Ascendas REIT - OCBC Investment 2020-02-03: Expect Further Inorganic Growth Ahead


Ascendas REIT - Expect Further Inorganic Growth Ahead

  • Ascendas REIT's 3QFY19 DPU -12.3% y-o-y due to timing differences
  • Still expecting positive rental reversions
  • Capital recycling continues

3QFY19 results below expectations

  • ASCENDAS REIT (SGX:A17U)’s 3QFY19 results fell short of ours and the street’s expectations, due largely to timing differences between its rights issue and acquisition completion of a portfolio of 28 business park properties in the US and two in Singapore.
  • Gross revenue and NPI grew 5.9% and 8.5% y-o-y to S$239.7m and S$182.3m, respectively, but DPU fell 12.3% to 3.507 S cents due to the factors highlighted earlier.
  • Ascendas REIT's FY19 NPI, which comprises the nine month period from 1 Apr to 31 Dec 2019 due to a change in financial year end to 31 Dec, jumped 10.6% to S$537.7m.
  • DPU slipped 3.3% to 11.49 S cents and formed 71.4% of our original 12-month period forecast prior to the financial year end change.

Guiding for low single digit rental reversion in Singapore and high single digit overseas

  • Operationally, Ascendas REIT maintained its robust rental reversions momentum in Singapore. This came in positive across all sub-segments, ranging from 0.7% (Integrated Development, Amenities & Retail) to 9.2% (Business & Science Parks) in FY19.
  • Average portfolio rental reversions were +6.2% in Singapore and +1.0% in Australia. The firm rental uplifts in Singapore was partly driven by tenants’ stickiness given capex requirements for a relocation.
  • Looking ahead, management has guided for a low single-digit improvement in rental reversion in Singapore and high single-digits across its three overseas markets of Australia, UK and US.
  • Singapore portfolio occupancy softened slightly by 0.9 ppt q-o-q to 87.2%, but it has since sold Wisma Gulab (vacant) which was a drag on occupancy. Vacancy rate in Australia declined from 4.6% (30 Sep 2019) to 2.6%, while UK’s occupancy was unchanged at 97.7%.

Strong debt headroom for acquisitions and AEIs

  • Ascendas REIT’s gearing was healthy at 35.1% (31 Dec 2019), leaving it with ample debt headroom of S$1.1b before reaching the 40% level. We expect proactive inorganic growth ahead, with UK logistics and business park properties looking more interesting again following more clarity over Brexit.
  • Ascendas REIT has also proposed to redevelop iQuest@IBP, as the property is vacant and plot ratio will be maximised, which translates into an increase in GFA by 12k sqm. Furthermore, this property is expected to benefit from the future Jurong Regional MRT Line. Initial yield on cost is reasonable at 6%, but management sees room for it to come in at an average yield of 8% over an illustrative 10-year lease.
  • After adjustments and lowering our cost of equity assumption from 7.1% to 6.7% given improved visibility in UK and Ascendas REIT’s resilient portfolio, we bump up our fair value to S$3.59 (previously S$3.25).
  • See Ascendas REIT Share Price; Ascendas REIT Target Price; Ascendas REIT Analyst Reports; Ascendas REIT Dividend History; Ascendas REIT Announcements; Ascendas REIT Latest News.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2020-02-03
SGX Stock Analyst Report BUY MAINTAIN BUY 3.59 UP 3.250