• Ascendas REIT (SGX:A17U)’s diversified portfolio of 200 industrial assets across three different geographies is expected to stay resilient despite recessionary outlook posed by the COVID-19 pandemic. Its key strengths are an experienced management team, a strong sponsor and good operational track record.
• While we like Ascendas REIT’s asset quality and management strategy, the current valuation of 1.3x 2020F P/BV is not attractive enough.

Expect Retail, Hospitality & Leisure to be the Most Impacted Segment

• We expect retail, hospitality & leisure (it accounts for 5% of gross monthly revenue) to be the most impacted segment in Ascendas REIT’s portfolio. On the positive side, we expect demand to remain strong for data centres (5.6%), logistics & supply chain management (12.2%), and bio medical sciences (11.3%).
• Overall Ascendas REIT’s income is diversified across more than 20 sectors, with no particular segment accounting for more than 15% of income.

Proportion of Rent Deferrals Likely to be Low

• Singapore Government’s latest measure allows all tenants (except residential) to defer rents for up to 6 months if they were impacted by COVID-19. Based on our channel checks, the proportion of industrial tenants who have requested such rent deferrals remains low ( < 5%) and thus we don’t expect any drastic cut in near-term DPU.

Occupancy to Remain Healthy But Rents Could Come Under Pressure

• About 19% of leases are due for renewal in FY20 of which 5% are single-tenanted buildings. The bulk (41%) of leases is from its business parks and science parks. Amidst current market conditions, we believe more industrial tenants will be inclined to extend their current leases at lower rents, rather than move to a new premise and incur additional capex.
• Overall, we expect portfolio occupancy to stay 90% but rent reversions are likely to be in -2% to 0% range compared to +6% in FY19.

Earnings Changes

• We have lowered our FY20-22F DPU by 2% factoring in slightly lower occupancy rates and rent growth; we raised our COE to 7.2% (from 7.0%). Maintain NEUTRAL.

Balance Sheet Remains Sound

• Ascendas REIT’s gearing remains optimal at 35.1% with a healthy interest cover of 5.1x as of Dec 2019. Weighted average debt maturity stands at 4.0 years with only 8% of its total debt maturing in FY20- 21F.
• FX risks are also mitigated, with a high level of natural hedges for Australia (73.8%), the United Kingdom (100%) and the United States (75.8%).
• The acquisition of a 25% stake in Galaxis from sponsor, for SGD 102.9m, at a 3% discount to valuation, with a proforma net property income (NPI) yield of 6.2%, is also yield accretive. Galaxis, located in One North Singapore, comprises a mix of business parks, office space, retail & F&B with a remaining lease-term of 52 years, is 99.6% occupied, with a WALE of 2.5 years.

Source: RHB Invest Research - 20 Apr 2020