• Strong performance in 1Q20, but operational outlook remains challenging.
• Expect flat rental reversion for FY20F on slower leasing demand.
• Upgrade to ADD with a lower DDM-based Target Price of S$3.00.

1Q20 Business Update

• In its 1Q20 business update, Ascendas REIT (SGX:A17U) saw a slight q-o-q uptick in portfolio occupancy, led by Singapore properties. It achieved a healthy positive rental reversion, averaging 8%, led by Australia (+13.7%), Singapore (+7.7%) and US (+7.4%) properties.
• Balance sheet is healthy with gearing at 36.2% and no refinancing needs in 1H20. Ascendas REIT has S$290m of cash and S$200m in committed facilities at end-1Q20. It also completed the divestment of S$125.3m worth of properties in 1Q and acquired a 25% stake in Galaxis for S$102.9m.

Challenging Leasing Environment in Singapore

• Looking ahead, management indicated that due to the COVID-19 outbreak and slow macro outlook, it expects overall rental reversions to be flat for FY20F.
• In Singapore, it will pass on the property tax rebates to qualifying tenants. In addition, F&B, retail and food factory tenants will receive further rent relief for Apr/May 2020. These tenants make up < 4% of Singapore income. While none of the Singapore tenants indicate intention to pre-terminate in the near term, we think the leasing environment would remain challenging. Hence, we tweak down the current Singapore portfolio occupancy by 1-2% pt over the next 2 years.
• In the medium term, completion of Grab’s HQ in 1Q21 as well as redevelopment of 25&27 Ubi Rd and iQuest @ IBP will likely contribute new income to the Singapore portfolio.

Slower Demand in Overseas Portfolio

• In Australia, it has suspended rent collection from retail/F&B tenants ( < 1% of Australia income) from Apr until restrictions are lifted as well as engaged in tenant discussions to offer assistance via lease incentives or rent deferrals.
• In the UK, it is extending available space for short-term leases to industries such as food, pharmaceuticals and medical tenants and helping tenants with their cashflow through a change in rental payment structure.
• The US remains robust for now, with no rent rebates given. While leasing enquiries have declined in all 3 countries, management expects existing tenants in Australia to renew their leases while potential tenants in UK/US are slowing their leasing interest or expansion plans.
• That said, occupancy in UK/US was at 97.5%/92.9% at end- 1Q20, with low lease expiries of 3.7% and 8.8% in UK and US in FY20 (as at end-4Q19).

Upgrade to ADD From Hold

• Overall, we lower our FY20-22F DPU estimates by 4.1-8% to factor in lower portfolio occupancy, largely in Singapore, tweak down our rental growth assumption to -1% to -3% over the next 2 years and include income contribution from its 25% stake in Galaxis. Consequently, our DDM-based Target Price is revised to S$3.00.
• However, with the recent Ascendas REIT Share Price correction, likely factoring in some of these challenges, Ascendas REIT now offers total return of 10%. Hence, we upgrade the stock to Add.
• We like Ascendas REIT for its diversified earnings base and income growth from redevelopment activities.
• Upside risk: faster-than-expected global recovery.
• Downside risk: protracted downturn from impact of COVID-19.

Source: CGS-CIMB Research - 28 Apr 2020