ASCENDAS REAL ESTATE INV TRUST (SGX:A17U)
Ascendas REIT - Kick-starting Redevelopment Of Science Park I Soon
- Ascendas REIT reported good results with 1H21 DPU growing 5.4% y-o-y driven by acquisitions in the US, Europe and Australia that are yield accretive. The redevelopment of TÜV SÜD PSB Building entails uplift in plot ratio from 1.2x to 3.5x, thereby increasing GFA from 342,895sf to 1,200,132sf. We estimate that the redevelopment is accretive to DPU by 4%.
- Ascendas REIT provides a recurrent and resilient 2022 distribution yield of 5.3%. Maintain BUY. Target price: S$3.83.
Ascendas REIT's 1H21 RESULTS
- Ascendas REIT (SGX:A17U) reported 1H21 DPU of S$0.0766 (+5.4% y-o-y), which is in line with our expectations. Gross revenue and net property income (NPI) grew 12.4% and 14.8% y-o-y respectively due to contribution from two office properties in San Francisco (acquired in Nov 20), 11 data centres across Europe (acquired in Mar 21) and two suburban offices in Australia (acquired in Sep 20 and Jan 21).
- Positive rental reversion driven by Singapore and the US. Ascendas REIT achieved positive rental reversion of 6.4% in 1H21 (1Q21: 3%, 2Q21: 8.9%). In Singapore, business space, high-specifications industrial buildings & data centres and logistics & distribution centres provided healthy reversions of +3.7%, +4.8% and +4.9% respectively. New leases are derived mainly from biomedical and IT & data centres industries, which accounted for 34% and 19.5% of new contribution to gross rental income. Business parks in the US registered strong reversions of +26.3% driven by Raleigh (biomedical tenant) and San Diego (defence industry). Management expects positive low single-digit rental reversions for 2021.
- Portfolio occupancy improved by 0.9ppt q-o-q to 91.5% in 2Q21. In Singapore, occupancy improved by 1ppt q-o-q to 87.9% due to 31 Joo Koon Circle, which was fully leased to a biomedical tenant. In Australia, occupancy improved 0.5ppt q-o-q to 95.8% after it secured a logistics tenant for 1 Distribution Place in Sydney. Occupancies for the UK/Europe and US were resilient at 97.5% and 92.1% respectively.
- Proactive asset recycling. Ascendas REIT has completed S$1,723m worth of acquisitions to increase its exposure to business spaces and data centres by 7ppt h-o-h to 59% in 1H21. These include 75% stake in business park property Galaxis located above one-north MRT station (S$534.4m), 11 data centres across key cities in Europe (S$904.6m) and suburban office property at 1-5 Thomas Holt Drive in Macquarie Park, Sydney, Australia (S$284m). Ascendas REIT has divested four properties in Australia (1314 Ferntree Gully Road in Melbourne and 62 Stradbroke Street in Brisbane) and one property in Singapore (11 Changi North Way) for S$144.7m.
- Prudent capital management. Ascendas REIT has issued a 7-year €300m Eurobond at 0.75% in 2Q21. It also secured new green loans of US$448.6m (S$597.7m) in 1Q21 and A$205.5m (S$213m) in 2Q21. All-in weighted average cost of debt has improved 0.3ppt h-o-h to 2.4% in 1H21. Aggregate leverage was healthy at 37.6%. Ascendas REIT has debt headroom of S$4.2b based on regulatory limit on aggregate leverage of 50%.
STOCK IMPACT
- Potential redevelopment of TÜV SÜD PSB Building. Ascendas REIT plans to redevelop Science Park I in Singapore, starting with the TÜV SÜD PSB Building. The lease with German testing, inspection and certification specialist TÜV SÜD has expired, and the tenant had relocated to International Business Park in early-21. The building contributed gross revenue of S$4.2m in FY20, which represents rental of only S$1.52psf pm. The 342,895sf site located next to Kent Ridge MRT Station and National University Hospital has a plot ratio of just 1.2 compared to 3.5-4.0 for nearby One-North business park (within five minutes’ drive).
- Potential uplift in plot ratio. Ascendas REIT shared that the mixed development will have three high-rise towers catering to IT and life science tenants with retail space and amenities. Plot ratio of 3.5x is likely to be granted, thereby increasing GFA from 342,895sf to 1,200,132sf. Size of the development is estimated to be S$800m-1,000m (management will share more details next quarter). Construction costs are expected to be higher due to specifications for the life science component.
- Estimated accretion to DPU by 4%. Assuming construction costs at S$350psf, average rents at S$5.50psf pm and occupancy rate at 95%, we estimate that the potential ould provide ROI of about 7.5%. The enhancement to 2022 distributable income is estimated at 4%.
- Keen to build more BTS business park properties. The built-to-suit (BTS) business park property for Grab’s headquarters was completed and handed over to Grab on 30 Jul 21. It is located at one-north and is fully leased to Grab for 11 years.
- Supporting tenants during Phase 2 (Heightened Alert). Ascendas REIT provided half a month of rent rebates amounting to S$0.7m to support F&B and retail tenants affected by Phase 2 (Heightened Alert). An additional two-week rent rebate is expected to be provided to these tenants in 2H21.
EARNINGS REVISION/RISK
- We maintain our existing DPU forecast.
VALUATION/RECOMMENDATION
- Maintain BUY. Our target price of S$3.83 is based on DDM (cost of equity: 6.0%, terminal growth: 1.8%).
- See
SHARE PRICE CATALYST
- Resiliency and growth from business parks and logistics segments.
- Contributions from development projects and AEIs.
Jonathan KOH CFA
UOB Kay Hian Research
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https://research.uobkayhian.com/
2021-08-03
SGX Stock
Analyst Report
3.830
SAME
3.830
