• Ascendas REIT (SGX:A17U)'s 3Q/FY19 DPU deemed broadly in line due to changes in financial year end and timing differences between rights issue and new income contributions.
• Ascendas REIT reported a +6.0% portfolio rental reversion for FY19, driven by Singapore assets and stable portfolio occupancy of 90.9%.
• Maintain HOLD, with a slightly lower Target Price of S$3.14, as we account for divestments, redevelopment of iQuest and AEIs.

3Q/FY19 DPU Broadly in Line at 29%/94% of Our FY19 Forecasts

• As a result of the change in financial year end from Mar to Dec, and timing differences between the issuance of new shares from a rights issue and income contributions from new acquisitions, we deem Ascendas REIT’s 3Q/FY19 DPU of 3.507/11.490 Scts to be broadly in line with our FY19 forecasts.
• We expect FY20 growth in FY20 to come from full-year contributions from acquisitions made in 3QFY3/19 and the completion of 254 Wellington Road in Melbourne, Australia.
• Overall portfolio occupancy as at end-FY19 stood at 90.9% (vs. 91.0% in the previous quarter).

Improving Metrics in Singapore

• FY19 rental reversions in Singapore were +6.2%, led by a +9.2% reversion for the business and science parks.
• Occupancies in Singapore declined to 87.2% (vs. 88.1% in the previous quarter) due to lower occupancies at Wisma Gulab, 40 Penjuru Lane, and Pioneer Hub.
• Accounting for the divestments of Wisma Gulab and 202 Kallang Bahru and the redevelopment of iQuest, the Singapore portfolio occupancy would have been 88.4%.

Overseas Markets Remain Stable With Low Upcoming Expiries

• Occupancies in Australia improved to 97.4% due to new take up at 62 Stradbroke Street, with +1.0% rental reversions. Occupancies were a stable 97.7% in the UK and 93.9% for the new US portfolio. Upcoming expiries in Australia, the UK, and the US represent 10.4%, 3.7% and 8.8% of their respective country portfolios.

No Break in Capital Recycling Efforts

• Ascendas REIT announced the divestment of Wisma Gulab and 202 Kallang Bahru in Singapore for S$105m — above their latest valuations as at end-FY19; the sale should be completed within 1Q20. The S$84.3m redevelopment of iQuest was also announced, with $15m worth of asset enhancement initiatives (AEIs) at The Capricorn and The Galen.
• Gearing was 35.1%, while all-in cost of borrowings was 2.9% as at end-FY19.

Reiterate HOLD, With a Target Price of S$3.14

• We reiterate our HOLD call with a DDM-based Target Price of S$3.14, as we account for the divestments, redevelopment and AEIs leading to a 1.0-3.3% increase in FY20-21F DPU.
• While we like Ascendas REIT for its diversified portfolio and strong tenant base, we think its valuations are stretched at > 2 s.d. above its historical mean; a potential entry point could be below S$3.00.
• Upside risks: further interest rate cuts and accretive acquisitions.
• Downside risks: major tenant non-renewals and a weakening of industrial rents.

Source: CGS-CIMB Research - 31 Jan 2020