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Well worth the wait

  • Acquisition of Woolworths HQ has finally materialised following perpetual securities issuance 
  • Tight NPI yield of c.5.2% (4.8% post cost) reflects property’s long WALE of 10 years with annual rental escalations of 2.75%
  • Highly DPU accretive acquisition at c.4% on a full-year basis; S$100m fund raising assumed in our estimates
  • Upgrade to BUY with a TP of S$1.60
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Investment Thesis

Upgrade to BUY on valuation. The Manager has delivered on an acquisition to drive DPU growth of c.9% in FY23. The acquisition of Woolworths HQ will enhance AAREIT’s portfolio by c.27% and offers an attractive accretion of c.4% to DPU.

Potential for further organic growth in portfolio. In addition to the potential to tap on unutilised GFA of more than 500,000 sqft within its Singapore portfolio, Woolworths HQ presents the opportunity leverage on a further c.1.5m sqft of unutilised GFA. Moreover, the annual rental escalations for its master-leases provides for organic revenue growth of c.1%-3%.

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Looking to the next accretive acquisition. Following on from the acquisition of Woolworths HQ in Sydney, we look forward to the completion of the acquisition of 315 Alexandra Road in Singapore. With the stock’s recent inclusion into the FTSE EPRA NAREIT Developed Asia Index, we believe the improved trading liquidity of AAREIT and potential lowering in cost of equity would enable it to embark on further accretive acquisitions despite the stiff competition for good quality income-producing assets.

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Valuation:

Upgrade to BUY; DCF-based TP of S$1.60. Our target price of S$1.60 is based on DCF. Our assumed discount rate is 6.5% (risk-free rate of 2.5%). Our target price implies a target yield of 5.9% (FY23F) and a P/NAV of 1.19x.

Where we differ:

We have factored in S$100m equity fund raising in FY23. In our view, our estimates are more conservative as we have assumed a potential equity fund raising of S$100m to manage its balance sheet. Fund raising of less than S$100m presents upside to our earnings estimates. 

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Key Risks to Our View:

Key risks include further delays in the completion of the 315 Alexandra Road acquisition.

Key arguments:

  • Upgrade to BUY on valuation. The Manager has delivered on an acquisition to drive DPU growth of c.9% in FY23. The acquisition of Woolworths HQ will enhance AAREIT’s portfolio by c.27% and offers an attractive accretion of c.4% to DPU.
  • Potential for further organic growth in portfolio. In addition to the potential to tap on unutilised GFA of more than 500,000 sqft within its Singapore portfolio, Woolworths HQ presents the opportunity leverage on a further c.1.5m sqft of unutilised GFA. Moreover, the annual rental escalations for its master-leases provides for organic revenue growth of c.1%-3%.
  • Looking to the next accretive acquisition. Following on from the acquisition of Woolworths HQ in Sydney, we look forward to the completion of the acquisition of 315 Alexandra Road in Singapore. With the stock’s recent inclusion into the FTSE EPRA NAREIT Developed Asia Index, we believe the improved trading liquidity of AAREIT and potential lowering in cost of equity would enable it to embark on further accretive acquisitions despite the stiff competition for good quality income-producing assets.
     
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DCF valuation. Our target price of S$1.60 is based on DCF. Our assumed discount rate is 6.5% (risk free rate of 2.5%). Our target price assumes a target yield of 5.9% (FY23F) and a P/NAV of 1.19x.

Where We Differ: 
We have factored in S$100m equity fund raising in FY23. In our view, our estimates are more conservative as we have assumed a potential equity fund raising of S$100m to manage its balance sheet. Fund raising of less than S$100m presents upside to our earnings estimates.