Ascendas REIT - Phillip Securities 2021-06-21: Rebalancing Continues

ASCENDAS REAL ESTATE INV TRUST (SGX:A17U)

Ascendas REIT - Rebalancing Continues

Portfolio stable. Slight dip in Ascendas REIT (SGX:A17U)'s occupancy from 91.7% to 90.6% due to non-renewals but reversions positive at 3.0%. Singapore assets improving.
Demand remains muted as companies exercise caution but tenants also avoid relocation costs, leading to higher retention rates for Ascendas REIT. Electronics (29.3%) and Biomedical (34.0%) sectors main sources of demand in 1Q21.
Reiterate BUY call on Ascendas REIT. DDM target price (COE 6%) raised from S$3.64 to S$3.65.

Ascendas REIT remains our top pick in the sector for its scale and diversification.

US and Singapore rental reversions were 6.2%and 2.9% respectively. Singapore reversions were mixed, with positive reversions of 5.6%, 2.8% and 0.8% for logistics, business parks and light industrials respectively. Reversions for high-spec and integrated development assets were -0.9% and -2.7%.

Ascendas REIT's 1Q21 portfolio occupancy slid q-o-q from 91.7% to 90.6%, under non-renewals in Australia and Singapore.
- Singapore occupancy fell q-o-q from 88.4% to 86.9% on the back of a 14.9ppt decline at 138 Depot Road and 0% occupancy at TÜV SÜD PSB Building which will be redeveloped (4Q21: 100%).
- Australia’s occupancy shed 2.5ppts to 94.9% following a non-renewal at 1 Distribution Place (1Q21 0%, 4Q21 100%).
Occupancy is expected to improve as the manager has lined up tenants for the space.

Ascendas REIT’s acquisition of this stake comes 13 months after its initial 25% investment in Galaxis, acquired from MBK Real Estate Asia Pte Ltd. The agreed property value of S$720mn on a 100% basis represents a 2% discount to the market value of Galaxis and a 14.3% appreciation since Ascendas REIT’s initial investment.
Ascendas REIT has raised S$420mn from private placements and will issue an additional S$83mn new units as partial payment to CapitaLand (CAPL SP, Buy, target price S$4.38) for the remaining 75% stake. The issue will increase its share base by 4.2%.
Galaxis is currently held by a private limited company and is subject to a 17% corporate income tax. With full ownership of Galaxis, Ascendas REIT can apply for limited liability partnership conversion, allowing unitholders to enjoy tax transparency on the income from Galaxis. Expected DPU accretion on a pro-forma basis, assuming a 6-month conversion approval process, is 0.46%.

On 3 June 2021, Ascendas REIT announced its divestment of two Brisbane and one Melbourne logistics assets for S$104.5mn and S$24.2mn. The assets were 100% occupied as of 31 December 2020. The divestment will reduce its pro-forma NPI and DPU by S$5.1mn and 0.075 Singapore cents respectively when completed in 3Q21.

Demand remains muted as companies exercise caution but tenants are also avoiding relocation costs, leading to higher retention rates for Ascendas REIT. The Electronics and Biomedical industries accounted for 29.3% and 34.0% of new demand in 1Q21, helping to prop up demand for light-industrial/high-spec and business parks respectively. Singapore/Australia/US/UK will account for 13.9%/3.0%/4.0%/2.4% of FY21e lease expiries by GRI. The bulk of the Singapore expiries will be from tenants located in business parks (43%) and logistics assets (25%).
New acquisitions and completed developments are expected to support Ascendas REIT's FY21e DPU growth of 9.2%. These include Grab’s build-to-suit property scheduled for completion in 3Q21 and UBIX, which is being repositioned from a light-industrial to high-spec asset sometime in 4Q21.

Ascendas REIT declared a distribution of S$0.0563 per unit for the period 1 January 2021 to 13 May 2021, forming 35% of our FY21e DPU, broadly in line with our full year forecast.
We adjust Ascendas REIT's FY21e/22e DPU forecast by -0.5%/0.8% to reflect its acquisition of the remaining stake in Galaxis and divestment of the three Australian logistics assets.
Reiterate BUY call on Ascendas REIT. DDM target price for Ascendas REIT is raised from S$3.64 to S$3.65 (COE 6%).
Catalysts are expected from acquisitions and redevelopment. We forecast DPU growth of 9.2% for FY21e as acquisitions and redevelopment/AEI start contributing.
See
Ascendas REIT remains our top pick for the sector in view of its scale and diversification. The REIT also continues to future-proof its portfolio by increasing its exposure to growth sectors of the economy: knowledge economies, technology and e-commerce.

Natalie Ong Phillip Securities Research | https://www.stocksbnb.com/ 2021-06-21

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