Ascendas REIT - Built to last

4 May 2020

Tenants asking for rental relief/deferments account for <1% of revenue. Cash of $290mn and committed facilities of $200mn to meet operating cost and distributions
15% of tenants are SME or in trade sectors that are likely to be impacted (aviation, F&B, retail, Oil & Gas hospitality/leisure)
Maintain ACCUMULATE with a lower TP of S$3.18 (prev $3.31). We incorporate the acquisition of the 28 US, 2 SG and 1 Australian business parks, which lifted our FY20e DPU by 3%, FY21e/22e DPU is lower due lower occupancy and rental assumptions to reflect weaker economic outlook.

Outlook

+7.7% rental reversions on SG lease in 1Q20, SG occupancy improved 1.4ppts to 88.6%. Portfolio occupancy also improved 0.8ppts to 91.7%. Reversions of 7.7% came in slightly above management’s guidance of mid-single-digit reversion, attributed to stronger reversions at business parks (+15.6%) and hi-spec (+12.2%). Of the 28,000sqm of new demand, 11% came from COVID-related demand (i.e. for storage of essential goods). The management is cautious about the leasing for the rest of the year, expecting reversions to come in flat for the full year.

AREIT’s geographically diversified portfolio and low tenant concentration risk (1,490 tenants, the largest tenant accounts for <4% of revenue) helps to reduce the impact to the portfolio. Arrears for 1Q20 was below 1%, largely in line with historical numbers. Distribution visibility remains high – management does not think that they will need to retain distributions due to AREIT’s strong cash position ($290mn in cash and cash equivalents and $200mn in committed facilities) to meet cashflow needs.

During April when the circuit breaker was enforced, a significant number of tenants remain in operation. The management shared that 40% of business park, 50% of hi-spec and 90%-100% of logistic and light industrial tenants were in operation. With the SG government tightening the definition of businesses providing essential service, a reduction in these numbers is expected. The relatively high percentage of operational tenants, especially in assets where telecommuting is not possible (light industrial and logistics), does give some comfort regarding the degree of business disruption and the number of tenants that may require rental deferments/waivers.

Singapore (71% of AUM)

C.$20mn in property tax rebates received from the Singapore government will be passed on to all tenants. Only F&B and retail tenant will receive an additional 1-month rental rebate from AREIT. These F&B and retail tenants account for <1% of SG portfolio GRI and the additional rebate will cost AREIT $2mn. The management is prepared to offer additional help, albeit in a target manner to tenants who are more in need of help.

Australia (13% of AUM)

Suspended rent collection from retail/F&B tenants (<1% of Australia rental income) from April until lockdown is lifted. 9 logistics and travel tenant have asked for rental relief.

United States (10% of AUM)

No rental rebates given to date, 16 tenants asking for rental rebates (c.$20m worth of rent)

United Kingdom (6% of AUM)

No rental rebates given to date. However, AREIT has allowed some tenants to change their rental payments from quarterly (3 months) in advance to monthly in advance, to help tenants with their cashflow.

Portfolio at risk

The management assessed that c.15% of tenants in the portfolio are SMEs or are in industries that are likely to be impacted (i.e. aviation, F&B, retail, Oil & Gas, hospitality/leisure).

Maintain ACCUMULATE with and lower TP of S$3.18 (prev. $3.31)

We incorporate the acquisition of the 28 US, 2 SG and 1 Australian business parks, the divestment of 3 SG assets and AEI of iQuest, and lower our occupancy assumptions to reflect weaker economic outlook.

DPU of 16.74 cents represents a yield of 5.6%. If we were to assume 1 month of rental rebates to paid out to SG tenants (c.$67mn), FY20e DPU would be 7.1% lower at 15.55cents, representing yield of 5.2%.

Despite its P/NAV of 1.38x which is at the +1.5 s.d. level (post-GFC), we think its’s stability is due to tenant and geographical diversification and track record of DPU accretive acquisitions and AEIs justifies its premium and will provide stable FY20e yields of 5.6%.