Ascendas REIT - Phillip Securities 2020-11-02: Standing Steady

ASCENDAS REAL ESTATE INV TRUST (SGX:A17U)

Ascendas REIT - Standing Steady

Portfolio reversion of -2.3% in 3Q20 but occupancy inched up from 91.5% to 91.9%. Low-single-digit positive reversions for FY20e still achievable owing to stronger leasing in 1H20, in line with our rental reversion forecasts.
Weaker industrial outlook mitigated by scale and diversified tenant mix. No pre-terminations except for SG portfolio: nine tenants accounting for 1,800sqm of NLA.
Upgrade to Ascendas REIT to BUY with lower DDM Target Price of S$3.61, down from S$3.63, mainly due to higher debt and perpetual securities. Estimates tweaked for recent acquisition of MQX4.

Recent pullback in Ascendas REIT's share price presents better entry price, and total returns of 31.5% to our Target Price – upgrade to BUY.

Ascendas REIT (SGX:A17U) announced its acquisition of MQX4 on 18 September 2020. This is a suburban office under development in Macquarie Park, Sydney, bought at a "as if completed" market valuation of S$161mn. The completed asset will have a net lettable area of 19,384 sqm, comprising 17,753 sqm of office space and 1,631 sqm of retail space.
The acquisition will be funded with debt and/or internal resources and carries an initial NPI yield of 6.1%. A 3-year rental guarantee can provide upside if Ascendas REIT can lease out the property before the rental guarantee period ends.
Completion of the land sale is expected in 4Q 2020, and of MQX4, around mid-2022.
This is Ascendas REIT's third acquisition YTD, following its purchase of a 25% stake in Galaxis and a logistics asset under development in Kiora Crescent, Yennora, Sydney in March and July 2020 respectively.

Singapore occupancy rose from 87.9% to 88.8%, supported by higher occupancy at Cintech II (30 Sep 2020: 100%, 30 Jun 2020: 0%) and a logistics asset, 40 Penjuru Lane (30 Sep 2020: 98.8%, 30 Jun 2020: 85.5%). This was partially offset by a decline in Australian occupancy from 98.4% to 97.5% due to a non-renewal at 92 Sandstone Place, Brisbane. Take-up was mainly driven by the government and logistics and supply-chain companies.

Ascendas REIT's gearing improved largely due to S$300mn non-call green perpetuals issued at 3.0%, which are counted as equity in gearing calculations. Total gross borrowings and perpetual securities to unitholders’ funds amounted to 63.3%.
Adjusted interest coverage, which includes interest payment for the perpetuals, is estimated at 3.9x (2018: 4.2x). This is amply above the MAS' 2.5x minimum.
Earnings are expected to be underpinned by its diversified rental income from industrial assets which have shown resilience to the economic downturn. Out-of-pocket rebates totalled just 2% of FY20e revenue.

Despite better occupancy, Singapore reversions were a negative 2.8%. Larger space signed with negative reversions wiped out Ascendas REIT’s +11.5% reversions in the US. Aside from business parks’ positive 4.5%, reversions for the other asset classes were flat or negative: Logistics and Distribution Centres (-16.2%), High-Specification (-3.3%), Light Industrial (-1.4%) and Integrated Development (flat).
9M20 portfolio reversions came in at +4.2%. We think low-single-digit positive reversions for FY20e are still achievable owing to stronger leasing locked in in 1H20.

Subdued leasing is expected as companies continue to put business and expansion plans on hold out of caution. Singapore industrial rents were weak in 3Q20 while sector occupancy only crept up due to warehouse leasing.

We adjust our forecasts to reflect its acquisition of MQX4. Our Target Price dips to S$3.61 due to higher debt and perpetual securities. Recent pullback in Ascendas REIT's share price presents better entry price and total returns of 31.5% to our Target Price. As such we upgrade our call for Ascendas REIT from Accumulate to BUY.
See Ascendas REIT Share Price; Ascendas REIT Target Price; Ascendas REIT Analyst Reports; Ascendas REIT Dividend History; Ascendas REIT Announcements; Ascendas REIT Latest News.
Ascendas REIT’s S$13.8bn portfolio comprises 197 properties across Singapore, Australia, the UK and the US. This results in low asset-concentration risks, with no property accounting for more than 4.6% of its revenue. Such geographical diversification and low tenant concentration - 1,450 tenants, the largest at < 4% of revenue - help to attenuate the economic impact on its portfolio. Its portfolio weighted average security deposit is about 5.3 months of rental income.

Natalie Ong Phillip Securities Research | https://www.stocksbnb.com/ 2020-11-02

SGX Stock Analyst Report BUY UPGRADE ACCUMULATE 3.61 DOWN 3.630