Ascendas REIT - Maybank Kim Eng 2019-11-04: Scaling Up Again


Ascendas REIT - Scaling Up Again

Leap-frogging into the US, BUY

  • ASCENDAS REIT (SGX:A17U) has announced its first US portfolio deal following stable Sep 2019 quarterly results. See Ascendas REIT Announcements. Its SGD1.66b acquisition of 28 US and 2 SG business park properties from its sponsor at a blended 6.5% NPI yield will be partially funded by a SGD1.31b rights issue and is DPU and NAV accretive at +0.6% and +3.2%.
  • We see the properties well-supported by favourable growth fundamentals, whilst strengthening Ascendas REIT’s AUM with rising business park concentration and DPU visibility on its longer 4.2-6.9-year WALEs. Its low 34.6% gearing post-deal allows for further acquisition-led DPU upside. See Ascendas REIT Dividend History.
  • We raised FY21 DPUs by 0.8% for its recent Australian deal and will adjust estimates for this latest transaction after the EGM in mid-Nov. Reiterate BUY with 11% total return to our new SGD3.35 DDM-based Target Price. See Ascendas REIT Share Price; Ascendas REIT Target Price.

Stable quarter, SG recovery on track

  • Ascendas REIT’s DPU rose 2.3% y-o-y in Sep 2019, helped by higher contributions from the two UK portfolios that were added in late 2018. While its SG occupancy dipped slightly (from 88.9% to 88.1%), rental reversions were stronger at +4.0% vs +3.0% previously with all segments reporting positive reversions (at +3.1-7.0%).
  • Management expects to achieve a positive low single-digit rent reversion for 2019, ahead of a more measured (flattish) guidance at the start of the year. Ascendas REIT’s large and diversified AUM positions it well against a steady sector recovery, helped by easing supply and higher pre-commitment on new business park and high-specs space.

New deal marks US entry, strengthens SG core

  • Ascendas REIT is pushing into the US with its latest acquisition of 28 business park properties at a 6.4% NPI yield. These and two SG assets at 6.7% NPI yield should boost its AUM by 15.4% as its overseas contribution rises from 21% to 28% and business park concentration increases from 33% to 42%.
  • We see near-term DPU upside, supported by improving occupancies (currently at 93.7% for the US). The acquisition is both DPU and NAV accretive on a 76-23 equity-debt mix including the SGD1.31b rights issuance at SGD2.63/unit (~15% discount) and debt of SGD394.3m. As such, gearing will improve from 36.3% to 34.6% when the deal is completed in 4Q 2019.

Steady quarter, fine-tuning estimates

  • Ascendas REIT’s DPU rose 2.3% y-o-y during its Sep 2019 quarter (2Q19), with higher contributions from the 38 properties in the two UK logistics portfolios that were acquired between Aug 2018 and Oct 2018. SG’s revenue rose 1.2% y-o-y while NPI was up 15.9% y-o-y due largely to FRS 116 adjustments.
  • Portfolio occupancy was stable at 91.0%; SG occupancy fell q-o-q from 88.9% to 88.1%, with lower occupancies at its logistics and distribution centres (Logis Hub@Clementi) and business park properties (31 IBP and Plaza 8 at 1, 3 & 5 Changi BP Crescent). SG properties saw an average +4.0% rental reversion, which improved from +3.0% in 1Q19, with positive reversions across all segments at 3.1-7.0%, except for integrated development (flat). Tenants from the biomedical sector contributed the largest 25.9% of new demand.
  • An AUD110.9m (SGD104.4m) acquisition of its fourth suburban office property in Australia at 254 Wellington Road in Melbourne was announced on 3 Oct 2019. We have factored in this deal, set to be completed in 20 2020, as well as the divestment of No. 8 Loyang Way, a light industrial property for SGD27.0m (at 14.4% above valuation), which in aggregate lift FY21 DPU 0.8%.

Acquires SGD1.66b business parks portfolio

  • Ascendas REIT will acquire from its sponsor a portfolio of 28 business park properties in the US and two in Singapore at a blended 6.5% NPI yield. The US properties are freehold and located in the high-growth tech-cities of Raleigh, Portland and San Diego. Each market has witnessed high net absorption with strong demand from the technology, life science and defence industries, and this has supported 30-40% rental growth since 2010, according to Cushman & Wakefield.
  • Going forward, we believe growth fundamentals will continue to be supported by the expanding research and technology ecosystems, and the assets’ proximities to renowned universities. Tenancies across the portfolio include several investment grade names. The properties are about 10-15% under-rented according to management, and importantly backed by WALEs of 3.9-4.9 years as of end-Sep 2019, with the majority of leases embedded with annual rent escalations of between 2.5-4.0%.
  • The two SG business park properties – Nucleos and FM Global Centre, should increase its business & science parks market share. Post-deal this is expected to add 7.1% and 10.7% to its GFA and AUM respectively.
  • Ascendas REIT's AUM contribution from business & science parks to its SG portfolio is set to increase from 33% to 37%. Both properties also command long remaining 52-73-year land lease - higher than the 20-30-year leases from fresh sites under the industrial government land sales programme, and are backed by long 6.9-year WALE, which is above its 3.6-year SG WALE.

Chua Su Tye Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-11-04
SGX Stock Analyst Report BUY MAINTAIN BUY 3.35 SAME 3.300