• Ascendas REIT's 1H20 DPU of 7.27 Scts makes up 48.3% of our FY20F forecast.
• Portfolio occupancy remains stable, some drags from rent relief.
• Downgrade to HOLD with a higher DDM-based Target Price of S$3.12.

Ascendas REIT's 1H20 Results Highlights

• Ascendas REIT (SGX:A17U) posted a 14.6%/11.2% y-o-y rise in gross revenue and NPI to S$521.2m/S$388m with contributions from the US and Singapore business park properties, acquired in Dec 2019. This was partly offset by rent rebates to tenants and income vacuum from divestments/redevelopment properties.
• Distribution income rose 3% y-o-y to S$263.2m, however, DPU declined 10.8% y-o-y to 7.27 Scts due to an expansion in unit base following a rights issue in Dec 2019.

Stable Portfolio Occupancy

• Ascendas REIT achieved portfolio occupancy of 91.5% at end-1H20 on positive rental reversion of 5.4%. Australia and US portfolios recorded reversions of +16.2-16.6% while Singapore saw an average 4% across its properties. Sources of new demand came mainly from logistics and supply chain management, engineering, IT and data centres and lifestyle, retail and consumer products sectors.
• Looking ahead, management indicated that it expects to achieve a low single-digit positive reversion in FY20, vs. its earlier guidance of flat reversion for the year.
• Ascendas REIT has 8.2% of gross rental income to be renewed in 2HFY20F and another 15.8% in FY21F.

Some Near-term Drags From Tenant Rent Reliefs

• Ascendas REIT indicated that it expects to extend S$20m of out-of-pocket rent reliefs due to the impact of COVID-19, of which about half have been released to date, largely to tenants in Singapore.
• In Australia, it has suspended rent collection from retail/F&B tenants ( < 1% of Australia income) from Apr until they reopen and have offered rental waiver and deferment to two SME tenants.
• In UK, no rent rebates have been given to date although it allowed some tenants to change their rental payment structure.
• The US remains robust with rental rebates provided to one small café operator.
• Ascendas REIT completed the acquisition of a 25% stake in Galaxis in Mar 2020 and recently announced the purchase of a logistics property in Sydney for A$23.5m. The transaction is expected to be completed in 3QFY20 and will be fully funded by debt. Balance sheet is robust with aggregate leverage at 36.1% as at end-1H20.

Downgrade to HOLD

• Overall, we tweak down our Ascendas REIT's FY20-22F DPU estimates by 2.2-2.6% post results, to factor in slight changes in portfolio occupancy, partly offset by new contributions from the new Sydney property.
• We raise our DDM-based Target Price to S$3.12 as we lower our cost of equity but downgrade our rating to HOLD from ADD, given the recent Ascendas REIT share price rally and limited near-term upside.
• Upside risk: faster-than-expected global recovery.
• Downside risk: protracted downturn from the impact of COVID-19.

Source: CGS-CIMB Research - 23 Jul 2020