• Maintain BUY, SGD2.90 Target Price, 13% upside with 6.5% FY19F yield.
• Ascendas REIT is our top industrial REIT pick due to its well-diversified industrial assets, dominant position in the Singapore market and stock liquidity.
• Industrial sector rental rates in Singapore have been stabilising and are expected to pick up in 2019, with supply slowing down. The recent string of UK acquisitions further diversifies its portfolio across geographies and asset classes, and should help stabilise distribution growth ahead.

Favourable Outlook for Singapore Portfolio, Positive Reversion to Continue

• The outlook for the industrial segment is turning positive with favourable demand-supply dynamics, especially for business parks and hi-tech industrial space. More than half of Ascendas REIT’s assets are focused on the above two segments, and should benefit from this trend. While its logistics portfolio is still showing weakness, we believe the slowdown in supply and Ascendas REIT's diversified exposure across industrial segments should offset the impact in the coming quarters.
• Additionally, Ascendas REIT has minimal single-tenant buildings (~3% of rental income) due for renewal over the next two years. This minimises the conversion risk into multi-tenancy properties – which results in lower income.
• Overall, we expect rental reversion for FY19 to stay positive in the 2-5% range and estimate that the portfolio occupancy rate will increase 1-2ppts.

Doubling Down on Its UK Exposure

• Ascendas REIT further expanded its UK exposure in October by acquiring a second portfolio of 26 logistics assets in the UK for GBP257.5m (SGD459.2m). The portfolio is fully occupied (including rent guarantees) and offers an initial NPI yield of 5.54%, with a weighted average lease expiry (WALE) of 9.1 years.
• Earlier in August, Ascendas REIT completed the acquisition of 12 logistics properties for GBP207.3m (SGD373.2m). Its UK properties now account for 8% of total portfolio value post acquisitions (Singapore: 78%, Australia: 14%).

Active Capital Recycling to Continue

• Ascendas REIT has been actively rebalancing its portfolio, ie divesting mature shorter-lease assets and redeploying the capital into higher-yield longer-WALE assets – a strategy which we like. Over the last two years, it hived off eight properties worth ~SGD0.5bn, all at a premium to book value. This, in combination with its asset enhancement initiatives, has been instrumental in it delivering higher unitholder returns over the last few years, despite the challenging industrial market in Singapore.

BUY With a Target Price of SGD2.90

• Our DDM-derived Target Price is based on 7.3% COE, 3% risk-free rate and terminal growth of 1.5%.
• Ascendas REIT is our preferred industrial pick and offers the best exposure to the favourable business park and hi-tech industrial segments in Singapore.

Source: RHB Invest Research - 14 Dec 2018