DPU Inline, Adjusting to New FY, BUY

• Ascendas REIT (SGX:A17U)’s DPU fell 12.3% y-o-y as its units increased 16.3% y-o-y following the Nov 2019 SGD1.3b rights issue. But contributions from its assets across all markets improved, helped by positive rental reversions, especially in Singapore.
• We see rental growth momentum supporting DPU recovery for the industrial sector’s largest, most liquid name. We revised our forecasts to realign with its new Dec year-end. Our DDM-based Target Price remains unchanged at SGD3.35.
• Ascendas REIT (SGX:A17U)’s fundamentals are supported by its scale, concentrated Singapore business parks/high-specs portfolio, and DPU upside from further overseas diversification. BUY.

Occupancy Stable, SG Dipped on Two Non-renewals

• Ascendas REIT's 3QFY19 revenue rose 5.9% y-o-y, helped by contributions from 28 new US and two Singapore business parks from Dec 2019.
• Singapore revenue and NPI rose 2.2% y-o-y and 5.8% y-o-y (with FRS 116 adjustments). Its portfolio occupancy was stable at 90.9% (from 91.0% end-Sep 2019), with higher occupancies in Australia (up q-o-q from 95.4% to 97.4%) mitigating lower Singapore occupancies. This fell from 88.1% to 87.2% due to two logistics and a high-specs asset - Wisma Gulab, which with 202 Kallang Bahru were divested at 5.5% and 13.3 above valuations, respectively. New demand was driven mostly by expansion activities of its existing tenants.

Positive Rental Reversion Outlook

• Its Singapore properties achieved a strong +8.8% rental reversion, up from +4.0% in the previous quarter, and pushed reversions for FY19 to +6.0% (versus +3.7% for its FY18), with positive reversions across all its asset classes. Its Singapore business parks performed better (+9.2% in FY19), with its cap rates tightening by 40-50bps to 5.25-6.00%, while logistics was weaker (+4.9%).
• Ascendas REIT expects to achieve low single-digit reversions in Singapore, and high single-digit reversions for its overseas properties in 2020.
• In Australia, the bulk of the 10.4% expiring leases are backed by strong demand growth fundamentals in Melbourne while its US portfolio is currently 10-15% under-rented. Early renewals for its largest US tenants (Carefusion, Nike) have been achieved at higher signing rents.

Growth Levers From AEIs, Redevelopment, Deals

• Management has initiated AEIs at two aging Singapore business parks (Capricorn and Galen) and an Australian logistics asset (484-490 and 490-500 Great Western Highway) to be completed by 1H 2020.
• Redevelopment works at iQuest@IBP in Singapore meanwhile should see a doubling in NLA by 3Q 2022.
• Low 35.1% leverage supports further deals, with acquisitions from its sponsor in Singapore, and in Australia and UK.

Source: Maybank Kim Eng Research - 3 Feb 2020