Ascendas REIT - UOB Kay Hian 2021-02-03: 2H20 Deleveraged & Well Positioned For Further Expansion


Ascendas REIT - 2H20 Deleveraged And Well Positioned For Further Expansion

  • Ascendas REIT’s 2H20 DPU of 7.418 cents met our expectations. Accretive overseas acquisitions and positive rental reversion from business park properties in the US have generated healthy growth. Management maintained guidance of positive low single-digit rental reversion for full-year 2021.
  • We like Ascendas REIT for its quality tenant base and geographical diversification. The stock provides stable and resilient distribution yield of 5%. 

Ascendas REIT's 2H20 Results

Growth driven mainly by overseas acquisitions.

  • Ascendas REIT's gross revenue and NPI increased 12.5% and 7.8% respectively y-o-y in 2H20 due to acquisitions of 28 business parks properties in the US and two in Singapore in Dec 19, one suburban office property in Melbourne in Sep 20 and two office properties in San Francisco in Nov 20.
  • Ascendas REIT provided rent rebates of S$17.8m for tenants affected by the COVID-19 pandemic in 2020.

Portfolio occupancy was stable at 91.7% as of Dec 20.

  • Singapore occupancy edged lower by 0.4ppt q-o-q to 88.4% due to non-renewal of lease for 11 Changi North Way.
  • Occupancies Australia and UK were stable at 97.4% and 97.5% respectively.
  • Occupancy for US improved 0.9ppt to 92.9% due to the two newly acquired office properties in San Francisco with occupancy of 100%.

Recovery to positive reversion driven by business parks in the US.

  • Rental reversion swung from negative 2.3% in 3Q20 to positive 2.5% in 4Q20. The recovery was supported by strong positive rental reversion of 18.8% for its US portfolio driven by business park properties in Portland.
  • On a full-year basis, rental reversion was positive at 3.8% in 2020. The government sector accounted for 22.7% of new demand by gross rental income.
  • Management guided positive low single-digit rental reversion for full-year 2021 due to current market uncertainties.

Further expansion in Australia and the US.

  • Ascendas REIT completed the acquisition of an 8-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 NPI yield of 5.8%.
  • Ascendas REIT has also acquired two suburban office properties at Macquarie Park, Sydney MQX4 (completion: mid-22) and 1-5 Thomas Holt Drive (completion: Jan 21) for total consideration of S$445m. The two suburban office properties provide NPI yield of 6.1% and 5.9% respectively.
  • The acquisition of two office properties in San Francisco 505 Brannan Street and 510 Townsend Street for S$768m and NPI yield of 4.9% was completed in Nov 20.

Deleveraged with ample headroom to accommodate growth.

  • Ascendas REIT has deleveraged and lowered its aggregate leverage by 2.1ppt q-o-q to 32.8% after completing private placement and preferential offering to raise S$1.2b in Nov and Dec 20. Ascendas REIT has available debt headroom for acquisitions of S$5b before reaching regulatory limit on aggregate leverage of 50%.

Cautious outlook with silver lining.

  • Demand is subdued as companies remain cautious and have put expansion plans on hold. Ascendas REIT's Australia portfolio has expanded by 29% due to recent acquisitions. Its UK portfolio provides income stability due to long weighted average lease to expiry of 8.8 years. Its US portfolio provides organic growth with rent escalation at 2.5% to 4.0% per year.

Growth inspired by foreign companies expanding in Singapore.

  • Notwithstanding the uncertain outlook, Ascendas REIT has received enquiries from foreign companies in the technology, biomedical and capital equipment sectors. They are potential new tenants for multi-tenanted buildings and convert-to-suit facilities. Singapore has attracted foreign direct investments due to political stability and the ability to bring the COVID-19 pandemic under control.

More acquisitions on the cards.

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-02-03
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