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


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.


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