• Keep NEUTRAL and Target Price of SGD 3.00, 9% downside.
• Ascendas REIT (SGX:A17U) remains one of the most defensive industrial REITs with its diversified portfolio and predominant exposure to the business parks sector, which is expected to stay resilient.
• While we continue to like it for its asset quality and management, current valuation is not attractive enough (1.5x P/BV) in our view. We recommend investors accumulate on pullbacks.

SME Tenants Account for < 20% of Singapore Rental Income

• SME tenants account for < 20% of Singapore rental income, of which 12% comprise of F&B/retail SMEs and the remaining, industrial SMEs. Thus impact of the mandatory one-month rent rebate to be offered by REITs for qualifying SME tenants (COVID-19 Bill) is likely to be minimal. Ascendas REIT estimates the rent waivers provided to tenants so far is < SGD 20m ( < 2% of FY20F revenue). It has also granted about SGD3m of rent deferrals, covered by security deposits.

Overseas Assets Impact

• For Ascendas REIT's Australia portfolio, management guided that the overall impact of rent rebate is < SGD 0.5m.
• For UK assets, it has not offered any rent rebates but instead allowed some leases to change payments to monthly in advance instead of quarterly.
• For the US, rent rebate granted was minimal – USD10,000 to a small café operator in Portland. Management noted there has been no pre-termination of leases due to COVID-19 up until Jun 2020.

Stable Occupancy With Positive Rent Reversions Expected for FY20F

• Ascendas REIT's 1Q20 portfolio occupancy rose 0.8ppt q-o-q to 91.7%, driven by higher demand for SG logistic assets. Management continues to expect higher logistics demand across its markets, with COVID-19 accelerating e-commerce demand.
• We also see demand for its key business parks segment (45% of portfolio) remaining resilient as many cater to growth industries such as biomedical, infocomm technologies and healthcare.
• For 1Q20, rent reversions stood healthy at 8% and management anticipates flattish rent reversion for the rest of year.

Acquisition of Remaining Stake in Galaxis Likely in 2H20

• In 1Q20, Ascendas REIT announced the acquisition of a 25% stake in Galaxis from Mitsui for SGD103m. We expect the REIT to acquire the remaining 75% stake from its sponsor later this year, which should be positive to its DPU.
• Gearing stands comfortably at 36.2%, and even assuming full debt funding for the said acquisition, gearing is likely to stay at 38%. Management has guided that despite the recent increase in gearing limit to 50%, gearing is targeted at < 40%. It plans to remain a SG-focussed REIT with the local market accounting for 60-70% assets.
• In terms of development assets, there is a slight delay in Grab’s headquarters completion (1Q21 instead of 4Q20), while asset enhancements for The Capricorn and The Galen were completed in 1H20.

Source: RHB Invest Research - 9 Jul 2020