Ascendas REIT - UOB Kay Hian 2020-02-03: Oct-Dec19 Business Parks Make For Good Business

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

Ascendas REIT - Oct-Dec19 Business Parks Make For Good Business

  • Ascendas REIT achieved positive rental reversion of 8.8% for leases renewed in Oct-Dec 19, driven by business & science parks in Singapore (+11.8%). The 28 newly-acquired business park properties in the US will make full-year contributions in 2020 and benefit from a high proportion of leases with rental escalation of 2.5-4.0% per year. Maintain BUY.



OCT-DEC 19 RESULTS

  • Ascendas REIT (SGX:A17U) reported DPU of 3.507 S cents for Oct-Dec 19 (-12.3% y-o-y), bringing 2019 DPU to 11.490 S cents (-3.3% y-o-y).

Business parks make for good business.

  • Gross revenue increased 5.9% y-o-y, driven by the acquisition of 28 business park properties in US tech cities of San Diego, Raleigh and Portland and two business park properties in Singapore, which was completed on 11 Dec 19. The 28 business park properties in the US made a maiden contribution of S$6.5m to gross revenue. Ascendas REIT has also successfully renewed leases for key US tenants - CareFusion Manufacturing and Nike ahead of expiry.

Business parks in Singapore boosted rental reversions.

  • Ascendas REIT achieved positive rental reversion of 8.8% for leases renewed in Oct-Dec 19, driven by business & science parks buildings in Singapore (+11.8%). Most of the leases signed were from tenants in the engineering (30.2% by rental income), electronics (16.8%) and lifestyle & consumer (15.7%) sectors.
  • There were no lease renewals for the UK and Australia segments during the quarter. Management expects positive rental reversion at low-single-digit in 2020, driven mainly by overseas markets.

Diversified portfolio provides resiliency.

  • Ascendas REIT has a diversified base of 1,490 tenants spread over 200 properties in Singapore, Australia, the UK and the US. The mix by asset value between Singapore-to-overseas is 72:28, and single-to-multi-tenant buildings is 29:71. Weighted average lease expiry (WALE) is 3.9 years (Singapore: 3.5 years, Australia: 4.4 years, UK: 8.8 years, US: 4.1 years).
  • Singapore occupancy declined marginally by 0.9ppt q-o-q to 87.2%, mainly attributed to lower occupancies at Wisma Gulab, 40 Penjuru Lane and Pioneer Hub. Excluding divested Wisma Gulab and 202 Kallang Bahru as well as the redevelopment of iQuest, the Singapore portfolio occupancy would have been 88.4%.
  • Occupancies in the UK was stable at 97.7% (flat q-o-q), while US occupancy was 93.9%. For Australia, occupancy improved 2ppt q-o-q to 97.4% due to a new take-up at 62 Stradbroke Street, Brisbane (100% occupied).

Gearing improved 1.1ppt q-o-q to 35.1%.

  • Ascendas REIT has debt headroom of S$1.1b before reaching gearing of 45%. Average debt maturity lengthened to 4.0 years from 3.6 years in 3Q19. All-in debt cost improved marginally by 0.1ppt q-o-q to 2.9% with 75.8% of borrowings at fixed rates (-1ppt q-o-q).


STOCK IMPACT


Outbreak of coronavirus creates new uncertainties.

  • Business sentiment was weighted down by trade tensions. The global economy was initially expected to stage a modest recovery in 2020. However, the outbreak of the novel coronavirus, which has been declared as a Public Health Emergency of International Concern by the World Health Organisation, has created a new element of uncertainties. Companies are expected to remain conservative in their business and expansion plans.

Stability from Australia and the UK.

  • Management expects subdued demand and rental growth due to high amount of new completions in Singapore. The Australian portfolio provides stable performance due to their good locations, while the UK portfolio provides resiliency due to long WALE of 8.8 years.

Growth from the US.

  • Ascendas REIT’s US properties, which will make full-year contributions in 2020, benefit from the fast-growing technology and healthcare industries as well as a high proportion of leases with rental escalation of 2.5-4.0% per year.

Redevelopment for iQuest.

  • Ascendas REIT has commenced redevelopment of iQuest at International Business Park at an estimated cost of S$84.3m. The property will benefit from the new Jurong Regional Line and the development of Jurong Lake District, the largest regional economic gateway outside of the CBD. Plot ratio has increased from 1.4 to 2.5, resulting in additional GFA of 129,200sf (NLA increased by 115%). iQuest will be demolished and rebuilt into a new business park building with updated specifications and large floor plate of 31,200sf. The new iQuest is scheduled for completion in 3Q22.

Asset enhancement initiatives.

  • Ascendas REIT has commenced AEI for The Capricorn and The Galen at Science Park 2 at an estimated cost of S$13.0m.

Capital recycling.

  • Ascendas REIT has divested high-specifications building Wisma Gulab at S$88m (S$4.6m gains) and light industrial building at 202 Kallang Bahru at S$17m (S$2.0m gains). Divestment of Wisma Gulab was completed on 23 Jan 20. The divestment of 202 Kallang Bahru is expected to complete in 1Q20.


EARNINGS REVISION/RISK

  • We maintain our earnings forecasts.


VALUATION/RECOMMENDATION






Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2020-02-03
SGX Stock Analyst Report BUY MAINTAIN BUY 3.35 UP 3.250



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