Ascendas REIT - UOB Kay Hian 2019-02-01: 3QFY19 In Line

ASCENDAS REAL ESTATE INV TRUST (SGX:A17U)

Ascendas REIT - 3QFY19 In Line

Ascendas REIT saw occupancies gradually recovering and achieving positive rental reversion of 3.2%.
Ascendas REIT will be developing a 455,400sf BTS building to serve as GRAB’s headquarters. Total development cost is S$181.2m and provides NPI yield of 6.4%.
Maintain BUY and target price of S$3.01.

ASCENDAS REAL ESTATE INV TRUST (SGX:A17U, Ascendas REIT)'s gross revenue increased 4.2% y-o-y in 3QFY19 driven by newly acquired properties in the UK (38 logistics properties acquired in Aug 18 and Oct 18) and Australia (108 Wickham Street, Cargo Business Park and 169-177 Australis Drive) and a redeveloped property in Singapore (20 Tuas Avenue1).
NPI increased 6.6% higher by 0.7% y-o-y to 3.998 S cents due to lacement of 178m new units in Sep 18.

Ascendas REIT has a diversified base of 1,350 tenants spread over 98 properties in Singapore, 35 properties in Australia and 38 properties in the UK. The country mix by property value between Singapore, Australia and the UK is 79:14:7.
Multi-tenant buildings accounted for 70.7% of total asset value.
Weighted average lease expiry (WALE) is 4.4 years (Singapore: 3.9 years, Australia: 4.5 years, the UK: 11.3 years).

Portfolio occupancy improved 0.7ppt q-o-q to 91.3% in 3QFY19, driven by properties in Singapore where occupancy improved 1.7ppt q-o-q to 88.8%. Ascendas REIT secured new take-ups at 20 Tuas Avenue 1 (logistics), 9 Changi South Street 3 (logistics) and FoodAxis @ Senoko (light industrial).
By property type, occupancy for Hi-Specs Industrial shown the most improvement at 2.3ppt q-o-q, followed by Logistics at 1.5ppt q-o-q and Light Industrial at 1.3ppt q-o-q respectively.
Rental reversion of +3.2% was recorded for renewed leases in multi-tenant buildings in Singapore (business & science parks: 5.4%, light industrial & flatted factories: 4.5%). The precision engineering sector accounted for 31.3% of new leases signed.

Aggregate leverage increased 3.5ppt q-o-q to 36.7% due to acquisition of 26 logistics properties in the UK for S$459.2m. Some 75.6% of Ascendas REIT’s borrowings are on fixed rates for an average term of 3.2 years. Interest coverage ratio is healthy at 5.3x.
Ascendas REIT ensures a high level of natural hedge for its properties in Australia (76.8%) and the UK (100.0%).

In Singapore, the supply of new industrial properties peaked in 2014- 17 and is expected to taper off. However, businesses remain cautious and continue to review their space requirements due to uncertainties from the US-China trade conflict and Brexit.

Ascendas REIT will develop and manage the built-to-suit (BTS) building, which is located within one-north business park. NPI yield of the building is estimated at 6.4%. The lease by Grab will be 11 years with a 5-year renewal option. The lease will include built-in annual rental escalations.
Total development costs of S$181.2m will be financed by private-placement proceeds (completed in Sep 18) and existing debt facilities. The building will have a total GFA of 455,421sf and is expected to complete by 4Q20.

The project is expected to boost proforma FY18 DPU by 0.2%, assuming a funding mix of 40% debt/60% equity. Post-completion, Ascendas REIT's Singapore portfolio would increase to S$8.9b (from S$8.7b) and the proportion of Business and Science Park properties will rise to 43% (from 42%). This will also be Ascendas REIT's 17th development project and the third business park property in one-north.

Maintain BUY and target price of S$3.01, based on DDM (required rate of return: 6.7%, terminal growth: 2.0%).
Ascendas REIT currently trades at an attractive distribution yield of 6.0% for FY19.

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2019-02-01

SGX Stock Analyst Report BUY MAINTAIN BUY 3.010 SAME 3.010