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Ascendas REIT - UOB Kay Hian 2021-03-30: Multifaceted Growth Of Well-Diversified Portfolio

ASCENDAS REAL ESTATE INV TRUST (SGX:A17U) | SGinvestors.io ASCENDAS REAL ESTATE INV TRUST (SGX:A17U)

Ascendas REIT - Multifaceted Growth Of Well-Diversified Portfolio

  • Ascendas REIT will benefit from the easing of safe management measures to allow 75% of employees back to work at the office starting 5 Apr 21 as business parks and hi-spec industrial buildings in Singapore accounted for 45% of its AUM. It could refocus on growth in Singapore with potential acquisitions of Ascent at Science Park I and Galaxis at one-north. Redevelopment of Science Park I could unlock value.
  • Ascendas REIT provides FY22 distribution yield of 5.4%. Maintain BUY. Target price: S$3.82.



WHAT’S NEW


Benefitting from multinational companies expanding in Singapore.

  • Ascendas REIT (SGX:A17U) 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 (redevelop light industrial building into high-specification industrial building). Singapore has attracted foreign direct investments due to political stability and its ability to bring the COVID-19 pandemic under control.

Redevelopment of Science Parks I and II a long-term undertaking.

  • Ascendas REIT owns older buildings Cintech I, II, III & IV (GFA: 582,000sf) and The Rutherford & Oasis (GFA: 292,960sf) at the 30ha Science Park I.
  • Ascendas REIT's sponsor CapitaLand (SGX:C31) owns The Chadwick, The Curie and The Cavendish (GFA: 262,550sf), which are located between Ascendas REIT’s buildings.
  • The nine properties sit on a contiguous plot of land along Science Park Drive. Their existing plot ratio is low at 1.2 compared to 3.5-4.0 for nearby one-north Business Park (within five minutes’ drive). Ascendas REIT could jointly redevelop Science Park I with sponsor CapitaLand. It is in constant dialogue with relevant government agencies to push ahead with the redevelopment, which is likely to be spread over many phases due to its huge scale.

Sustainable organic from US business park properties.

  • Ascendas REIT acquired 28 Business Park properties in Portland, Raleigh and San Diego for S$1,285m in Dec 19. These properties generated strong positive rental reversion of 18.8% in 4Q20 driven by business park properties in Portland. Demand in Raleigh and San Diego will be driven by Technology and Life Sciences industries.
  • We expect business parks properties in the US to maintain positive rental reversion in 2021. They also provide organic growth with rent escalation at 2.5% to 4.0% per year.

Resiliency from growth of technology tenants.

  • Ascendas REIT's acquisition of two office properties in San Francisco 505 Brannan Street (tenant: Pinterest, WALE: 12 years) and 510 Townsend Street (tenant: Stripe, WALE: 7 years) for S$768m with NPI yield at 4.9% was completed in Nov 20. Both tenants Pinterest and Stripe are benefitting tremendously from the COVID-19 pandemic.
    • Pinterest benefitted from growth in advertising from small & medium-sized businesses and a surge in international users.
    • Stripe benefitted from growth in online shopping and payment processing. It raised US$600m and was valued at US$95b in Mar 21, 2.5x the valuation it attained during the last fund raising in 2019.


STOCK IMPACT


More acquisitions are forthcoming in 2021.

  • Ascendas REIT secured accretive acquisitions worth S$1.4b in Singapore, Australia and the US in 2020 (completed S$973m and S$535m to be completed over the next two years). It has an optimal asset mix 60:40 between Singapore and overseas markets.
  • Having expanded overseas at a frantic pace over the past five years (investment mandate extended to overseas properties in Aug 15), Ascendas REIT could refocus on expanding within Singapore in 2021.
  • Potential acquisitions from sponsor CapitaLand include Ascent at Science Park I (GFA: 555,030sf) and Galaxis (75% stake) at one-north (GFA: 742,050sf).
    • Key tenants at Ascent are Johnson & Johnson, Dyson, Merck and Prestige Biopharma.
    • Key tenants at Galaxis are Canon, Sea Ltd, Oracle and Avaloq.

Development projects to start contributing.

  • Built-to-suit business park development for Grab’s headquarters (NLA: 410,000sf) and UBIX (NLA: 143,400sf), the redevelopment of former 25 & 27 Ubi Road 4, will be completed in 2Q21 and 4Q21 respectively.

Acquired data centres in Europe.

  • Ascendas REIT has completed the acquisition of 11 data centres located across the UK (four), Netherlands (three), France (three) and Switzerland (one) from vendor Digital Realty Trust for S$904.6m in Mar 21. The acquisition provides an initial net property income (NPI) yield of 6%.
  • Nine data centres, representing 93% of the acquired portfolio's assets under management (AUM), are located in London, Amsterdam and Paris, which are the top co-location data centre markets in Europe.
  • The acquisition would expand exposure to the fast-growing data centre market from 4% to 10% of Ascendas REIT's AUM. The exposure to UK/Europe would expand from 6% to 12% of AUM. The portfolio has high occupancy rate of 97.9% and long WALE of 4.6 years by rental income. 83% of the leases by rental income have embedded annual rent escalations of 1-3%.

Adds a new engine for growth and expansion.

  • The acquisition of 11 data centres in Europe has injected a new dimension for growth. There is room for asset enhancements for the 11 data centres via:
    1. repositioning some powered shell data centres into co-location data centres, and
    2. converting ancillary office spaces into data halls.
  • Over the longer term, Ascendas REIT's management intends to build scale for data centres in Singapore and Europe, focusing on core and shell data centres.

EARNINGS REVISION/ RISK

  • We maintain our existing DPU forecast for Ascendas REIT.
  • Ascendas REIT incurred rental waivers of S$17.8m in FY20. The same magnitude of assistance to tenants is unlikely to be repeated in FY21.


VALUATION/RECOMMENDATION



SHARE PRICE CATALYST

  • Resiliency from Business Parks, Logistics and Data centres segments.
  • Contributions from development projects and AEIs.





Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-03-30
SGX Stock Analyst Report BUY MAINTAIN BUY 3.820 SAME 3.820



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