Ascendas REIT - DBS Research 2019-07-04: Higher For Longer

ASCENDAS REAL ESTATE INV TRUST (SGX:A17U)

Ascendas REIT - Higher For Longer

Lower-for-longer expectations on interest rates to drive Ascendas REIT (SGX:A17U)’s valuations up.
Pricing in accretive acquisitions in our estimates.
Target Price raised to S$3.40.

While we acknowledge that Ascendas REIT’s share price has done well, we continue to see increased allocations into S-REITs which would benefit Ascendas REIT. Furthermore, boosted by improving property fundamentals and expectations that interest rates will remain low for longer, we believe that valuations will remain elevated in the medium term.
Therefore, we have reduced our discount rate assumptions in our models (risk-free rate from 3.0% to 2.5%) and cost of debt assumptions down by 25bps, factoring acquisitions into our estimates, resulting in a revised Target Price of S$3.40.

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 Ascendas REIT is likely to execute on growth plans to deepen the 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.

We see acquisitions as the next driver for Ascendas REIT’s share price and project S$500m of deals to be concluded by the end of FY20F, funded by a 60%/40% equity/debt mix, keeping gearing stable at c.37%.

Our DCF-based Target Price is raised to S$3.40 to account for lower discount rates and acquisitions. Maintain BUY on the back of total potential returns of c.13%.

Interest-rate risk. An increase in lending rates will negatively impact dividend distributions.

Ascendas REIT’s Singapore portfolio’s occupancy rate is projected to remain stable in the medium term and hover around the c.85% level as the Manager looks to actively engage tenants and new prospects. Given Ascendas REIT’s scale in Singapore, the Manager continues to attract a diverse tenant base to its properties, despite the competitive operating environment. The key reasons are the variety of asset types and its focus on business parks and hi-tech properties, which continue to see good demand.
Looking ahead, with close to c.10% of the portfolio still vacant, the ability to backfill the unoccupied space provides potential upside to our earnings estimates. A long portfolio-weighted average lease expiry (WALE) profile of 4.2 years means good earnings visibility for Ascendas REIT.

Rental reversionary trends are moderating but are expected to remain in the low-to mid-single-digit range in the coming year which is commendable. Given the narrowing spread between passing and market rents, we expect rental reversionary trends to remain flattish or even turn negative for selected sectors.
We are positive on Ascendas REIT’s business and science park exposure which accounts for close to 37% of portfolio value. We project its Australian portfolio to deliver resilient earnings, backed by a weighted average lease expiry (WALE) of 4.5 years.

Ascendas REIT has regularly embarked on acquisitions and development projects, which have helped the REIT deliver sustained growth in distributions over time. The Manager has, over time, built up a substantial presence in Australia and the UK, which as of 4Q19, formed c.22% of assets (Australia 14% and UK 8%).
The Manager remains focused on deepening its presence in its core markets of Singapore, Australia and the UK to add diversity to the REIT’s exposure and build resilience across business cycles.

Derek TAN DBS Group Research | Carmen TAY DBS Research | Mervin SONG CFA DBS Research | https://www.dbsvickers.com/ 2019-07-04

SGX Stock Analyst Report BUY MAINTAIN BUY 3.40 UP 3.200