Ascendas REIT - RHB Invest 2019-04-30: All In The Price

ASCENDAS REAL ESTATE INV TRUST (SGX:A17U)

Ascendas REIT - All In The Price

Maintain NEUTRAL and Target Price of SGD2.90, 4% downside.
ASCENDAS REIT (SGX:A17U) has been among best performing REITs, with YTD Ascendas REIT share price increase of 17% (outperforming STI and S-REITs by 6%).
Current valuations look rich at 1.4x P/BV, which we believe has sufficiently factored in its dominating industrial positioning and liquidity.
Key risk is the continued slowdown in industrial demand from prolonged trade tensions. The strong fund flows into REITs on a dovish rate outlook, however, offer Ascendas REIT share price support over the near term.

Management noted that industrial demand has been fairly healthy so far with its SG industrial portfolio registering 1% q-o-q occupancy improvement to 88.3%. Key sources of new demand have been bio-medical, transport and storage sectors.
Rent reversions were also healthy at 7%/4% for 4Q/FY19 (Mar) with all sub-segments registering positive growth.
Management has, however, guided for a cautious outlook for FY20, with flattish rents expected. Key reasons being uncertain demand outlook on trade tensions, slowdown in manufacturing growth, and higher industrial supply (due to industrial supply pushback from 4Q18 to 2019).

Ascendas REIT highlighted that the UK, Europe and Australia remain key potential markets for acquisitions in the near term. Despite Brexit concerns, management believes the UK offers good long-term potential and diversification benefits with long WALE and freehold land tenure.
For SG, focus will mainly be on the rejuvenation of its existing assets by upgrading building quality and tapping into any additional GFA.
During FY19, Ascendas REIT completed one redevelopment and five asset enhancement initiatives (AEI) (for SGD98m), and has plans for four AEIs and one redevelopment (for SGD58m). Targeted ROI for AEI and redevelopment is c.7-7.5%.

In Jan 2019, Ascendas REIT announced that it will develop and manage Grab’s new Build-to-Suit (BTS) HQ at a total development cost of SGD181.2m. The building, to be completed by end-2020, will be fully leased to Grab for a long tenure of 11+5 years.
The deal is accretive with an initial NPI yield of 6.4%, and comes with annual rent escalations, which should further enhance yields. The transaction will increase its exposure to Business & Science parks to 34% (from 33%) and is a testimony to its core expertise of value creation from BTS projects.

We lower our FY20F-22F DPU by 1-2%, factoring in slightly lower rental growth for the SG portfolio.

Gross revenue and NPI for the quarter rose 4% y-o-y, aided by contributions from newly-acquired properties in Australia and the UK, as well as SG redevelopment properties. Operating expenses were 7% higher mainly due to the deployment of new operations command centre supporting multiple buildings in SG.
Finance costs rose 17% y-o-y on higher borrowings for acquisitions. Distributable income was higher at 13% y-o-y on higher rollover adjustments from taxes paid.
Ascendas REIT's overall 4Q/FY19 results were in line, accounting for 25%/100% of our DPU estimates.

On a same-store basis (129 assets), property value rose SGD110m to SGD10.2bn mainly driven by ~25bps cap rate compression (6.08% currently) across its Australian portfolio.
Weighted average cap rates for SG and UK assets remained relatively steady at 6.18% and 5.77% respectively. NAV/unit (adjusted) stood at SGD2.05.

There was a slight 0.4ppts q-o-q reduction in gearing on the back of higher property value. Ascendas REIT has headroom of SGD0.7bn for acquisitions (assuming comfortable gearing of 40%). 83% of debt is currently on fixed terms, with average debt-to-maturity of four years.
Ascendas REIT also has a high level of natural currency hedge for its overseas asses with 76%/100% of its Australia/UK assets matched by local debt.

Vijay Natarajan RHB Securities Research | https://www.rhbinvest.com.sg/ 2019-04-30

SGX Stock Analyst Report NEUTRAL MAINTAIN NEUTRAL 2.900 SAME 2.900