Ascendas REIT - DBS Research 2019-04-30: Chanel Never Disappoints

ASCENDAS REAL ESTATE INV TRUST (SGX:A17U)

Ascendas REIT - Chanel Never Disappoints

Ascendas REIT's resilient returns backed by diversified portfolio.
Positive rental reversion of 3.7% in FY19, at higher end of expectations (0%-5%); worst could be over.
Ample capacity to acquire; attractive pipeline of business parks from the Sponsor to be value accretive additions.

Like a Chanel bag in a lady’s wardrobe, ASCENDAS REIT (SGX:A17U) remains one of the must-haves among Singapore REITs.
While valuations are at a premium, we believe that investors have comfort on Ascendas REIT’s ability to deliver consistent returns across market cycles and remains a key stock in one’s portfolio.
Our Target Price is lifted to S$3.20 to reflect our more modest interest rate assumptions (vs previous 50bps hike) in our discount rate. BUY!

Conservative estimates with upside bias if acquisitions materialise. Ascendas REIT’s share price is trading within a virtuous cycle at an implied cost of capital that is conducive for accretive acquisitions. We believe that the Manager is likely to execute on growth plans to deepen Ascendas REIT’s exposure in its key markets of Singapore, UK, and Australia with potential equity fund raising to support these initiatives.
In addition, we see ample opportunities for the Manager to deliver earnings surprises which include
1. Ascendas REIT’s ability to re-let close to 12% of vacant space in its portfolio, and
2. acquisitions which the street has not priced in.

Operating metrics such as occupancy rates and rental reversions remained positive. While the Manager is cautious of a potential slowdown in growth momentum in FY20, we believe that the portfolio of business parks in Singapore, logistics assets in Australia and the UK will continue to attract tenants, resulting in sticky occupancies and cashflows.

Our DCF-based Target Price is raised to S$3.20 to account for lower discount rates.
Maintain BUY on the back of total potential returns of c.11%.

Interest-rate risk. An increase in lending rates will negatively impact dividend distributions. However, Ascendas REIT's strategy has been to actively manage its exposure and it currently has c.80% of its interest cost hedged at fixed rates.

FY19 marked a year of stability and firm growth for Ascendas REIT. Growth momentum continued into 4Q19 as gross revenues rose 4.3% y-o-y to S$225.1m. This was mainly underpinned by new acquisitions in the UK (completed in mid Aug-18 and Dec-18) and Australia, as well as contributions from two new redevelopment projects in Singapore – Schneider Electric Building and 20 Tuas Avenue 1 - which more than offset non-renewals and downsizing by tenants at selected properties in Singapore.
Due to slightly higher property expenses, net property income grew at a slower rate at 3.5% y-o-y to S$163.4m. Partly lifted by a one-off roll-over adjustment, as well as contributions from its overseas assets, distributable income jumped 12.7% y-o-y to S$129m. Given the enlarged unit base however, DPU only rose marginally by 0.3% to 4.148 Scts.
On a full-year basis, Ascendas REIT's FY19 DPU of 16.035 Scts met our expectations.

Portfolio occupancy nudged slightly higher from 91.3% (3Q19) to 91.9% (4Q19), led mainly by improved leasing momentum across its Singapore portfolio, which delivered a 1 ppt increase over the quarter. We understand that the sequential improvement was mainly due to a pick-up at 40 Penjuru, 4 Changi South Lane and 9 Changi South properties, which are currently > 90% occupied.
While portfolio rental reversions were firm at 3.7% and 6.6% for FY19 and 4Q19, respectively, it is expected to be flattish in the upcoming financial year, as the Manager was cautious on ongoing uncertainty in the global industrial space – particularly demand-supply dynamics for the Light Industrial sub-segment, which makes up nearly 20% of Singapore leases due for renewal in FY20F. Despite near-term challenges, we believe that Ascendas REIT’s diversified portfolio and exposure to key growth markets overseas continues to bode well for resilient DPUs ahead.

Ascendas REIT's properties in Australia and the UK should continue to churn out stable cashflows. The weighted average lease expiry for Australia and UK are 4.5 years and 9.3 years respectively, offering strong income visibility and growth through built-in rent escalations. Overall, the Sydney leasing market will likely offer the brightest prospects given healthy macro fundamentals and sticky demand for quality spaces. The compression in cap rates in Australia by c.24 bps y-o-y reflects this.
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 mitigate NAV risks.

Gearing was stable at c.36.3% in 4Q19, which is within the Manager’s optimal range of 35-40%. The average debt maturity profile has also improved from 3.6 years to 4 years, with interest costs also flat q-o-q at 3.0%. As at end Mar-19, approximately 83% of borrowings were hedged into fixed rates.
Ascendas REIT has been active in pursuing redevelopments, and most recently partnered with Grab for a 42,310 sqm build-to-suit business park development, with an estimated completion in 3QFY21. In anticipation of supply-side challenges in the Light Industrial space, Ascendas REIT sees potential to redevelop selected plots into higher-spec facilities, unlocking longer-term value for the REIT; 25 and 27 Ubi Road 4 is one such initiative, among other ongoing asset enhancement works.

Derek TAN DBS Group Research | Carmen TAY DBS Research | Mervin SONG CFA DBS Research | https://www.dbsvickers.com/ 2019-04-30

SGX Stock Analyst Report BUY MAINTAIN BUY 3.20 UP 2.950