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Morningstar | AREIT’s 2Q FY19 In Line; Active Management to Drive Future Growth Despite Cautious Near-Term Outlook

Ascendas Real Estate Investment Trust, or AREIT’s, second-quarter fiscal 2019 (year ending March) results were largely in line with our expectations. Net property income decreased by 1% year over year to SGD 158.9 million on the back of a 1.1% year-over-year increase in revenue to SGD 218.1 million. The decline in net property income was affected by a one-off reversal of certain accrued property operating expenses, amounting to SGD 2.5 million. Excluding this one-off item, net property income would have increased by 0.5% year over year. Distribution per unit decreased by 4.2% year over year to SGD 0.03887, mainly due to lower net property income, higher interest expense, and a larger issued unit base. Management are cautious on the near-term outlook, as they have seen businesses in Singapore being more prudent in expansion, owing to uncertainties arising from the trade tension between U.S. and China. After adjusting for the second-quarter results and taking a more conservative stance in the near-term outlook, we lowered our fair value estimate to SGD 2.42 per unit from SGD 2.55. Our no-moat and stable moat trend ratings are unchanged. We think the units are overvalued at the current price, as the Singapore industrial property sector continues to suffer from oversupply issues in the near term and there are increasing uncertainties arising from trade tension, resulting in businesses becoming more vigilant when reviewing their business-space commitments.

Rental reversion was at 2.3% for second-quarter fiscal 2019, slightly below the 3.1% achieved in second-quarter fiscal 2018. All the segments in Singapore saw positive rental reversion within the range of 0.3%-3.0%, led by its business and science parks. Occupancy rates for the trust’s portfolio increased marginally to 90.6% from 90.5% in first-quarter fiscal 2019, mainly due to the inclusion of the 100%-occupied portfolio of U.K. properties, which the firm acquired on Aug. 16, 2018. Occupancy rates at its Singapore portfolio declined to 87.1% from 88.1% in first-quarter fiscal 2019 due to nonrenewals at some logistic properties, 40 Penjuru Lane and 9 Changi South Street 3. Meanwhile, occupancy rates at its Australian portfolio remained stable at 98.5%. We still expect the Singapore industrial property market to remain challenging in the near term as: (1) businesses are becoming more cautious when reviewing their business-space commitment as a result of the ongoing trade war between U.S. and China; and (2) around 2.9 million square metre of new supply is expected to be added from now until 2020, which represents around 6% of the 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 acquired its first portfolio of 12 logistics properties in the U.K. for approximately SGD 373.2 million, followed by a second portfolio of 26 logistics properties in the U.K. shortly after for approximately SGD 463.8 million (completed on Oct. 4). To reduce the risk from foreign currency fluctuations, the trust has structured both acquisitions in such a way that they are both naturally hedged. The long weighted average lease to expiry of these two U.K. portfolios also helps to overcome any potential impact from Brexit. In the long run, we think that AREIT’s strategy of actively managing and reconstructing its portfolio will continue to enhance the quality of its portfolio, driving growth and creating value for its unitholders. Management has stated that it is looking into properties with redevelopment or asset-enhancement initiative potential in Singapore and will continue to look at expanding its overseas footprint, mainly in Australia and the U.K.

For more information on both of the U.K. acquisitions, please see our July 27 report "AREIT Ventures Into the U.K. With Acquisition of Logistics Properties; FVE Raised to SGD 2.55" and our Oct. 1 report "AREIT Expands in the U.K. by Acquiring Second Logistics Properties Portfolio; FVE Intact at SGD 2.55."