Ascendas REIT - CGS-CIMB Research 2020-04-28: Healthy Operational Performance In 1Q20

ASCENDAS REAL ESTATE INV TRUST (SGX:A17U)

Ascendas REIT - Healthy Operational Performance In 1Q20

In its 1Q20 business update, Ascendas REIT (SGX:A17U) saw a slight q-o-q uptick in portfolio occupancy, led by Singapore properties. It achieved a healthy positive rental reversion, averaging 8%, led by Australia (+13.7%), Singapore (+7.7%) and US (+7.4%) properties. See Ascendas REIT Announcements.
Balance sheet is healthy with gearing at 36.2% and no refinancing needs in 1H20. Ascendas REIT has S$290m of cash and S$200m in committed facilities at end-1Q20. It also completed the divestment of S$125.3m worth of properties in 1Q and acquired a 25% stake in Galaxis for S$102.9m.

Looking ahead, management indicated that due to the COVID-19 outbreak and slow macro outlook, it expects overall rental reversions to be flat for FY20F.
In Singapore, it will pass on the property tax rebates to qualifying tenants. In addition, F&B, retail and food factory tenants will receive further rent relief for Apr/May 2020. These tenants make up < 4% of Singapore income. While none of the Singapore tenants indicate intention to pre-terminate in the near term, we think the leasing environment would remain challenging. Hence, we tweak down the current Singapore portfolio occupancy by 1-2% pt over the next 2 years.
In the medium term, completion of Grab’s HQ in 1Q21 as well as redevelopment of 25&27 Ubi Rd and iQuest @ IBP will likely contribute new income to the Singapore portfolio.

In Australia, it has suspended rent collection from retail/F&B tenants ( < 1% of Australia income) from Apr until restrictions are lifted as well as engaged in tenant discussions to offer assistance via lease incentives or rent deferrals.
In the UK, it is extending available space for short-term leases to industries such as food, pharmaceuticals and medical tenants and helping tenants with their cashflow through a change in rental payment structure.
The US remains robust for now, with no rent rebates given. While leasing enquiries have declined in all 3 countries, management expects existing tenants in Australia to renew their leases while potential tenants in UK/US are slowing their leasing interest or expansion plans.
That said, occupancy in UK/US was at 97.5%/92.9% at end- 1Q20, with low lease expiries of 3.7% and 8.8% in UK and US in FY20 (as at end-4Q19).

Overall, we lower our FY20-22F DPU estimates by 4.1-8% to factor in lower portfolio occupancy, largely in Singapore, tweak down our rental growth assumption to -1% to -3% over the next 2 years and include income contribution from its 25% stake in Galaxis. Consequently, our DDM-based Target Price is revised to S$3.00.
However, with the recent Ascendas REIT Share Price correction, likely factoring in some of these challenges, Ascendas REIT now offers total return of 10%. Hence, we upgrade the stock to Add.
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 like Ascendas REIT for its diversified earnings base and income growth from redevelopment activities.
Upside risk: faster-than-expected global recovery.
Downside risk: protracted downturn from impact of COVID-19.

LOCK Mun Yee CGS-CIMB Research | EING Kar Mei CFA CGS-CIMB Research | https://www.cgs-cimb.com 2020-04-28

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