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Morningstar | AREIT’s 1Q Fiscal 2019 Largely In Line; Active Portfolio Management Drives Future Growth. See Updated Analyst Note from 31 Jul 2018

Ascendas Real Estate Investment Trust's, or AREIT’s, first-quarter fiscal 2019 (ending March) results were largely in line with expectations. Net property income increased by 3.8% year over year to SGD 159.2 million on the back of a 1.5% year-over-year increase in revenue to SGD 216.6 million. However, distribution per unit decreased by 1.2% year over year to SGD 0.04002, as the prior-year first-quarter distribution included a one-off distribution of rollover adjustments from prior years of SGD 0.002. Excluding this one-off impact, distribution per unit would have increased by 4% year over year. Our fair value estimate of SGD 2.55 per unit is unchanged, along with our no-moat and stable moat trend ratings. We think the units are overvalued at the current price, as the Singapore industrial property sector continue to suffer from oversupply issues in the near term.

Rental reversion was 10.5% for first-quarter fiscal 2019, largely due to a lease in the high-specifications industrial space that was signed more than 10 years ago. All the other segments in Singapore continue to see positive rental reversion except for the logistics and distribution centres, which saw a negative 6.1% rental reversion. Hence, we do not think this high rental reversion would be sustainable for the rest of the year. Occupancy rates for the trust’s portfolio decreased to 90.5% quarter over quarter from 91.5% in fourth-quarter fiscal 2018, mainly due to a reduction in the occupancy rates at its Singapore portfolio, driven by the completion of the redevelopment of 20 Tuas Avenue 1 and nonrenewals at SB Building and No. 31 International Business Park. Occupancy rates at its Australian portfolio remained stable at 98.6%. We still expect the Singapore industrial property market to remain challenging in the near term, as around 2.9 million square metres of new supply is expected to be added from now until 2020, representing around 6% of existing supply. However, around 54% of this new supply has been precommitted, supporting our view of limited risks of oversupply in the long term. As a result, we expect higher rental growth rates and occupancy in fiscal 2022 and 2023.

Ascendas REIT continues to actively manage its portfolio. It has recently announced the acquisition of a portfolio of 12 logistics properties in the U.K. for approximately SGD 373.2 million. This acquisition is in line with AREIT’s strategy to diversify its portfolio, and management has reiterated that there could be more to come. For more information on this acquisition, please see our July 27 report “AREIT Ventures Into the U.K. With Acquisition of Logistics Properties; FVE Raised to SGD 2.55.” In the long run, we think AREIT’s strategy of actively managing and reconstructing its portfolio will continue to enhance the quality of its portfolio, drive growth, and create value for its unitholders.