Ascendas REIT - DBS Research 2021-02-03: The Next Data Centre Play?

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ASCENDAS REAL ESTATE INV TRUST (SGX:A17U)

Ascendas REIT - The Next Data Centre Play?

• Ascendas REIT's FY20 DPU of 14.7 cents was slightly below our projection due to timing differences in fund raising and completion of acquisitions.
• Positives:
  1. resilient earnings despite COVID-19 and
  2. rental reversions at +3.8%.
• European data centre acquisition is taking longer than expected; an announcement is expected soon.
• Maintain BUY with target price of S$4.00.

Ascendas REIT's FY20 results

FY20 results mostly in line; driven by S$1.5bn of acquisitions during the year

• Ascendas REIT (SGX:A17U)'s FY20 revenue increased 13.6% y-o-y led by contribution from acquisitions: 28 business parks in the US, 2 business parks in Singapore, 2 office buildings in San Francisco. Increase was partially offset by lower occupancies at several properties, rent rebates given, and divestments during the year
• Ascendas REIT's FY20 DPU of 14.7 cents was just ~2% below our projections, due mainly to the drag in earnings caused by timing difference between equity fund raising and completion of acquisition.

Our thoughts and Recommendation

Improvement in rental reversions q-o-q

• In 4Q20, rental reversions in Singapore and the US improved.
  • Singapore: +0.9% in 4Q20 vs -2.8% in 3Q20.
  • US: +18.8% in 4Q20 vs +11.5% in 3Q20.
• Despite a challenging year amid the COVID-19 pandemic, Ascendas REIT still managed to report a positive rental reversion of 3.8% for FY20. Only notable non-renewal in 4Q20 was a logistics tenant at 11 Changi North Way.

Grab HQ development could be delayed further

• Construction of Grab HQ was delayed by approximately 2 quarters due to the COVID-19 pandemic.
• Estimated completion is currently planned for late- 2Q21 but may be further delayed.
• Disruption in the construction industry due to the COVID-19 pandemic has led to higher construction costs.
  • Unlikely to have much impact on Grab HQ construction as it has already been committed.
  • But may affect other developments, although impact will not be too significant.

Portfolio valuations mostly stable; same-store valuation increased ~1.0%

• Ascendas REIT's portfolio valuations remained stable; slight compression in cap rates for Singapore properties.
  • Cap rate compression for Business & Science Parks.
  • Cap rate compressions also seen in the Australian portfolio.
• 4Q20 portfolio occupancy rate inched down 0.2ppt q-o-q to 91.7%.

Strong balance sheet with a debt headroom of ~S$5.0bn

• Equity fund raising in November 2020 led to improvement in gearing to 32.8%.
• All-in cost of borrowing is at 2.7% with an ICR of 4.3x.
• Only S$325m of Ascendas REIT's loans are due in FY21.
  • S$132m in term loan facilities.
  • S$193m in MTNs.
• Growth sectors are driving new demand. Biomedical, renewal energy, consumer goods and logistics industries accounted for more than 76% (by GRI) of new leases signed in 4Q20.

Low single-digit positive rental reversions expected for FY21

• 16.3% (by GRI) of Ascendas REIT's portfolio leases are due to expire in FY21.
  • Manager has already commenced renewal negotiations with tenants.
  • Likely to see tenant retention rate of 60%-70%, similar to FY20.
• Expect rent reversions for Singapore leases to be flat-to-slightly-positive
  • Lease at 3 single-tenanted buildings in Singapore will expire in FY21; 2 of these leases by logistics tenants are highly likely to be renewed, may consider redevelopment/AEI works at the other single-tenanted properties.
• Rental incentives in the US and Australia have been creeping up; but we still expect to see positive rental reversions
  • Expect most tenants to renew their leases.
  • Demand in San Diego and Raleigh will be driven by Technology, Life Sciences and Gaming sectors.
  • Suburban offices and logistics properties in Australia are also expected to see healthy demand and growth.

Recommendation

• We continue to like Ascendas REIT for its diversified portfolio that has proven to be resilient amidst the COVID-19 pandemic. Despite setting aside more than S$22m in rental rebates and deferments to assist tenants, Ascendas REIT was still able to report healthy earnings. Given its large debt headroom and access to fund raising, Ascendas REIT conducted more than S$1.5bn of acquisitions and developments in FY20.
• We are expecting Ascendas REIT to announce an acquisition of a European data centre portfolio very soon as we understand that negotiations are on track. We have assumed that the European data centre portfolio is valued at S$1.0bn and have included this assumption into our valuations.
• Ascendas REIT's FY21 DPU is expected to rise ~8% with the completion of the acquisition, as well as the contributions from earlier acquisitions.
• 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 have a BUY call for Ascendas REIT with a target price of S$4.00.

Rachel TAN DBS Group Research | Dale LAI DBS Research | Derek TAN DBS Research | https://www.dbsvickers.com/ 2021-02-03

SGX Stock Analyst Report BUY MAINTAIN BUY 4.000 SAME 4.000