Ascendas REIT - OCBC Investment 2019-07-30: Flat DPU; Near-Term Blip In Australia

ASCENDAS REAL ESTATE INV TRUST (SGX:A17U)

Ascendas REIT - Flat DPU; Near-Term Blip In Australia

Ascendas REIT (SGX:A17U) has changed its financial year end from 31 March to 31 December. As such, the reporting period from 1 Apr 2019 to 30 Jun 2019 is considered as 1QFY19.
Ascendas REIT’s gross revenue grew 6.1% y-o-y to S$229.7m. NPI increased at a larger magnitude of 11.5% to S$177.5m as land rent expense has been excluded from property operating expenses following the adoption of FRS116. Excluding this effect, adjusted NPI would have increased 6.3% y-o-y.
DPU was flat y-o-y at 4.005 S cents (+0.1%) due to higher management fees and finance costs, coupled with an enlarged unit base. This accounted for 24.6% of our initial full-year forecast.

Operationally, Ascendas REIT’s portfolio occupancy fell 0.8 ppt q-o-q to 91.1%, as the slight improvement in Singapore (+0.6 ppt to 88.9%) and full occupancy in UK was offset by a dip in Australia from 98.0% to 92.3%. This was in turn attributed to three properties, two of which are in Sydney and one in Melbourne. The largest of the three is 94 Lenore Drive in Sydney (21,143 sq m NLA), which saw its previous tenant move out to its own building. Ascendas REIT has since fully-leased the property to another tenant, but this came into effect only in Jul.
From our understanding, committed occupancy for Ascendas REIT’s Australia portfolio has increased to 94%-95% with this lease.
In terms of rental reversions, Singapore saw positive rental uplifts of 3.0%. Australia was a mixed bag, with positive rental reversions of 1.9% for Suburban Office, but -9.9% for Logistics & Distribution Centres. However, we understand that the negative rental reversion was for a small lease. This is also reflected in overall Australia portfolio rental reversion of 0.2%.

Given the recent weaker-than-expected Singapore GDP figure, it was not surprising to learn that the environment has become more muted with slower enquiries. However, we believe Ascendas REIT’s longer-term prospects remain sound, with potential of rejuvenation in its Science Park properties and inorganic growth opportunities with the likelihood of a lower interest rate environment ahead.
We lower our risk-free rate assumption by 30 bps to 2.0% and lift our terminal growth rate from 1% to 1.5%. Consequently, our fair value increases from S$2.74 to S$2.98.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2019-07-30

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