Ascendas REIT - DBS Research 2020-07-24: Fuel Cells Of The New Economy


Ascendas REIT - Fuel Cells Of The New Economy

  • Ascendas REIT's 1H20 operating and financial metrics remain resilient
  • Brighter reversionary prospects a bright spot; organic growth outlook stable.
  • Acquisitions is a catalyst to reaccelerate growth momentum.
  • Riding on multiple tailwinds; BUY, lift Target Price to S$4.00.

Fuel cells of the new economy

1H20 DPU of 7.2 Scts (-11% y-o-y, -3% h-o-h).

  • Ascendas REIT (SGX:A17U) reported a 14.6% and 11.1% rise in 1H20 revenues and net property income (NPI) to S$521.2m and S$388.0m respectively. The stronger performance was largely driven by contribution from 28 properties in the US and two business parks acquired in December 2019. This was partially offset by rental rebates provided to eligible tenants (c.S$9.6m), income vacuum from divestments and ongoing developments, and lower occupancies in Singapore.
  • Ascendas REIT's distributable income rose by 3.7% y-o-y to S$263.2m. The drop in DPU was largely due to the enlarged unit base and a one-off DPU boost of 0.25 Scts a year ago from a rollover tax adjustment excluding this, the drop would have been lower at 8.0%.

Balance sheet metrics stable; natural hedges in place defend NAV against forex volatility.

  • Gearing stayed stable at 36.1% (vs 35.1% a quarter ago) which was due to incremental debt taken to fund the recent acquisition of a 25% stake in The Galaxis. Overall financial metrics remain stable - ICR ratio at 4.2x and 92% of its properties are unencumbered.
  • Debt cost remained stable at 2.9% with c.81% of interest costs fixed.
  • Ascendas REIT has taken a natural hedging strategy in its overseas investments with Australia (77% hedged), GBP (100%) and USD (100%) implying minimal volatility to NAVs from currency movements.

Outlook & Our recommendation

Quiet optimism that the worst is over.

  • Stripping off the contribution from new acquisitions in the US, organic performance was respectable. While we understand Ascendas REIT estimates rental rebates to be S$20m in total (before property tax rebates of a similar amount), close to half of this has been disbursed. Depending on the trajectory of the economic recovery, the actual amount may be lesser than expected. That said, we have been conservative and have assumed rebates of S$20m in our FY20F earnings projections.

Slight dip in occupancy rates expected; but brighter outlook for reversions.

  • Ascendas REIT’s portfolio occupancy rates maintained stable, dipping 2 ppts to 91.5%, driven from Australia (98.4%, +1.1 ppt q-o-q, with marginal dips in Singapore (87.9%,-0.7ppt), UK (97.5%, stable) and USA (92.1%, -0.8ppt). Ascendas REIT’s same-property occupancy for Singapore properties remained flattish at 85.0% in June 2020, arresting the dip seen in this segment over the past few quarters.
  • Rental reversions have been tracking above our estimates at 4.3% in 1H20 (4.3% in 2Q20, 8.0% in 1Q20). We saw strong rental reversions across its markets (Singapore +4.0%, Australia +16.6%, US +16.2%). We note that the Singapore’s rental reversionary performance was impacted by a tenant in the Hi-specs segment (-30.6% negative rent reversions).
  • Looking ahead, the sense we get from management is one of quiet optimism as the economy gradually grinds itself back towards pre-COVID levels. Ascendas REIT’s leading position within the business parks, hi-spec industrial properties, and logistics sectors will enable the REIT to capture a wider spectrum of industries. Key sources of demand for 1H20 mainly came from the logistics, engineering & IT/datacenters.

The world is its oyster as acquisition momentum to restart and drive further upside.

  • With Ascendas REIT trading at a conducive cost of capital, we believe that acquisitions will remain a big part of its strategy in 2H20, augmenting a stronger growth profile in 2021 and beyond. We have assumed S$500m in acquisitions in our estimates (60% equity/40% debt) which we believe can be achieved through
    • acquiring a part of its Sponsor’s pipeline of business park assets, and
    • third party acquisitions in UK, Australia and the US.

Time to fuel multiple structural tailwinds; Target Price raised to S$4.00, implying target FY21 yield of 4.0%.

  • Ascendas REIT has been lagging its other industrial S-REIT leaders (Mapletree Industrial Trust (SGX:ME8U) and Mapletree Logistics Trust (SGX:M44U)) YTD and we believe it is time for Ascendas REIT to reclaim its spot among the top. We see multiple structural tailwinds for Ascendas REIT:
    • Greater adoption of e-commerce driving demand for logistics properties (in SG, UK and Australia totalling 27% of AUM);
    • Increasing demand for datacenters (c.5% of AUM) from IoT, cloud adoption etc.;
    • Unique to Ascendas REIT is its deep seated exposure in the business parks segment (43% of AUM - SG: 32%, US: 11%).
  • The trend towards more flexible working arrangements by companies may drive a decentralisation trend which would benefit Ascendas REIT and fuel redevelopment of its older science park properties with higher plot ratios.

Estimates revised.

Derek TAN DBS Group Research | Dale LAI DBS Research | https://www.dbsvickers.com/ 2020-07-24
SGX Stock Analyst Report BUY MAINTAIN BUY 4.00 UP 3.450