EUR 850.00 For Business Accounts Only

Morningstar | AREIT’s Q3 Fiscal-Year 2019 in Line; Active Portfolio Management to Drive Future Growth; FVE Raised

Ascendas Real Estate Investment Trust’s third-quarter fiscal-year 2019 (ending March) results were largely in line with expectations. Net property income increased by 6.6% year over year to SGD 168 million on the back of a 4.2% year-over-year increase in revenue to SGD 226 million. The increase in revenue and net property income was mainly driven by its acquisition of two U.K. logistics property portfolios that was completed in August and October 2018 and the completion of the redevelopment of 20 Tuas Avenue 1 that was partly mitigated by non-renewals at certain properties in Singapore. Distribution per unit only increased by 0.7% year over year to SGD 0.03998 after taking into consideration a larger issued unit base. After factoring the third-quarter fiscal-year 2019 results and making minor adjustments to our cash flow model, we raised our fair value estimate to SGD 2.50 from SGD 2.42 per unit. Our no-moat and stable moat trend ratings remains unchanged. We think the units are overvalued at the current price as the Singapore industrial property sector continues to suffer from oversupply issues and uncertainties remain from the U.S. and China trade tension, resulting in businesses taking a cautious stance when reviewing their business space commitment in the near term.

Rental reversion was at 3.2% for third-quarter fiscal-year 2019, above the 2.3% achieved in second-quarter fiscal-year 2019. All the segments in Singapore saw positive rental reversion within the range of 1.7% to 10.3%, which was led by its Integrated Development, Amenities and Retail properties, and its Business and Science Parks. Occupancy rates for the trust’s portfolio improved to 91.3% quarter over quarter from 90.6% in second-quarter fiscal-year 2019 mainly due to the inclusion of the 100% occupied second U.K. property portfolio that was acquired in October 2018. Occupancy rates at its Singapore portfolio improved marginally to 87.3% quarter over quarter from 87.1% in second-quarter fiscal-year 2019 due to new tenancy at 20 Tuas Avenue 1, FoodAxis @ Senoko, and 9 Changi South Street 3. Occupancy rates at its Australian portfolio declined slightly quarter over quarter to 98.1% from 98.5% due to the inclusion of one of its properties following the completion of upgrading work. We continue to expect the Singapore industrial property market to remain challenging in the near term as (1) businesses remain cautious when reviewing their business space commitment as a result of the ongoing trade tensions between the U.S. and China and (2) around 2.4 million square metres of new supply is expected to be added for the next two years from now until 2020, which represents around 4.9% of the existing supply. However, it is worth noting that around 54% of these new supplies has been pre-committed, supporting our view of a limited risks of oversupply in the long term. As a result, we expect higher rental growth rates and occupancy in fiscal years 2022 and 2023.

Ascendas REIT has been actively managing its portfolio. Aside from the acquisition of its second portfolio of 26 logistics properties in the U.K. on Oct. 4, 2018, the trust has entered into a build-to-suit business park development for Grab, a leading online to offline, or O2O mobile platform in Southeast Asia that is involved in providing ride hailing, food delivery, and mobile payment services. The total development cost for this development is SGD 181.2 million, which is expected to be roughly 60% funded by net proceeds from the private placement that was completed in September 2018 and the remainder 40% by internal resources and debt. This business park development is expected to be completed by third-quarter fiscal-year 2021 and is expected to generate a net property income yield, or NPI yield, of 6.4%. Grab has committed to lease the whole property for 11 years with a renewal option of five years. An annual rental escalation is also included in this lease. We view this development positively as the NPI yield is higher than the 5.5% NPI yield generated by its current business and science park properties and is dividend per unit accretive.

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, drive growth, and create value for its unitholders. Management has stated that it is looking into properties with redevelopment or asset enhancement initiatives potential in Singapore and will continue to look at expanding its overseas footprint mainly in Australia and the U.K.