• Ascendas REIT achieved higher portfolio occupancy but reversions turned negative in 3Q.
• Management maintains positive reversion guidance for FY20F.
• Upgrade Ascendas REIT to ADD rating with a higher DDM-based target price.

Ascendas REIT's 3Q20 Business Update

• In its 3Q20 business update, Ascendas REIT (SGX:A17U) saw a slight q-o-q uptick in portfolio occupancy to 91.9% on the back of higher occupancy in Singapore portfolio, partly offset by a slightly weaker Australia take-up.
• Ascendas REIT's rental reversion in 3Q averaged -2.3% (9M: +4.2%) with drags from Singapore (-2.8%) while US portfolio recorded +11.5%. Management re-iterated that it expects to achieve low single-digit positive rental reversions for FY20F.
• Ascendas REIT also completed the purchase of a suburban office in Melbourne in Sep 2020 and announced two new acquisitions, in Yennora and Macquarie Park, in Sydney, currently under development, worth S$182.1m. These properties are scheduled to be completed in mid-2021F and mid- 2022F, respectively.

Negative Rental Reversion in Singapore

• In Singapore, the negative rental reversions came largely from logistics & distribution centres, hi-specs industrial as well as light industrial and flatted factories, in 3Q20, as management adopted a tenant retention strategy. Nonetheless, leasing activity improved after P2 of the post circuit breaker and the higher take-up in Singapore was due to new demand from government agencies, logistics and supply chain management as well as engineering tenants.
• Ascendas REIT guided that it provided additional 0.5 months of waiver to retail tenants in Singapore in Aug/Sep 2020. In Australia, it suspended rental collection of F&B tenants ( < 1% of Australia portfolio) until they re-open. No rebates were given for tenants in the UK while only one tenant was given rebate in the US.
• Nonetheless, leasing environment is expected to remain challenging as tenants reassess or put their expansion plans on hold. Ascendas REIT has a remaining 3.9% and 21.7% of rental income to be renewed in Singapore in 4Q20F and FY21F and minimal expiries overseas.

Robust Balance Sheet

• Balance sheet is healthy with gearing at 34.9% and Ascendas REIT has remaining 6% of its total debt to be refinanced for the rest of FY20F.
• Ascendas REIT issued S$300m of perpetual securities in Sep 2020 at a coupon of 3% and this is likely to result in interest cost savings for the REIT. Based on a 50% aggregate leverage assumption, Ascendas REIT has potential debt headroom of S$4.2bn, to fund any acquisitions. This puts the trust in a strong position to evaluate inorganic growth opportunities.

Upgrade Ascendas REIT to ADD

• We tweak our Ascendas REIT's FY20F DPU marginally down but raise our FY21-22F DPU to factor in interest cost savings from the perpetual securities issued in Sep 2020 and new contributions from the two Australian properties under development, scheduled to be completed over the next two years.
• Ascendas REIT's share price had retraced by 13% over the past three months and offers attractive FY21F yield of 5.1%. We upgrade our rating to ADD.
• Upside risk: faster-than-expected global recovery.
• Downside risk: protracted downturn impact of COVID-19.

Source: CGS-CIMB Research - 26 Oct 2020