Ascendas REIT - DBS Research 2019-01-30: Building Blocks For A Brighter Future

ASCENDAS REAL ESTATE INV TRUST (SGX:A17U)

Ascendas REIT - Building Blocks For A Brighter Future

Another steady quarter with occupancy rates staying ahead of expectations.
Rental reversions picked up at 3.2%, pointing to a brighter outlook.
Proposed development of Grab’s new HQ in One North is a value accretive addition to Ascendas REIT.
BUY call and S$2.95 Target Price maintained.

ASCENDAS REAL ESTATE INV TRUST (SGX:A17U, Ascendas REIT): 3Q19 results in line; transitional quarter with better times ahead.

Ascendas REIT reported another stable set of operating results. 3Q19 gross revenues came in 4.2% higher y-o-y to S$226.4m. This was mainly from acquisitions in Australia (108 Wickham Street, Cargo Business Park and 169-177 Australis Drive), acquisition of logistics properties in the UK (completed in middle Aug-18 and Dec-18), and the completion of redevelopment works at 20 Tuas Avenue 1. This was offset by non-renewals at certain properties in Singapore.
Net property income grew by a faster 6.6% to S$168m on the back of lower property tax expenses. Total amount available for distribution grew by 7.0% y-o-y to S$124.3m.
Given the enlarged unit base post recent equity fund raisings, DPU rose marginally by 0.7% to 3.998 Scts.

Ascendas REIT's 9M19 operating results was in line with estimates. Gross revenues and net property income were 2.3% and 3.1% higher y-o-y to S$661.1m and S$486.1m respectively.
Total amount for distributable income increased by a lower 0.9% to S$356.7m on the back of higher interest expenses. 9M19 DPU of 11.887Scts formed 75% of our full year forecast.

While we expected occupancy to drop given the more cautious tone set by the Manager in the previous quarter, Ascendas REIT continued to be able to maintain occupancy rate at 87.5% (vs 87.3% a quarter ago) with the Singapore multi-tenanted properties seeing a marginal 0.2 bps increase in take-up rates to 83.5% (vs 83.1% a quarter ago). This highlights the strength of the REIT’s diversified portfolio which enables the Ascendas REIT to continue to deliver a resilient set of results.
Rental reversion for the quarter was up by 3.2% (vs 2.3% in 2Q19) and this was achieved across all property segments with notable increases in Business Parks (+5.4%), Hi-Specs & Data-centers (+1.7%), Light industrial and flatted factories (+1.7%), and integrated developments (+10.3%). Looking ahead, the Manager expects to see an improvement in reversions, a sign of increased stability.

Ascendas REIT’s properties in Australia and the UK continued to churn out stable cashflows. The weighted average lease expiry for Australia and UK are 4.5 years and 11.3 years respectively, offering strong income visibility, with minimal expiries in FY19.
The Manager has attempted to reduce income volatility by hedging cashflows; cashflows from Australia and UK are substantially hedged up to 1 year out while the REIT has taken a natural hedge position through taking local currency denominated loans (76% for AUD and 100% for GBP) to limit risk to NAV.

3Q19 gearing inched higher to c.36% after the close of the recent UK acquisition and is expected to rise further to 37% on the back of the recent announcement of a built-to-suit development in Singapore (estimated construction value of c.S$188m). This is still within the Manager’s optimal level. Interest rates remained stable at 3.0%, and Ascendas REIT has a debt expiry tenure of 3.6 years.

Ascendas REIT will build a 42,310 sqm (est 455k sqft) GFA “Built-to-suit” Business Park for Grab Taxi Holdings Pte Ltd (Grab) within One North, which is one of Singapore’s more vibrant master-planned business park hubs off the Central Business District.
The development will be spread over 2 tower blocks (9 storeys and 4 storeys) connected via a sky bridge and will be a Green Mark Goldplus Building.
The total development cost is estimated to be S$181.2m (land premium S$84m, stamp duty S$8.4m, S$88.8m construction cost) and will be borne by Ascendas REIT. The development will be completed by 4Q20.
Upon completion, the property will be 100% leased to Grab Taxi Holdings Pte Ltd (Grab) for a period of 11 years with a further extension option of 5 years.
We note that the land lease for this BTS is 30 years and is a direct allocation to the end-user.

We see this as a quality addition and further enhances the Ascendas REIT’s portfolio in Singapore.
Post completion, with a new long term lease in place, Ascendas REIT’s weighted average lease expiry (WALE) in Singapore will lengthen slightly to 4.0 years vs 3.9 years previously.

At an estimated initial yield of 6.4%, the accretion to DPU is projected to be 0.03 Scts (+0.1%). Funds will come from a combination of proceeds raised in the previous placement exercise, and debt.

Based on media articles, we note that the company currently has offices in Marina One (100k sqft), Guoco Tower (55k sqft), and Cecil Street (4.5k sqft) which are being used to house their data scientists while the office at Midview City houses the backroom and management team. While Grab will likely consolidate into the new HQ, it represents close to a doubling of their footprint in Singapore.

Derek TAN DBS Group Research | Mervin SONG CFA DBS Research | Carmen TAY DBS Research | https://www.dbsvickers.com/ 2019-01-30

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