• Keep BUY and SGD3.60 TP, 22% upside and c.5% yield. 2Q/1H22 DPU came in line with our expectations. 2Q saw strong operational improvement in terms of occupancy and stronger rental reversion, indicating that the industrial market remains on solid footing. Acquisition pace is expected to slow down but organic growth and asset enhancements should offset cost increases and drive DPU growth. Amidst the current volatile market, we expect investors to prefer defensive industrial S-REITs over other sectors.

• 1H DPU up 3.5% YoY/3.6% HoH, aided by higher revenue from acquisitions and development completions, but partially offset by higher utility expense for Singapore assets. Management noted that Singapore utility cost rose within its guided range of 50-70% (our estimate of Ascendas REIT’s impact SGD5-6m for 1H or c.2% of DPU) based on its new contract, which is valid until end-2022. AREIT is currently negotiating utility contracts for next year with indications that costs are likely to inch up slightly higher (10-20%). It will be raising its service charges for Singapore assets from 4Q, which should help absorb some of the cost increases. Interest costs were down 10bps to 2.1% on the back of longer tenure EUR and HKD bonds issued last year. 80% of its debt is hedged, with every 50bps increase resulting in 1% DPU impact.

• Healthy improvement in operating metrics. Portfolio occupancy rose 1.6ppts QoQ to 94% – Singapore (+1.2ppts QoQ), the US (+1.3ppts QoQ) and the UK/Europe (+1ppt QoQ), with slight decline in Australia (-0.2ppt QoQ). The improvements came mainly from the logistics segment, which has been seeing continued demand growth from increasing supply chain disruptions resulting in longer stockpiling. Looking ahead, high occupancy is likely to be maintained across the markets barring the US where there could be some pressure from potential non-renewal of business park asset leases due in 2H. Rent reversions accelerated in 2Q at +13.2% (1Q: +4.6%, 1H: +8.9%) with all markets seeing double-digit rent uplift, indicating it is still a landlords’ market.

• Acquisition pace is expected to slow down, with management noting its SGD1bn acquisition target looking less likely in 2022 (1H: SGD223m). With current volatility, market acquisitions are likely to be more piecemeal in nature rather than portfolio as the latter involves extended timeframe and premium valuations, which are unfavourable in current market conditions. Gearing is comfortable at 36.7%, presenting >SGD1bn debt headroom for any sponsor of third party acquisitions.

• No changes to estimates. AREIT has the highest ESG score of 3.3 out of 4.0 among the industrial REITs (based on our proprietary in-house methodology). As this score is three notches above our country median, we apply a 6% premium to our intrinsic value to derive our TP.

Source: RHB Research - 3 Aug 2022