Ascendas REIT - UOB Kay Hian 2022-08-03: 1H22 Higher Rental Reversion, Occupancy & Utilities Expenses


Ascendas REIT - 1H22 Higher Rental Reversion, Occupancy & Utilities Expenses

  • Ascendas REIT achieved positive rental reversion of 13.2% in 2Q22, supported by growth momentum across all geographic regions. Portfolio occupancy improved 1.4ppt q-o-q to 94.0%, driven by Singapore and UK/Europe. Management plans to scale up in new economy assets, such as logistics properties.
  • We have cut our DPU forecast for Ascendas REIT by 7% due to higher utilities expenses.
  • Ascendas REIT provides resilient 2022 distribution yield of 5.4%. Maintain BUY with a target price of S$3.45.

Ascendas REIT's 1H22 Results

  • Ascendas REIT (SGX:A17U) reported DPU of 7.873 cents for 1H22 (+2.8% y-o-y), which is below our expectations. Gross revenue increased 13.7% y-o-y due to acquisitions in Singapore, Australia, Europe, UK and the US.
  • Positive rental reversion driven by Singapore, UK and US. Ascendas REIT achieved positive rental reversion of 9.4% in 1H22 (1Q22: 4.6% and 2Q22: 13.2%).
    • In Singapore, business space and life sciences generated strong reversions of +19.9% in 2Q22, driven by biomedical and R&D activities. Logistics and industrial segments also saw healthy reversions of +7.5% and +4.4% respectively.
    • Business parks in the US registered strong reversion of +15.3% in 2Q22, driven by Portland.
    • Data centres in UK/Europe provided positive rental reversion of +11.7%.
  • Management guided positive mid-single-digit rental reversion for 2022 (previous: low-single-digit).
  • Occupancy on upward trend and above 90% for all geographic regions. Ascendas REIT's portfolio occupancy improved by 1.4ppt q-o-q to 94.0% in 2Q22.
    • In Singapore, occupancy improved by 1.9ppt q-o-q to 91.9% due to higher occupancy at UBIX (improved 33.5ppt q-o-q to 51.5%) and a new tenant at 1 Changi South Lane.
    • Occupancy in the US improved 1.3ppt q-o-q to 95.3% in 2Q22 with the seven newly-acquired logistics properties in Chicago fully occupied.
    • In UK/Europe, occupancy improved 1.0ppt q-o-q to 97.7% after securing a new tenant for unit 13 Wellesbourne Distribution Park in the UK.
  • NPI margin narrowed 3.5ppt y-o-y to 71.6% in 1H22. Property operating expenses increased 43.1% y-o-y in 1H22 due to higher utilities expenses. Utilities (landlord’s portion) accounted for 8% of operating expenses in 2021. Ascendas REIT renewed its supply contract for electricity in Singapore in Oct 21 and electricity tariffs are locked in till Dec 22. Management expects utilities expenses to increase 50-70% in 2022.
  • Acquiring more logistics properties. In 1H22, Ascendas REIT completed the acquisitions of nine logistics properties in Australia and the US as well as one redevelopment project in Singapore with a total investment of S$261.6m.
    • It acquired two newly-completed logistics properties in Sydney and Brisbane in Feb 22.
    • It completed the acquisition of seven last mile logistics properties in Chicago in Jun 22.
    • The redevelopment of 25 and 27 Ubi Road 4 was completed in Jan 22 at a cost of S$38.2m. The five-storey industrial building was renamed UBIX and has occupancy of 51.5%.
  • Prudent capital management. Ascendas REIT’s aggregate leverage increased 0.8ppt q-o-q to 36.7% as of Jun 22. It has available debt headroom of S$4.6b before hitting MAS’ limit on aggregate leverage of 50%. All-in weighted average cost of debt was stable at 2.1% and interest coverage ratio is healthy at 5.7x. Average debt maturity was extended by 0.4 years to 3.9 years. 80% of its borrowings are hedged to fixed rates.

Plotting steady growth.

  • Ascendas REIT plans to expand in new economy assets. Many companies are building up their logistics capabilities to build resilience in their supply chains. The logistics industry is facing a structural change from just-in-time to just-in-case in supply chain management.
  • Ascendas REIT is focusing on last mile infill locations near residential population centres where supply is limited. It serves a diverse range of third-party logistics players and distributors. Demand remains strong and occupancy for Ascendas REIT’s logistics space is close to 100%.
  • Ascendas REIT has achieved positive rental reversion for logistics space at +7.5% in Singapore and +15.2% for Australia in 2Q22. Digitalisation of the economy will also lead to greater demand for business space and data centres.

Investing in last mile logistics space in Kansas City.

  • Ascendas REIT has completed the acquisition of 11 logistics properties located in Kansas City for S$207.8m (US$156.0m) in Nov 21. This is Ascendas REIT’s first foray into the US logistics market. The 11 logistics properties are located on freehold land and infill locations across Kansas City’s established sub-markets of South Johnson County, North Johnson County, Eastern Jackson County and Northland. It has 200,000sqm of last mile logistics space offering convenient access to the mid-western population centres. The portfolio provides NPI yield of 5.1% for the first year.

Investing in last mile logistics space in Chicago.

  • Ascendas REIT has completed the acquisition of seven logistics properties located at infill sub-markets across Chicago for S$133.2m (US$99m) in Jun 22. The portfolio has long WALE of five years and is 100% occupied by 12 tenants. Chicago is an important rail hub and interchange for freight traffic between major railways. The portfolio provides NPI yield of 5.3% for the first year.

Ascendas REIT - Earnings forecast revision and recommendation

Jonathan KOH CFA UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-08-03
SGX Stock Analyst Report BUY MAINTAIN BUY 3.45 DOWN 3.690