Ascendas REIT - DBS Research 2019-07-30: Your Lighthouse In The Dark


Ascendas REIT - Your Lighthouse In The Dark

  • ASCENDAS REIT (SGX:A17U)'s 1QFY20 DPU in line with estimates.
  • Operational metrics stable; rental reversionary trends ahead of guidance.
  • Attractive and visible pipeline for acquisitions a further re-rating catalyst.
  • BUY call, Target Price S$3.40 maintained.

What’s New

1QFY20 DPU of 4.005 Scts (+0.1% y-o-y) in line.

  • Ascendas REIT's FY20 began well with a 1Q DPU of 4.005 Scts, forming 24.8% of our full-year forecasts. The portfolio continued to deliver another quarter of resilience, with revenues and net property income (NPI) coming in 6.1% and 11.5% higher y-o-y at S$229.6m and S$177.5m respectively.
  • The stronger top-line growth was attributable to acquisitions in Australia and Europe, positive rental reversions in Singapore and contribution from the completed redevelopment at 20 Tuas Avenue. The drop in operating expenses by 9.0% was mainly due to the reclassification of land rent (S$8.2m) following adoption of FRS 116 and lower property tax savings from retrospective downward revisions in annual values in FY19.
  • On a like-for-like basis (w/o effect of FRS 116), NPI would have increased by 6.3% instead.
  • Distributable income increased by 6.3%, in line with NPI increases, translating into a DPU of 4.005 Scts (+0.1% y-o-y) due to an enlarged share base.

Occupancy rises on stronger leasing momentum, but tone remains cautious.

  • Ascendas REIT's portfolio occupancy dipped slightly to 91.1% (vs 91.9% in 4Q19) mainly due to the slight dip in occupancy rates in Australia from the expiry of three leases (but one of the properties has been subsequently leased up – 94 Lenore Drive (Sydney). In Singapore, the multi-tenanted buildings (MTB) on a same-store basis, saw a slight dip to 85.5% (vs 86% previously). Overall occupancy rates in Singapore improved slightly to 88.9% (vs 88.8%) due to new take-ups at 37A Tampines Street 92, 20 Tuas Avenue 1 and 10 Toh Guan Road.
  • Portfolio rental reversions remained steady at 3.0% for Singapore properties, ranging from 0.0% (integrated development; amenities & retail) to 3.7% (Business Parks). For renewals in Australia, Ascendas REIT reported a positive 0.2% for leases expiring in 1QFY20, in line with expectations. We note that there is a -9.9% rental reversion for renewed leases in the logistics & distribution centres segment in Australia.
  • Looking ahead, the Manager maintains its guidance of flattish rental reversions in FY20F, given feedback from tenants of an overall more tepid demand outlook. This is due to the 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 abroad will continue to bode well for stability and resilient DPUs ahead.

Overseas properties to augment resilience and growth.

  • Ascendas REIT’s properties in Australia and the UK should continue to churn out stable cashflows ahead. The weighted average lease expiry for Australia and UK are 4.3 years and 9.1 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.24bps 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 one year out while the REIT has taken a natural hedge position by taking local currency-denominated loans (c.75.476% for AUD and 100% for GBP) to mitigate NAV risks.

Gearing levels allow headroom for further redevelopment opportunities or acquisitions.

  • Gearing inched higher to c.37.2% in 4Q19, which is within the Manager’s optimal range of 35-40%. Average debt maturity profile dipped 3.8 years, with interest costs also flat q-o-q at 3.0%. As at end March 2019, approximately c.75.3% of borrowings were hedged into fixed rates.

Capital recycling in the works.

  • Ascendas REIT also actively reconstitutes its portfolio to optimise capital. The REIT announced the proposed divestment of 8 Loyang Way 1 for S$27.0m (above book value of S$23.6m).
  • Ascendas REIT has been actively pursuing redevelopments and has close to c.S$237.7m worth of developments, AEIs and redevelopment project in the works. Among these, the largest is the built-to-suit project for Grab and repositioning of 25 & 27 Ubi Road 4 into a high-specification property, among other ongoing asset enhancement works.

BUY call, Target Price S$3.40 maintained.

  • With another stable quarter, we expect investors to remain vested in Ascendas REIT which we see as a safe harbour in uncertain times.
  • Catalysts include potential asset injections from Sponsor CapitaLand (SGX:C31) into the vehicle to bulk up and grow.

Derek TAN DBS Group Research | Carmen TAY DBS Research | Rachel TAN DBS Research | https://www.dbsvickers.com/ 2019-07-30
SGX Stock Analyst Report BUY MAINTAIN BUY 3.400 SAME 3.400