• 1QFY19 DPU -1.2% YoY due to oneoff item
• Solid portfolio rental reversion of 10.5%
• Maiden entry into UK

1QFY19 Results Within Our Expectations

Ascendas REIT (A-REIT) reported its 1QFY19 results which met our expectations. Gross revenue inched up 1.5% YoY to S$216.6m, while NPI grew at a faster pace of 3.8% to S$159.2m due largely to lower property tax expenses. The latter constituted 23.7% of our FY19 forecast. DPU of 4.002 S cents represented a slight dip of 1.2% YoY. However, this was attributed to a one-off distribution related to a tax ruling by IRAS amounting to S$5.9m (~0.20 S cents per unit) in 1QFY18.

Excluding this, DPU would have grown 4.0% YoY. This accounted for 24.5% of our full-year projection. A positive surprise came from A-REIT’s rental reversions, which improved 10.5% in Singapore in 1QFY19. This was boosted by the renewal of a 15-year lease at a Hispecifications property which was previously under-rented. Excluding this lease, rental reversions were positive at ~3%.

UK Here We Come!

Ascendas REIT announced last Thursday its proposal to acquire a portfolio of 12 logistics properties located in the UK from two third-party vendors. Once completed (expected in 3QCY18), this would mark A-REIT’s maiden entry into the region. The agreed portfolio value is GBP207.3m (~S$373.2m), which translates into an initial NPI yield of 5.3% (5.2% post-cost yield).

The benefits of the proposed acquisition include

1. a long portfolio WALE of 14.6 years (11.7 years if break clauses are taken into account),
2. predominantly freehold land (10 freehold and 2 on 999-year leases),
3. tight supply of logistics properties in the UK with room for market rental growth at ~3% p.a. in the near-term.

Overall, we are neutral on the transaction. Although the acquisition would provide A-REIT with a diversification of income streams, there are still uncertainties over the Brexit process. Funding is expected to come from a GBP-denominated 5- year fixed loan with interest rate of ~2.6%-2.8% to provide a natural hedge.

A-REIT is also likely to hedge the expected net income cash flows from the properties. On a pro forma basis, this transaction is expected to boost A-REIT’s FY18 DPU by 1.2%. Pending completion, we have not factored this proposed acquisition in our model. Our fair value estimate is unchanged at S$2.71.

Source: OCBC Research - 31 Jul 2018