Ascendas REIT - Maybank Kim Eng 2018-07-31: A Strong Start

ASCENDAS REAL ESTATE INV TRUST SGX:A17U

Ascendas REIT - A Strong Start

Ascendas REIT delivered a strong 1Q19 with core DPU up 4.0% y-o-y, in line with our estimate and slightly ahead of the street. We fine-tuned estimates to adjust for its recently announced deals.
We continue to see Ascendas REIT as the best proxy to recovering sector fundamentals given its concentrated business parks and high-specs portfolio.
Following its UK entry, we see further momentum on portfolio diversification efforts to drive upside to our 3.8% 3-year DPU CAGR estimate.

Valuations based on our DDM SGD3.05 Target Price (WACC: 7.0%, LTG: 1.5%) remain undemanding given its scale, liquidity and visible growth strategy.
BUY.

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Ascendas REIT’s 1Q19 Revenue and NPI rose 1.5% y-o-y / 3.8% y-o-y and 0.4% q-o-q / 0.8% q-o-q. DPU of SGD4.00cts, excluding the one-off distribution in 1Q18, grew 4.0% y-o-y. The performance was driven by contributions from acquisitions in Australia (100 and 108 Wickham Street in Brisbane) and redevelopment of 50 Kallang Ave in Singapore.
Ascendas REIT’s portfolio occupancy fell q-o-q from 91.5% to 90.5% - while occupancy in Australia remained high at 98.6%, Singapore occupancy fell q-o-q from 89.5% to 88.1%. This was attributed to the newly completed 20 Tuas Ave 1 (at 51.1% occupied but pre-committed for another 40%) and non-renewals at SB Building and No. 31 International Business Park.
Ascendas REIT achieved strong +10.5% rental reversion for renewed leases in its multi-tenanted buildings in Singapore (at +5.6% for business and science parks, +24.8% for high-specs industrial and +5.5% for integrated development) with new demand led by the transport and storage sector (accounting for 46.7% of new demand). Management expects improvement in FY19 from +0.7% in FY18.

During 1Q19, Ascendas REIT completed two acquisitions in Melbourne, Australia (No. 169-177 Australis Drive at AUD34.0m and No. 1314 Ferntree Gully Drive at AUD16.2m) and in Singapore a SGD61.4m redevelopment of 20 Tuas Ave 1 and a SGD12.3m AEI at 21 Changi South Ave 2. Its SGD373.2m UK logistics deal that was announced on 26 Jul is expected to close in 2Q19.
The AEI schedule now includes SGD26.1m for Aperia, Nordic European Centre, and 138 Depot Road.
Meanwhile, Ascendas REIT divested 30 Old Toh Tuck Road for SGD24.0m at end-Apr and will complete the sale of No. 41 Changi South Ave 2 for SGD13.6m (at 17% above valuation) in 2Q19. We have factored these in and its latest deals.

Earlier-than-expected pick-up in leasing demand driving improvement in occupancy.
Better-than-anticipated rental reversion trend.
Accretive acquisitions.

Prolonged slowdown in economic activity could reduce demand for industrial space, resulting in lower occupancy and rental rates.
Termination of long-term leases contributing to weaker portfolio tenant retention rate.
Sharper-than-expected rise in interest rates could increase cost of debt and negatively impact earnings, with higher cost of capital lowering valuations.

Chua Su Tye Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2018-07-31

SGX Stock Analyst Report BUY Maintain BUY 3.050 Same 3.050