Ascendas REIT's DPU Slightly Ahead of MKE Expectation, Raising Estimates & Target Price

• Ascendas REIT (SGX:A17U)’s 1H20 DPU fell 10.8% y-o-y, as its units rose 16.3% y-o-y following the Nov 2019 SGD1.3b rights issue, while the recent SGD1.7b portfolio deal has helped cushion revenue and NPI growth against rent-relief support.
• Rental reversions remain strong, especially for Singapore, with growth momentum supporting DPU recovery for the industrial sector’s largest, most liquid name.
• We raised Ascendas REIT's FY20 DPUs by 2%, and our DDM-based Target Price to SGD3.70 (COE: 6.3%, LTG: 2.0%).
• Ascendas REIT’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 Due to a Non-renewal

• Ascendas REIT's revenue rose 14.6% y-o-y in 1H20 with contribution from the portfolio of 28 US and 2 Singapore business park properties acquired in Dec 2019. This was partially offset by rent-relief support extended to its tenants, the divestment of Wisma Gulab in Jan 2020 and lower occupancies, mostly in Singapore. This dipped from 88.6% to 87.9% due to a non-renewal at 31 Joo Koon Circle.
• Management shared that tenants in logistics and supply chain management accounted for the largest proportion (23.3%) of new demand in 1H20 by gross rental income.

Positive Rental Reversion, Raising Guidance

• Ascendas REIT's portfolio achieved a +4.3% rental reversion in 2Q20 (vs +8.0% in 1Q20) with positive reversions across all markets – Singapore (+4.0%), Australia (+16.6%) and the US (+16.2%). Its Singapore business parks and integrated development, amenities & retail (at Aperia) performed better at +16.3% and +19.8%.
• We remain optimistic on its rental growth outlook, as its business parks remain under-rented and should deliver stronger (mid-teens) reversion into 2H. Management has raised its guidance for 2020 reversions from being flat in 1Q20, to a low positive single-digit.

Growth Levers From AEIs, Redevelopment, Deals

• Ascendas REIT has initiated AEIs at a Singapore logistics property (21 Changi South Avenue2) and three Australian suburban offices for SGD16.3m, and expects that the iQuest@IBP redevelopment and Grab build-to-suit project will both be delayed by six months. Its low 36.1% leverage supports further deals, with acquisitions from its sponsor in Singapore, and in Australia and UK.

Source: Maybank Kim Eng Research - 24 Jul 2020