Ascendas REIT - Worth the price tag

• 1H20 DPU of 7.27 cents formed 44.4% of our FY20e DPU.
• Positive rental reversions of 4.3% for 2Q20 amidst a more cautious leasing backdrop.
• Diversified and stable portfolio, with out-of-pocket rebates totaling c.2% of FY20e revenue. Well-positioned for acquisition – low cost of borrowing maintained and P/NAV at a premium (1.6x).
• Maintain ACCUMULATE with a higher TP of S$3.63 (prev. $3.29) mainly due to a lower beta assumption, which lowered our cost of equity from 6.45% to 6.0%. We adjust our estimates to reflect the acquisition of the 25% stake in Galaxis and the acquisition of the Australian logistic asset at Kiora Crescent.

Positives

+ Achieved positive portfolio rental reversions of +4.3%/+5.4% for 2Q/1H20. Portfolio reversions for 1Q20 came in at +8.0%. In Singapore, average rental reversion was +4.0% – business parks clocked +16.3% reversions due to certain assets in Changi Business Park; one renewal was by an international bank whose rent were marked-to-market upon renewal. Integrated Development penciled a 19.8% reversion due to Aperia while industrial and flatted factories achieved +5.1% reversions. -30.6% reversions for Hi-Spec asset class due to favourable rates offered to retain the tenant. Average rental reversion for Australia and the US were +16.6% and +16.2% respectively.

+ In it for the long haul – Forging ahead with acquisitions and AEIs. AREIT announced 2 acquisition YTD – acquisition of 25% stake in Galaxis was completed on 31 March 2020 at 3% discount to market value which the acquisition of a logistic asset under development (Kiora Crescent, Yennora, Sydney) was announced on 1 July 2020. During the quarter, AREIT completed 4 AEIs costing $22.9mn. In 2Q FY2020, S$16.3 million worth of new AEIs commenced across four properties.

+ Portfolio metrics remain healthy. Portfolio occupancy rate remained stable at 91.5% (1Q20: 91.7%), with improvements in Australia partially offsetting lower occupancies in SG and US. Aggregate leverage held steady at 36.1% (31 March 2020: 36.2%, 31 December 2019: 35.1%). Weighted average all-in cost of borrowing was maintained at 2.9% (31 March 2020: 2.9%, 31 December 2019: 2.9%)

Negatives

– 1H20 DPU fell -10.8% YoY due to larger unit base (+16.3%), rental waivers of $20mn and absence of rollover adjustments (1H19 +7.2mn).

Outlook

Rental rebates

Singapore (70% of AUM) – In line with the Singapore Government’s guidelines, AREIT has provided rent waivers to its tenants, amounting approximately S$20 million year-to-date. The actual amount to be disbursed will depend on the tenants’ eligibility assessment by the authorities. This amount is in addition to the Singapore Government’s property tax rebates and cash grants which will be fully passed through to eligible tenants. AREIT estimates that there are c.20% of SMEs in the portfolio.

Australia (13% of AUM) – Rent collection has been suspended from the F&B and retail tenants located at Ascendas Reit’s three suburban offices from April 2020 until their reopening. One lease of a leisure/hospitality tenant has been restructured and the tenant was provided with rent rebate. Rent waiver and deferment were offered to two small and medium enterprise (SME) tenants. The overall impact to AREIT is less than S$0.6 million.

United Kingdom (6% of AUM) – The rental payment frequency for some tenants has been changed from quarterly to monthly in advance and some rents have been deferred to the later part of the year to provide some cashflow relief to tenants.

United States (11% of AUM) – US$10,000 of rent rebates have been provided to date.

Maintain ACCUMULATE with and higher TP of S$3.62 (prev. $3.29)

We adjust our estimates to reflect the acquisition of the 25% stake in Galaxis and the acquisition of the Australian logistic asset at Kiora Crescent. Our TP is raised to $3.62 mainly due to a lower beta assumption, which lowered our cost of equity from 6.45% to 6.0%. We expect FY20e DPU yield of 4.8% at current entry price.

We see the merits of AREIT’s S$12.75 bn portfolio comprising of 197 properties spanning across Singapore, Australia, UK and the US, which results in low asset concentration risk (no property accounts for more than 4.6% of revenue). AREIT’s geographically diversified portfolio and low tenant concentration risk (1,490 tenants, the largest tenant accounts for <4% of revenue) also 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 S$561 million comprising of S$361 million in cash and S$200 million in committed facilities) to meet cashflow needs.

Despite its P/NAV of 1.6x which is on the high side, we think AREIT’s stability is due to tenant and geographical diversification and track record of DPU accretive acquisitions and AEIs justifies its premium. We think that AREIT’s low cost of borrowing (2.9%) and P/NAV which is at a premium presents a conducive environment for more acquisition.