Ascendas REIT 1Q20 - UOB Kay Hian 2020-04-29: Potent Combination Of Diversified Asset Mix & Defensive Balance Sheet


Ascendas REIT 1Q20 - Potent Combination Of Diversified Asset Mix & Defensive Balance Sheet

  • Ascendas REIT (SGX:A17U) impresses with impeccable execution. It achieved strong positive reversion of 8.0% on a portfolio-wide basis. Portfolio occupancy also edged higher by 0.8ppt q-o-q to 91.7%.
  • Ascendas REIT benefits from strong demand for logistics space in Singapore. Industries more affected by the COVID-19 pandemic, such as retail, aviation, oil & gas and hospitality, contribute less than 15% of gross revenue. The gradual lifting of the lockdown in the US is a positive catalyst.
  • Maintain BUY. Target price: S$3.35.

Maintained strong positive reversion of 8.0%.

  • In Singapore, reversion stood at 7.7% driven by Business & Science Parks and High-specifications Industrial & Data Centres (+12.2%). Management highlighted that 11% of the 301,400sf of leases signed came from COVID-related demand for storage of essential goods.
  • Rental reversion for Australia remains high at 13.7% due to healthy demand for logistics properties and suburban offices in Sydney.
  • Rental reversion in the US was healthy at 7.4% (renewed one lease at Portland).
  • There were no lease renewals in the UK.
  • Management expects overall rental reversions to be flat for FY20 in light of uncertainties brought about by the global pandemic.

Portfolio occupancy improved 0.8ppt qoq to 91.7%.

  • Singapore occupancy improved by 1.4ppt q-o-q to 88.6%, attributed to higher occupancies at 40 Penjuru Lane (+3.6ppt q-o-q) and LogisHub@Clementi (+20ppt q-o-q). Ascendas REIT benefitted from higher demand for logistics space. Occupancies in Australia and the UK were stable at 97.3% and 97.5% respectively. US occupancy edged lower by 1ppt q-o-q to 92.9%.

Completed acquisition of business park in Singapore.

  • Ascendas REIT completed the acquisition of a 25% stake in Galaxis for a purchase consideration of S$102.9m on 31 Mar 20. Galaxis is 17-storey building with business park and office space, a two-storey retail and F&B podium and a five-storey building with work lofts located at one-north with direct access to the one-north MRT station. The property is zoned for business park use and has an attractive NPI yield of 6.2%. It has high occupancy of 99.6%. Key tenants are Canon, Oracle, Sea (formerly Garena).
  • Ascendas REIT divested three properties in Singapore (Wisma Gulab, 202 Kallang Bahru and 25 Changi South Street1) with total sales proceeds of S$125.3m during 1QFY20.

Completed AEI works at two business & science parks buildings.

  • During 1QFY20, Ascendas REIT completed AEI works at the Capricorn and Plaza 8 at total costs of S$14.5m. Future AEIs in the pipeline include renovations at the Aperia in Singapore that is estimated to cost S$1.2m and slated for completion in 3QFY20.

Defensive balance sheet post successful rights issue.

  • Ascendas REIT has debt headroom of S$1.1b before reaching gearing of 45%. Average debt maturity lengthened to 4.0 years compared to 3.6 years during the last quarter. 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).
  • Ascendas REIT’s aggregate leverage is healthy at 36.2%. It has a large debt headroom of S$3.8b before reaching 50.0% aggregate leverage. It has cash and equivalent of S$290m to meet financial and operational obligations. It has S$200m of committed credit facilities that are unutilised.
  • Ascendas REIT has S$568m of debt to be refinanced in FY20, mainly due in 2HFY20.
  • Ascendas REIT has maintained a high level of natural hedge for Australia (76%), the UK (100%) and the US (increase from 76% to 100%).

Strength in diversity.

  • Ascendas REIT has a diversified customer base of 1,490 tenants across over 20 different industries. Industries that are relatively more resilient, such as financial services, government, data centres and biomedical, contributed about 50% of Ascendas REIT’s gross revenue. Industries that are more affected by the COVID-19 pandemic, such as retail, aviation, oil & gas and hospitality & leisure, make up less than 15% of gross revenue.

SMEs accounted for less than 20% of gross revenue.

  • Management estimated that 4% of tenants have requested for rent deferrals. They are smaller companies and accounted for less than 1% of gross revenue.

Impact of COVID-19 pandemic on overseas markets.

  • In Australia, Ascendas REIT has suspended rent collection from retail/F&B tenants ( < 1% of Australia portfolio by rental income) from April until restrictions are lifted. It has restructured the lease of one leisure/hospitality tenant to provide rental rebates.
  • In the US, landlords are not allowed to evict tenants due to non-payment of rents in Portland (until 30 Jun 20) and San Diego (until 25 Sep 20). However, no rent rebates have been given to-date.
  • In the UK, Ascendas REIT has allowed some tenants to change their rental payments from quarterly to monthly in advance, which helped to ease tenants’ cashflow management.

Ascendas REIT’s policy is to distribute at least 90% of the taxable income.

  • Management does not intend to withhold distribution. However, the situation is fluid and management will continue to monitor progress of rent collection. Rental arrears ratio is currently less than 1%.

Maintain BUY.

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2020-04-29
SGX Stock Analyst Report BUY MAINTAIN BUY 3.350 SAME 3.350