Ascendas REIT - OCBC Investment 2018-07-31: Fishing For UK Logistics Assets

Ascendas REIT - OCBC Investment Research 2018-07-31: Fishing For Uk Logistics Assets ASCENDAS REAL ESTATE INV TRUST SGX:A17U

Ascendas REIT - Fishing For UK Logistics Assets

  • 1QFY19 DPU -1.2% y-o-y due to one-off item.
  • Solid portfolio rental reversion of 10.5%.
  • Maiden entry into UK.

1QFY19 results within our expectations

  • Ascendas REIT (A-REIT) reported its 1QFY19 results which met our expectations. Gross revenue inched up 1.5% y-o-y to S$216.6m, while NPI grew at a faster pace of 3.8% to S$159.2m due largely to lower property tax expenses. The latter constituted 23.7% of our FY19 forecast.
  • DPU of 4.002 S cents represented a slight dip of 1.2% y-o-y. However, this was attributed to a one-off distribution related to a tax ruling by IRAS amounting to S$5.9m (~0.20 S cents per unit) in 1QFY18. Excluding this, DPU would have grown 4.0% y-o-y. This accounted for 24.5% of our full-year projection.
  • A positive surprise came from Ascendas REIT’s rental reversions, which improved 10.5% in Singapore in 1QFY19. This was boosted by the renewal of a 15-year lease at a Hi- specifications property which was previously under-rented. Excluding this lease, rental reversions were positive at ~3%.

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UK here we come!

  • Ascendas REIT announced last Thursday its proposal to acquire a portfolio of 12 logistics properties located in the UK from two third-party vendors. Once completed (expected in 3QCY18), this would mark Ascendas REIT’s maiden entry into the region. The agreed portfolio value is GBP207.3m (~S$373.2m), which translates into an initial NPI yield of 5.3% (5.2% post-cost yield).
  • The benefits of the proposed acquisition include
    1. a long portfolio WALE of 14.6 years (11.7 years if break clauses are taken into account),
    2. predominantly freehold land (10 freehold and 2 on 999-year leases),
    3. tight supply of logistics properties in the UK with room for market rental growth at ~3% p.a. in the near-term.
  • Overall, we are neutral on the transaction. Although the acquisition would provide Ascendas REIT with a diversification of income streams, there are still uncertainties over the Brexit process. Funding is expected to come from a GBP-denominated 5-year fixed loan with interest rate of ~2.6%-2.8% to provide a natural hedge.
  • Ascendas REIT is also likely to hedge the expected net income cash flows from the properties. On a pro forma basis, this transaction is expected to boost Ascendas REIT’s FY18 DPU by 1.2%.
  • Pending completion, we have not factored this proposed acquisition in our model. Our fair value estimate is unchanged at S$2.71.

Andy Wong Teck Ching CFA OCBC Investment Research | https://www.iocbc.com/ 2018-07-31
SGX Stock Analyst Report HOLD Maintain HOLD 2.710 Same 2.710