Ascendas REIT - UOB Kay Hian 2019-07-30: Strong 1QFY19 But Rental Reversion Could Moderate


Ascendas REIT - Strong 1QFY19 But Rental Reversion Could Moderate

  • Ascendas REIT’s Singapore portfolio performed well with positive rental reversion of 3% driven by business & science parks and high-specification industrial & data centres, while occupancy improved 0.6ppt to 88.9%.
  • Management has a cautious outlook and expects rental reversion to be flat for FY19 due to excessive new supply, although the business & science parks segment is expected to be more resilient.
  • Maintain HOLD. Target price: S$3.01. Entry price: S$2.78.

Ascendas REIT 1QFY20 Results

  • ASCENDAS REIT (SGX:A17U) reported 1QFY20 DPU of 4.005 S cents, inching up 0.1% y-o-y. The results are in line with expectations.

Less capital distribution.

  • Gross revenue rose by 6.1% y-o-y due to newly-acquired properties in the UK (acquired two logistics portfolio in Aug 18 and Oct 18) and Australia (acquired 169-177 Australis Drive in Jun 18 and Cargo Business Park and 1-7 Wayne Goss Drive in Sep 18) in FY19.
  • Property operating expenses decreased by 9.0% y-o-y due to the exclusion of land rent after adoption of FRS 116 with effect from 1 Apr 19. Excluding the impact of FRS 116, net property income would have increased by 6.3% y-o-y, instead of 11.5% y-o-y.
  • Income available for distribution increased 1.1% y-o-y to S$108.8m. DPU was maintained at 4.005 S cents.
  • Distribution from operations declined 4.8% y-o-y to 3.495 S cents due to dilution from private placement of 178m new units to raise S$452m in Sep 18. This was cushioned by an increase in distribution from capital of 54.1% y-o-y to 0.51 cents.

Positive rental reversion driven by Singapore.

  • Ascendas REIT achieved positive rental reversion of +2.7% for renewed leases in multi-tenant buildings in 1QFY20 (Singapore: +3.0% and Australian: +0.2%). For Singapore, rental reversions were driven by Business & Science Parks (+3.7%) and High-specification Industrial & Data Centres (+3.3%). Management expects rental reversion to be flat in FY19, due to the current global uncertainties and excessive industrial supply in Singapore.
  • Portfolio WALE remains healthy at 4.1 years (Singapore: 3.7 years, Australia: 4.3 years and UK: 9.1 years).

Temporary setback for occupancy in Australia.

  • Overall portfolio occupancy dropped 0.8ppt q-o-q to 91.1%. Occupancy for Australia dropped 5.7ppt q-o-q to 92.3% due to non-renewal of a lease at 94 Lenore Drive, a logistics property in Sydney. The new replacement tenant has already commenced a 5-year lease at the affected property with effect from Jul 19. Occupancy for Singapore improved 0.6ppt q-o-q to 88.9% due to due to new take-ups at 37A Tampines Street 92, 20 Tuas Avenue 1 and 10 Toh Guan Road. The UK portfolio occupancy rate remained at 100%.
  • Ascendas REIT has a diversified base of 1,350 tenants spread over 98 properties in Singapore, 35 properties in Australia and 38 properties in UK (breakdown by asset values: Singapore 79%, Australia 14% and UK 7%).

Creating value through development projects.

  • Ascendas REIT will develop a Built-to-Suit (BTS) building located at One-north business park to serve as Grab's new headquarters. The lease by Grab will be 11 years with a 5-year renewal option. The lease will include built-in annual rental escalations. Total development costs is S$181.2m while initial NPI yield is estimated at 6.4%. The building will have a total GFA of 455,421 sf, and is expected to be completed by 3QFY21.
  • Ascendas REIT will redevelop two light industrial buildings at 25 and 27 Ubi Road 4 into a high-specification building (floor plates enlarged from 18,300sf to 43,000sf). The site is located near Ubi MRT station. The new building is scheduled for completion in 1QFY22.

Capital recycling: AREIT has proposed to divest of 8 Loyang Way 1 at S$27m.

  • The proposed sale price is 8% higher than purchase price (S$25m), and is expected to generate gains of S$3.4m (14.4% over valuation of S$23.6m as at 31 Mar 19). Ascendas REIT has entered into a sale & purchase agreement with Seow Kim Polythelene Co Pte Ltd, and the proposed divestment is expected to complete in 2QFY19.

Singapore (79% portfolio valuation): Rental outlook remains subdued

  • in view of the excessive supply. An additional 2.7m sqm of new industrial spaces is expected to come on stream in rest of 2019 and 2020 (representing 5.5% of the total stock of 49.3m sqm as at 30 Jun 19), on top of the excessive new supply built up over the last 4-5 years.
  • 42% of the Singapore portfolio is in the business & science park segment, which serves the needs of industries in the new economy, remains a key growth area.

Australia and UK to see stable performance.

  • Australia’s stable contribution is underpinned by its long WALE of 4.3 years (vs 4.5 years last quarter), and rental escalations of c.3% p.a. For the UK, although leasing activities for logistics sector have slowed, rents are expected to hold firm amidst supply constraints.
  • UK contribution is also insulated with its long WALE of 9.1 years (vs 9.3 years last quarter), domestic nature of its tenants’ logistics businesses, which will stand Ascendas REIT in good stead to overcome any potential Brexit impact.

Gearing remained stable at 37.2% (+0.9ppt q-o-q),

  • Gearing remained stable at 37.2% (+0.9ppt q-o-q), leaving Ascendas REIT with S$0.5b available debt headroom before reaching the 40% limit. Average debt maturity also remained stable at 3.8 years (vs 4.0 years last quarter).
  • All-in debt cost remained stable at 3.0% as at Jun 19 (flat q-o-q) with 75.3% of borrowings at fixed rates (-7.7ppt q-o-q). From a balance sheet perspective, it has a high level of natural hedge of 75.4% for AUD and 100% for GBP.

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2019-07-30
SGX Stock Analyst Report HOLD MAINTAIN HOLD 3.010 SAME 3.010