides

The proposed assets to be acquired are fully freehold with 100% occupancy, which means investors need not worry about land use rights extension and value decay towards the end of the land lease. Its Weighted Average Lease Expiry (WALE) is also comfortably long at 9.1 years.

The lease structure is favourable to unitholders as tenants are required to pay all statutory outgoings, operating and maintenance expenses, essentially a triple-net lease.

Geographical spread of properties. Source: Areit Proposed Acquisition presentation slides

The properties, according to Areit management, are majority well-located at West Midlands, an important logistics hub situated at the centre of UK’s motorway network.

The major tenants include Aston Martin Lagonda, Amethyst Group, Eddie Stobart and Royal Mail Group. I did a quick cursory search and here is some key info about the tenants:

• Aston Martin Lagonda is a globally well-known luxury car manufacturer that also provides maintenance and repair services
• Amethyst Group is a third-party logistics services provider with 525,000 square feet of warehouse space across 6 distribution centres
• Eddit Stobart is a listed logistics and supply chain company with 5,700 employees and 26 distribution centres scattered across the UK and Europe
• Royal Mail Group is a global logistics and mail player with operations in 44 countries and annual revenue in excess of 10 billion pound

It seems that the major tenants are reputable companies established in their respective fields. Risks of them defaulting on rental payment would be relatively low.

Diversification of Portfolio 

Source: Areit Proposed Acquisition presentation slides

Post-acquisition, Areit would increase its exposure to logistics properties to 30% of the total portfolio asset value. The UK assets would take up 8% of the total asset value, an increase from 4%.

The proportion of freehold assets will also increase from 19% to 23% of total asset value.

Total cost of Acquisition

The estimated total cost of acquisition is approximately S$463.80 million comprises:

• The purchase consideration of S$451.67 million
• Acquisition fee payable to the manager amounting to S$4.59 million
• Professional fees, insurance premium and other expenses of S$7.55 million

Method of Funding

Management will fund the acquisition via a combination of Pound Sterling denominated debt and the proceeds from a private placement that closed on 7 Sept 2018.

If you recall, Areit raised gross proceeds of approximately S$452.1 million via a private placement exercise that issued 178 million new units at issue price of $2.54 per unit. The capital raising exercise was completed on 7 Sept and was about 2.2 times covered.

Impact on Areit

Source: Areit Proposed Acquisition presentation slides

Management guided that the deal is DPU accretive, a good deal for existing unitholders. Assuming if the deal had been completed on 1 Apr 2017 and the acquired assets were held through the financial year ended 31 Mar 2018, and the proposed acquisition funded by 52.5% equity and 47.5% sterling pound debt, the Distribution per Unit (DPU) would have expanded 0.14% to 16.01 cents.

WALE would improve to 4.5 years from 4.3 years, thanks to the long WALE of the acquired properties.

Another positive point is that the aggregate leverage would decrease to 36.7% from 38.5%. This would allow debt headroom for future acquisitions.

Conclusion

As communicated by Areit management, the acquisition seems to be fairly structured, with increased DPU post-acquisition, a more diversified asset portfolio, longer WALE and lower gearing. This seems to be a good deal that benefits the unitholders.

However, I am also wary about the seemingly aggressive expansion drive into the UK, as seen from the two acquisitions in 4 months. Investors would need to monitor Areit performance in the next few quarters, in particular, the occupancy and income generating abilities of the UK portfolio. Should it be as positive as what was described by the management before deals were finalised, investors can be affirmed of a bright prospect going forward.

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