Ascendas REIT - UOB Kay Hian 2020-10-27: 3Q20 Resiliency From Geographical & Tenant Diversification

ASCENDAS REAL ESTATE INV TRUST (SGX:A17U)

Ascendas REIT - 3Q20 Resiliency From Geographical & Tenant Diversification

Ascendas REIT (SGX:A17U)'s portfolio occupancy edged higher by 0.4ppt q-o-q to 91.9% in 3Q20 due to higher occupancies in Singapore. Rental reversion swung from a positive 4.3% in 2Q20 to a negative 2.3% in 3Q20. Management maintained guidance of positive low single-digit rental reversion for full-year 2020.
We like Ascendas REIT for its quality tenant base and geographical diversification.

Singapore occupancy improved 0.9ppt q-o-q to 88.8% due to higher occupancies at Cintech II and 40 Penjuru Lane. Occupancies in the UK and US were stable at 97.5% and 92% respectively.
Occupancy for Australia eased slightly by 0.9ppt to 97.5% due to non-renewal at 92 Sandstone Place at Brisbane.

Rental reversion swung from a positive 4.3% in 2Q20 to a negative 2.3% in 3Q20.
In Singapore, its business & science parks segment registered a positive reversion of 4.5%. Overall rental reversion for Singapore was negative 2.8% due to its high-specification industrial (-3.3%) and logistics & distribution centres (- 16.2%) segments.
In the US, Ascendas REIT’s business park properties achieved positive rental reversion of 11.5%.
On a ytd basis, rental reversion is a positive 4.2%. Management maintained guidance of positive low single-digit rental reversion for full-year 2020.

Ascendas REIT completed the acquisition of an eight-storey suburban office building at 254 Wellington Road in Melbourne for S$100.6m in Sep 20. Nissan has leased 65% of the office space to serve as its head office and training centre for 10 years. The suburban office provides net property income (NPI) yield of 5.8%.
Ascendas REIT has also acquired two properties under development, which are logistics warehouse Lot 7 Kiora Crescent (completion: 2Q21) and suburban office MQX4 Macquarie Park (completion: mid- 22), in Sydney for S$182.1m. The two properties provide NPI yield of 5.8% and 6.1% respectively.

Ascendas REIT has converted the roof level into a production area to maximise plot ratio for 52 & 53 Serangoon North Avenue 4. It has also upgraded the drop-off point, main lobby and toilets. The asset enhancement initiative (AEI) cost S$8.5m and was completed in Jul 20.

Aggregate leverage has edged lower by 1.2ppt q-o-q to 34.9%. Ascendas REIT has available debt headroom for acquisition of S$4.2b before reaching the regulatory limit on aggregate leverage of 50%. It has issued S$300m of non-tual securities at 3.00% in Sep 20. Ascendas REIT's average all-in cost of debt has improved 0.1ppt q-o-q to 2.8%.

Many companies remain cautious and have put their expansion plans on hold. Demand and rental growth for industrial space is expected to be subdued. Ascendas REIT has provided rental waivers of S$11.3m in 9M20, which included rental waiver of 0.5 months for retail tenants in August and September.

In Australia, Ascendas REIT has suspended rent collection for F&B and retail tenants at its three suburban offices. Lease for one hospitality/leisure tenant was restructured and rent waiver/deferment was provided to four SME tenants.
In the UK, Ascendas REIT has changed rental payment frequency from quarterly to monthly to ease tenants’ cash flow management. The UK portfolio benefits from high e-commerce penetration and long weighted average lease expiry (WALE) of 9 years.
In the US, Ascendas REIT’s business parks properties benefit from growth in technology and healthcare sectors. It has provided rental rebates to a cafe operator in Portland and restructured the lease of a tenant whose supply chain was disrupted by the COVID-19 pandemic.

Business park space benefits from increased demand from technology and pharmaceutical companies. In particular, Chinese technology giants setting up their regional HQ in Singapore could boost demand. Business & science parks in Singapore accounted for 32% of Ascendas REIT’s asset under management (AUM).

Jonathan KOH CFA UOB Kay Hian Research | Peihao LOKE UOB Kay Hian | https://research.uobkayhian.com/ 2020-10-27

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