• 2QFY19 DPU -4.2% YoY
• Portfolio rental reversion of +2.3%
• Cautious tone

2QFY19 Results Slightly Below Our Expectations

Ascendas REIT (A-REIT) reported its 2QFY19 results which fell slightly short of our expectations. Gross revenue rose 1.1% YoY to S$218.1m due largely to acquisitions, but partially offset by lower occupancy in Singapore. NPI fell 1.0% to S$158.9m, as there was a reversal of certain accrued property operating expenses in 2QFY18 which were no longer required.

DPU suffered a YoY decline of 4.2% to 3.887 S cents. This can be attributed to higher finance costs and an enlarged unit base. The latter was due to a timing issue as dilution from a private placement kicked in before contribution from A-REIT’s second UK portfolio acquisition (completed on 4 Oct).

For 1HFY19, A-REIT’s NPI grew 1.3% to S$318.1m, while DPU of 7.889 S cents represented a dip of 2.7% and this accounted for 48.3% of our FY19 forecast.

Softer Occupancy Amid Cautious Sentiment

Operationally, A-REIT’s Singapore occupancy declined by 1 ppt QoQ to 87.1%. Some tenants had downsized their operations, while others moved into their own facilities. Compared to previous quarters, management sounded more cautious during the analyst briefing, and highlighted that the US-Sino trade tensions had resulted in more wariness for businesses in their expansion plans.

Tenants are also taking a tougher stance towards lease negotiations, with some preferring to adopt a wait-and-see approach. One of the silver linings from 2QFY19’s results came from rental reversions, which remained positive at 2.3% for its Singapore portfolio (no renewals in Australia).

All business segments saw higher rental uplifts in 2QFY19. Management is also exploring a builtto-suit project in Singapore, and this is pending JTC’s approval.

Lowering FV to S$2.64

We make a number of adjustments to our model, which include factoring in A-REIT’s acquisition of two portfolios of UK logistics assets (38 properties in all), purchase of Cargo Business Park in Brisbane and recent private placement exercise which raised gross proceeds of S$452.1m.

We also moderate our rental assumptions for A-REIT’s Singapore properties. All in, our FY19 and FY20 DPU forecasts are lowered by 2.0% and 2.3%, respectively. Correspondingly, we trim our fair value estimate from S$2.71 to S$2.64.

Source: OCBC Research - 26 Oct 2018