RHB Investment Research Reports

Author: rhbinvest   |   Latest post: Tue, 21 Mar 2023, 9:32 AM


Ascendas REIT - a Stable Quarter; Stay BUY

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  • Maintain BUY and SGD3.60 TP, 28% upside with c.6% yield. Ascendas REIT posted a stable set of operational numbers for 1Q22. Overall, the industrial segment’s outlook remains relatively resilient across its markets, despite rising global uncertainties and inflationary pressures. We attribute the share price underperformance mainly to investors switching to growth/reopening plays (office/hospitality REITs). However, we believe AREIT’s well-diversified and resilient industrial portfolio, with redevelopment potential and a solid 6% yield profile, warrants a relook.
  • Healthy 1Q22 positive rent reversion of +4.6% (FY21: +4.5%) with all segments and markets leased during the quarter seeing rent growth – Australia (+16.5%), US (+14%), and Singapore (+3.9%). Portfolio occupancy dipped slightly by 0.6ppts to 92.6%, mainly due to non-renewal of two leases in Australia, while occupancy at the UK, Singapore, and US remained relatively stable. The redevelopment of UBIX (formerly 25 & 27 Ubi Road 4) was completed in January for a total cost of SGD38.2m with a pre-committed occupancy of 45% currently. Asset enhancements for Changi Logistics Centre and 17 Changi Business Park Central 1 are in progress, and expected to be completed by 2Q22 and 4Q22 respectively.
  • Manageable impact from rising interest rates and utilities. Utility charges for common areas borne by the REIT account for c.8% of opex, and this is expected to rise by 50% this year from higher electricity tariffs. NPI margins are therefore expected to see a 1% squeeze, which we believe can be offset by rent growth. AREIT has also been installing solar panels in its buildings to generate electricity, and as part of its green initiatives. About eight of its 96 assets in Singapore currently have solar panels installed, with another 11 planned this year. About 79% of its debt is hedged with every 20bps rate increase resulting in a modest 0.4% impact.
  • Room to unlock value from redevelopments. With the anticipated lifting of Singapore’s Data Centre (DC) moratorium later this year, management had previously noted that is sees potential to redevelop some of its light industrial assets in north eastern Singapore into DCs. There is also medium-term potential to unlock value from the gradual redevelopment of its science park assets (c.10% of its portfolio value). Acquisition pace is likely to slow down to c. SGD1b this year, on the back of rising rates, with the focus mainly on logistics, DC, and tech campuses. Gearing is modest at 36.8%, presenting SGD1-2bn debt headroom.
  • Maintain estimates. AREIT has the highest ESG score (3.3 out of 4.0) among industrial REITs under our coverage (based on our proprietary methodology), reflecting its strong ESG track record. As the score is three notches above our country median score, we applied a 6% premium to our intrinsic value.

Source: RHB Research - 5 May 2022

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