Ascendas REIT - UOB Kay Hian 2019-04-30: 4QFY19 Growth From Redevelopment, AEI & Acquisitions

ASCENDAS REAL ESTATE INV TRUST (SGX:A17U)

Ascendas REIT – 4QFY19: Growth From Redevelopment, AEI & Acquisitions

ASCENDAS REAL ESTATE INV TRUST (SGX:A17U) saw portfolio occupancies recover to 91.9% (+0.6ppt q-o-q) in 4QFY19 and achieved rental reversion of 3.7% for multi-tenant buildings in FY19. Singapore industrial rents are also stabilising.
Management guided on further UK and Australia acquisitions, which will allow diversification into more freehold properties with longer WALE.
Downgrade to HOLD with an unchanged target price of S$3.01, as Ascendas REIT share price has rallied by 18% ytd and upside is limited. Maintain OVERWEIGHT on the sector.

Ascendas REIT reported a 4QFY19 DPU of 4.148 S cents (+6.1% y-o-y), bringing FY19 DPU to 16.035 S cents (+0.3% y-o-y). Entry price: S$2.77. 4QFY19 gross revenue and NPI grew by 4.3% and 3.5% y-o-y respectively, due to acquisitions in Australia and the UK, and contributions from a completed redevelopment at 20 Tuas Ave1 in FY19 (partially offset by non-renewals in certain properties in Singapore).
The results were in line with expectations, coming in at 96.8% of our full-year estimate.

Ascendas REIT has a diversified base of 1,360 tenants spread over 98 properties in Singapore, 35 properties in Australia and 38 properties in the UK as of Mar 19. Its country mix by portfolio value between Singapore, Australia and the UK is 79:14:7.
Multi-tenant buildings accounted for 70.6% of total asset value. Weighted average lease expiry (WALE) is 4.2 years (Singapore: 3.8 years, Australia: 4.5 years, the UK: 9.3 years).

Overall portfolio occupancy improved 0.6ppt q-o-q and 0.4ppt y-o-y to 91.9%. For the Singapore portfolio, occupancy rate improved 1.0ppt q-o-q due to new take-ups and expansions at logistics properties, such as 20 Tuas Avenue 1, 4 Changi South Lane and 9 Changi South Street 3. The improvement in occupancy for logistic properties was significant at 5.4ppt q-o-q to 93.4%. Unfortunately, occupancy for light industrial buildings dropped 4.0ppt q-o-q to 84.0%. The Australian and UK portfolio occupancy rates were unchanged at 98.0% and 100%, respectively.
Positive rental reversion of 3.7% for renewed leases in multi-tenant buildings in Singapore during FY19 (no renewals in Australia and the UK). The bulk of new demand came from the transport and storage sector.
Gearing declined to 36.3% (-0.4ppt q-o-q), leaving Ascendas REIT with S$0.7b available debt headroom (before reaching 40% limit). Average debt maturity also improved to 4.0 years (vs 3.6 years in 3QFY19), following the issue of HK$1.45b (S$252m) 10-year bonds in Mar 19. All-in debt cost remained stable at 3.0% as at Mar 19 (flat q-o-q) with 83% of borrowings at fixed rates (+7.4ppt q-o-q).

Management noted they could tap on CapitaLand’s strength in retail to assist Ascendas-SingBridge, especially on amenities for industrial buildings. They noted that retail spaces enjoy vibrant crowds and footfall at lunch hours (but not well utilised in the evenings).

Expect further acquisitions in the UK and Australia, where they have a staff presence of 5 and 12, respectively. Management has guided on interest in overseas expansion, as means to gain more exposure to freehold assets with longer WALE tenancies.
Ascendas REIT’s UK portfolio has a long WALE of 9.3 years and mostly domestic logistics tenants, positioning it well to weather the potential economic storms of Brexit. As for Ascendas REIT’s Australia portfolio, it has a WALE of 4.5 years and average rental escalations of 3% p.a.

Industrial rents maintained across the board on q-o-q basis, but still down on y-o-y basis, according to CBRE. The sharpest y-o-y decline was on upper floor factory rents (flat q-o-q, -0.8% y-o-y) and upper floor warehouses (flat q-o-q, -0.8%). Muted outlook on trade has led to fewer expansions in the quarter. Leasing movements comprised renewals, as well as relocations (where high-tech manufacturing and logistics players move to higher spec buildings).
With tightening supply going forward, and assuming stable demand, rents are expected to remain stable. Higher-spec buildings are expected to see better rents, while rents of older buildings will face downward pressure.
Management noted that the excessive new supply of industrial property space (ie built up in the last -5 years), as well as an additional 2.8m sqm of space (ie 5.7% of total stock of 49.1m sqm) which will complete in 2019 and 2020, will keep a lid on industrial property rents.

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2019-04-30

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