Ascendas REIT - UOB Kay Hian 2019-09-11: Resiliency From Business Parks And High-specification Buildings

ASCENDAS REAL ESTATE INV TRUST (SGX:A17U)

Ascendas REIT - Resiliency From Business Parks And High-specification Buildings

Ascendas REIT (SGX:A17U) is better able to weather the uncertainties created by escalation in trade conflict due to its focus on business parks and high-specification buildings, where rents were on a gradual uptrend (53% of portfolio valuation). It continues to create value through developing Grab’s new HQ at one-north and a high-specification building at 25 & 27 Ubi Road 4.
Ascendas REIT provides a 2020F distribution yield of 5.2%.
Maintain HOLD. Target price: S$3.25. Entry price: S$2.98.

2.5m sf of new business park spaces is expected to come on stream in 2019-20, representing 10.5% of total stock. 59% of the new supply for business parks in 2020 and 2021 is already pre-committed. In particular, three of the six projects completing in 2020 are built-to-suit (BTS) to serve as headquarters for Grab, Razer and PBA Group.
Rents for business parks were stable at S$5.80psf pm for the city fringe and S$3.80psf pm for the rest of the island in 2Q19, supported by limited supply of multi-tenant buildings.
Similarly, 5.0m sf of new high-specification industrial spaces is expected to come on stream in 2019-21, all of which are fully committed. Rents for high-specification industrial buildings increased 4.8% y-o-y to S$3.30psf pm in 2Q19.

Ascendas REIT achieved positive rental reversion of +2.7% for renewed leases at multi-tenant buildings in 1QFY19 (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 macro uncertainties and excessive supply of light industrial properties (8% of portfolio valuation).

Ascendas REIT will develop a BTS building located at one-north business park to serve as Grab's new headquarters. Grab will lease the building for 11 years with the option to renew for another five years. The lease has built-in annual rental escalations. Total development cost 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 3QFY19.
Ascendas REIT will redevelop two existing 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 2QFY21.

Management targets to have 20-30% of its portfolio from overseas markets. It’s Australia and UK portfolio provides long WALE of 4.3 years (rent escalation of 3% p.a.) and 9.1 years respectively.
Ascendas REIT has achieved a high level of natural hedge for its Australia (A$ natural hedge 75.4%) and UK (£ natural hedge100%) against a fluctuation in exchange rates through borrowings denominated in Australian dollars and the British pound. It also hedges projected cash flow using forward contracts on a rolling basis four quarters ahead.

Ascendas REIT is one of the largest S-REITs in terms of market cap. It has a diversified portfolio anchored by business parks and high-specification industrial segments, which serve the needs of technology companies and modern services.
Ascendas REIT’s defensive strength is also supported by a weighted average security deposit of 5.1 months of rental income.

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2019-09-11

SGX Stock Analyst Report HOLD MAINTAIN HOLD 3.25 UP 3.010