• Ascendas REIT (SGX:A17U)'s 2Q22/1H22 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.

Ascendas REIT's 1H22 DPU Up 3.5% Y-o-y / 3.6% H-o-h

• Ascendas REIT's 1H22 DPU up 3.5% y-o-y/3.6% h-o-h, 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 S$5-6m for 1H or ~2% of DPU) based on its new contract, which is valid until end-2022.
• Ascendas REIT 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

• Ascendas REIT's portfolio occupancy rose 1.6ppts q-o-q to 94% – Singapore (+1.2ppts q-o-q), the US (+1.3ppts q-o-q) and the UK/Europe (+1ppt q-o-q), with slight decline in Australia (-0.2ppt q-o-q). 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

• Acquisition pace is expected to slow down, with Ascendas REIT's management noting its S$1bn acquisition target looking less likely in 2022 (1H: S$223m). 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.
• Ascendas REIT's gearing is comfortable at 36.7%, presenting > S$1bn debt headroom for any sponsor of third party acquisitions.

No Changes to Estimates

• Ascendas REIT 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 applied a 6% premium to our intrinsic value to derive our target price.

• Keep BUY rating on Ascendas REIT with S$3.60 target price, 22% upside and ~5% yield.

Source: RHB Invest Research - 3 Aug 2022