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Author: simonsg   |   Latest post: Thu, 10 Oct 2019, 9:26 AM

 

Ascendas REIT - Resiliency From Business Parks and High-specification Buildings

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  • Ascendas REIT (SGX:A17U) is better able to weather the uncertainties created by escalation in trade conflict due to its focus on business parks and high-specification buildings, where rents were on a gradual uptrend (53% of portfolio valuation). It continues to create value through developing Grab’s new HQ at one-north and a high-specification building at 25 & 27 Ubi Road 4.
  • Ascendas REIT provides a 2020F distribution yield of 5.2%.
  • Maintain HOLD. Target price: S$3.25. Entry price: S$2.98.

What’s New

Anchored by business parks and high-specification industrial buildings (53% of portfolio valuation).

  • 2.5m sf of new business park spaces is expected to come on stream in 2019-20, representing 10.5% of total stock. 59% of the new supply for business parks in 2020 and 2021 is already pre-committed. In particular, three of the six projects completing in 2020 are built-to-suit (BTS) to serve as headquarters for Grab, Razer and PBA Group.
  • Rents for business parks were stable at S$5.80psf pm for the city fringe and S$3.80psf pm for the rest of the island in 2Q19, supported by limited supply of multi-tenant buildings.
  • Similarly, 5.0m sf of new high-specification industrial spaces is expected to come on stream in 2019-21, all of which are fully committed. Rents for high-specification industrial buildings increased 4.8% y-o-y to S$3.30psf pm in 2Q19.

Positive rental reversion driven by Singapore.

  • Ascendas REIT achieved positive rental reversion of +2.7% for renewed leases at multi-tenant buildings in 1QFY19 (Singapore: +3.0% and Australian: +0.2%). For Singapore, rental reversions were driven by business & science parks (+3.7%) and high-specification industrial & data centres (+3.3%).
  • Management expects rental reversion to be flat in FY19 due to macro uncertainties and excessive supply of light industrial properties (8% of portfolio valuation).

Creating value through two development projects.

  • Ascendas REIT will develop a BTS building located at one-north business park to serve as Grab's new headquarters. Grab will lease the building for 11 years with the option to renew for another five years. The lease has built-in annual rental escalations. Total development cost is S$181.2m while initial NPI yield is estimated at 6.4%. The building will have a total GFA of 455,421 sf, and is expected to be completed by 3QFY19.
  • Ascendas REIT will redevelop two existing light industrial buildings at 25 and 27 Ubi Road 4 into a high-specification building (floor plates enlarged from 18,300sf to 43,000sf). The site is located near Ubi MRT station. The new building is scheduled for completion in 2QFY21.

Overseas markets (21% of portfolio valuation) provide diversification and resiliency.

  • Management targets to have 20-30% of its portfolio from overseas markets. It’s Australia and UK portfolio provides long WALE of 4.3 years (rent escalation of 3% p.a.) and 9.1 years respectively.
  • Ascendas REIT has achieved a high level of natural hedge for its Australia (A$ natural hedge 75.4%) and UK (£ natural hedge100%) against a fluctuation in exchange rates through borrowings denominated in Australian dollars and the British pound. It also hedges projected cash flow using forward contracts on a rolling basis four quarters ahead.

Stock Impact

Strength in diversity.

  • Ascendas REIT is one of the largest S-REITs in terms of market cap. It has a diversified portfolio anchored by business parks and high-specification industrial segments, which serve the needs of technology companies and modern services.
  • Ascendas REIT’s defensive strength is also supported by a weighted average security deposit of 5.1 months of rental income.

Earnings Revision/Risk

  • We forecast DPU of 12.1 S cents for FY19 (9-month period ending Dec 19) and 16.4 S cents for FY20 (12-month period ending Dec 20).

Valuation/Recommendation

  • Maintain HOLD. Our target price of S$3.25 is based on DDM (required rate of return: 6.5%, terminal growth: 1.5%).

Share Price Catalyst

  • Resiliency from business parks and high-specifications industrial segments.
  • Contributions from development projects and AEIs.

 

Source: UOB Kay Hian Research - 11 Sep 2019

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Chart Stock Name Last Change Volume 
Ascendas Reit 3.13 -0.04 (1.26%) 2,447 

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