Ascendas REIT - CGS-CIMB Research 2020-01-31: Capital Recycling Continues

ASCENDAS REAL ESTATE INV TRUST (SGX:A17U)

Ascendas REIT - Capital Recycling Continues

Ascendas REIT (SGX:A17U)'s 3Q/FY19 DPU deemed broadly in line due to changes in financial year end and timing differences between rights issue and new income contributions.
Ascendas REIT reported a +6.0% portfolio rental reversion for FY19, driven by Singapore assets and stable portfolio occupancy of 90.9%.

Maintain HOLD, with a slightly lower Target Price of S$3.14, as we account for divestments, redevelopment of iQuest and AEIs.

As a result of the change in financial year end from Mar to Dec, and timing differences between the issuance of new shares from a rights issue and income contributions from new acquisitions, we deem Ascendas REIT’s 3Q/FY19 DPU of 3.507/11.490 Scts to be broadly in line with our FY19 forecasts.
We expect FY20 growth in FY20 to come from full-year contributions from acquisitions made in 3QFY3/19 and the completion of 254 Wellington Road in Melbourne, Australia.
Overall portfolio occupancy as at end-FY19 stood at 90.9% (vs. 91.0% in the previous quarter).

FY19 rental reversions in Singapore were +6.2%, led by a +9.2% reversion for the business and science parks.
Occupancies in Singapore declined to 87.2% (vs. 88.1% in the previous quarter) due to lower occupancies at Wisma Gulab, 40 Penjuru Lane, and Pioneer Hub.
Accounting for the divestments of Wisma Gulab and 202 Kallang Bahru and the redevelopment of iQuest, the Singapore portfolio occupancy would have been 88.4%.

Occupancies in Australia improved to 97.4% due to new take up at 62 Stradbroke Street, with +1.0% rental reversions. Occupancies were a stable 97.7% in the UK and 93.9% for the new US portfolio. Upcoming expiries in Australia, the UK, and the US represent 10.4%, 3.7% and 8.8% of their respective country portfolios.

Ascendas REIT announced the divestment of Wisma Gulab and 202 Kallang Bahru in Singapore for S$105m — above their latest valuations as at end-FY19; the sale should be completed within 1Q20. The S$84.3m redevelopment of iQuest was also announced, with $15m worth of asset enhancement initiatives (AEIs) at The Capricorn and The Galen.
Gearing was 35.1%, while all-in cost of borrowings was 2.9% as at end-FY19.
See Ascendas REIT Share Price; Ascendas REIT Target Price; Ascendas REIT Analyst Reports; Ascendas REIT Dividend History; Ascendas REIT Announcements; Ascendas REIT Latest News.

We reiterate our HOLD call with a DDM-based Target Price of S$3.14, as we account for the divestments, redevelopment and AEIs leading to a 1.0-3.3% increase in FY20-21F DPU.
While we like Ascendas REIT for its diversified portfolio and strong tenant base, we think its valuations are stretched at > 2 s.d. above its historical mean; a potential entry point could be below S$3.00.
Upside risks: further interest rate cuts and accretive acquisitions.
Downside risks: major tenant non-renewals and a weakening of industrial rents.

LOCK Mun Yee CGS-CIMB Research | Ervin SEOW CGS-CIMB Research | https://www.cgs-cimb.com 2020-01-31

SGX Stock Analyst Report HOLD MAINTAIN HOLD 3.14 DOWN 3.150