Ascendas REIT - UOB Kay Hian 2019-11-04: 2QFY19 First Foray Into The US

ASCENDAS REAL ESTATE INV TRUST (SGX:A17U) | SGinvestors.io ASCENDAS REAL ESTATE INV TRUST (SGX:A17U)

Ascendas REIT - 2QFY19 First Foray Into The US

  • Ascendas REIT's 2QFY19 results are in line with our expectations with DPU increasing 2.3% y-o-y, driven by full-quarter contribution from 38 UK logistics properties.
  • The proposed acquisition of 30 business park properties, 28 in the US and two in Singapore, will expand exposure to business & science parks from 33% to 42% of portfolio valuation, and overseas markets from 21% to 28%. It is expected to increase DPU by 3% and NAV/share by 3.3%.
  • Maintain HOLD. Target price: S$3.28. Entry price: S$2.99.



2QFY19 RESULTS


Growth from UK logistics properties.

  • Gross revenue increased 5.3% y-o-y due to full quarter contributions from 38 logistics properties located in the UK acquired over two transactions in Aug and Oct 18. NPI increased by 12% y-o-y due to increase in gross revenue and adoption of FRS 116 Leases (lease payments for land rent now presented as finance costs) since Apr 19. Excluding the effects of FRS 116, NPI would have increased 6.8% y-o-y.
  • Distribution from capital increased 52.2% y-o-y to S$16.9m. DPU increased by 1.2% y-o-y due to dilution from private placement of 178m new units to raise S$452m in Sep 18.
  • See Ascendas REIT Announcements; Ascendas REIT Latest News.

Positive rental reversion (+4%) for renewed leases for multi-tenant buildings in Singapore during the quarter (no renewals in Australia and UK).

  • For Singapore, the rental reversions were driven by Logistics & Distribution Centres (7%), Light Industrial and Flatted Factories (3.9%), Business & Science Parks (3.9%), and High Specifications Industrial and Data Centres (3.1%). Of the new leases signed, biomedical sector tenants accounted for the largest proportion (25.9%) of new demand by gross rental income.
  • Management expects positive low single-digit rent reversion for FY19, in view of the current global uncertainty and new supply of industrial properties in Singapore.
  • Portfolio WALE stood at 4.0 years (Singapore: 3.6 years, Australia: 4.3 years, UK: 9.0 years).

Overall occupancy remained stable at 91.0% (-0.1ppt q-o-q).

  • Singapore occupancy declined to 88.1% (-0.8ppt q-o-q), due to non-renewals at Logis Hub @ Clementi, 31 International Business Park, and Plaza 8 (1, 3 & 5 Changi Business Park Crescent). For the Australian portfolio, occupancy improved to 95.4% (+3.1ppt q-o-q) due to 94 Lenore Drive in Sydney, which achieved full occupancy in the quarter.
  • As for the UK portfolio, occupancy declined to 97.7% (-2.3ppt q-o-q), due to lower occupancies at Unit 5 and Unit 13, Wellesbourne Distribution Park.

Gearing improved to 36.2% (-1ppt q-o-q).

  • Ascendas REIT has debt headroom of S$1.0b before reaching regulatory limit of 45%. Average debt maturity declined slightly to 3.6 years (1QFY19: 3.8 years). All-in debt cost remained stable at 3.0% (flat q-o-q).
  • From a balance sheet perspective, Ascendas REIT still has a high level of natural hedge in Australia (75.7%) and UK (100%), which minimises impact from forex fluctuations.


STOCK IMPACT


Acquiring high-quality business park properties in the US.

  • Ascendas REIT has proposed to acquire 28 business park properties in the US (located in top-10 tech-cities of Raleigh, San Diego and Portland) and two business park properties in Singapore (Nucleos and FM Global Centre located in Biopolis) from wholly-owned entities of sponsor CapitaLand at S$1.66b.

Gain exposure to growth in technology and life science.

  • Raleigh (5 properties) is the capital city of North Carolina and its Research Triangle is one of the largest life science hubs in the east coast. San Diego (8 properties) is the second largest city in California and a key hub for wireless, life science and defence industries. Portland (15 properties) is the largest city in Oregon and houses the global HQ for Nike and Columbia Sportwear and design centres for Addidas, Under Armour and Mizuno. Majority leases for these US properties are tripe net leases with 2.5% to 4.0% annual escalation.
  • All US properties sit on freehold land. The weighted average land lease to expiry for the two Singapore properties is 56.7 years.

Enlarge scale in business parks.

  • The acquisition will increase investments in business & science parks by 46%, and expand exposure from 33% to 42% of portfolio valuation. Exposure to freehold properties will expand from 21.6% to 29% of portfolio valuation. Exposure to overseas markets will increase from 21% to 28% of portfolio valuation (UK: 6%, US: 10% and Australia: 12%).
  • Ascendas REIT has a Singapore-centric strategy and intends to have overseas properties in developed markets account for 30-40% of portfolio valuations over time.

Acquisition is DPU accretive.

  • Assuming an 60% equity 40% debt mix, the acquisition will increase pro forma FY18 DPU by 3% and NAV/share by 3.3%. Aggregate leverage is expected to increase marginally from 36.3% to 36.7%. The acquisition is subject to approval from unitholders to be held on 27 Nov 19.

Funded by a mix of rights issue (76%), loans (23%) and acquisition fee units (1%).

  • Ascendas REIT plans to raise S$1,294.8m net proceeds (after deducting 15m related issue cost) from the rights issue. The rights issue allows existing unitholders to participate in the equity fund raising or monetise their right entitlements. The sponsor also intends to subscribe for its pro-rata entitlement and maintain its stake at 19%, while the balance will be fully underwritten by banks. The remaining acquisition cost will be funded by loan facilities (S$394.3m) and issuance of acquisition fee units (S$16.6m).


EARNINGS REVISION/RISK

  • We maintain our existing earnings forecast.


VALUATION/RECOMMENDATION






Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2019-11-04
SGX Stock Analyst Report HOLD MAINTAIN HOLD 3.28 UP 3.250



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