Ascendas REIT - OCBC Investment 2018-10-26: Sounding A Cautious Tone

ASCENDAS REAL ESTATE INV TRUST (SGX:A17U)

Ascendas REIT - Sounding A Cautious Tone

Ascendas REIT (A-REIT) reported its 2QFY19 results which fell slightly short of our expectations.
Gross revenue rose 1.1% y-o-y to S$218.1m due largely to acquisitions, but partially offset by lower occupancy in Singapore.

NPI fell 1.0% to S$158.9m, as there was a reversal of certain accrued property operating expenses in 2QFY18 which were no longer required.
DPU suffered a y-o-y decline of 4.2% to 3.887 S cents. This can be attributed to higher finance costs and an enlarged unit base. The latter was due to a timing issue as dilution from a private placement kicked in before contribution from Ascendas REIT’s second UK portfolio acquisition (completed on 4 Oct).
For 1HFY19, Ascendas REIT’s NPI grew 1.3% to S$318.1m, while DPU of 7.889 S cents represented a dip of 2.7% and this accounted for 48.3% of our FY19 forecast.

Operationally, Ascendas REIT’s Singapore occupancy declined by 1 ppt q-o-q to 87.1%. Some tenants had downsized their operations, while others moved into their own facilities.
Compared to previous quarters, management sounded more cautious during the analyst briefing, and highlighted that the US-Sino trade tensions had resulted in more wariness for businesses in their expansion plans. Tenants are also taking a tougher stance towards lease negotiations, with some preferring to adopt a wait-and-see approach.
One of the silver linings from 2QFY19’s results came from rental reversions, which remained positive at 2.3% for its Singapore portfolio (no renewals in Australia).
All business segments saw higher rental uplifts in 2QFY19. Management is also exploring a built- to-suit project in Singapore, and this is pending JTC’s approval.

We make a number of adjustments to our model, which include factoring in Ascendas REIT’s acquisition of two portfolios of UK logistics assets (38 properties in all), purchase of Cargo Business Park in Brisbane and recent private placement exercise which raised gross proceeds of S$452.1m. We also moderate our rental assumptions for Ascendas REIT’s Singapore properties.
All in, our FY19 and FY20 DPU forecasts are lowered by 2.0% and 2.3%, respectively. Correspondingly, we trim our fair value estimate to S$2.64.

Andy Wong Teck Ching CFA OCBC Investment Research | https://www.iocbc.com/ 2018-10-26

SGX Stock Analyst Report HOLD MAINTAIN HOLD 2.64 DOWN 2.710