EUR 850.00 For Business Accounts Only

Morningstar | Ascendas REIT's FY19 Largely In Line; Active Portfolio Management to Drive Growth; FVE Raised

Ascendas Real Estate Investment Trust’s fiscal 2019 (ended March) results were largely in line with expectations. Net property income increased 3.2% year over year to SGD 650 million on the back of a 2.8% year-over-year increase in revenue to SGD 886 million. The increase in revenue and net property income was mainly driven by the acquisition of two U.K. logistics property portfolios, four Australian properties, and contribution from the redeveloped 20 Tuas Avenue 1 and Schneider Electric building, partly mitigated by nonrenewals and downsizing by tenants at certain properties in Singapore. Distribution per unit only increased 0.3% year over year to SGD 0.16035 after taking into consideration a larger issued unit base.

After rolling forward our model, we raise our fair value estimate to SGD 2.62 per unit from SGD 2.50 as we increase our long-term growth assumptions for the trust. 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 continue to suffer from oversupply issues and uncertainties remaining from U.S.-China trade tensions, resulting in businesses taking a cautious stance when reviewing their business space commitment in the near term.

Rental reversion was at 3.7% for fiscal 2019, above the 0.7% achieved in fiscal 2018. All the segments in Singapore saw positive rental reversion of 2.0%-7.9%, led by the integrated development, amenities, and retail properties and the business and science parks. Average occupancy for the trust’s portfolio improved to 91.9% quarter over quarter from 91.3% mainly due to a higher occupancy rate in Singapore, which rose to 88.3% quarter over quarter from 87.3%. We continue to expect the Singaporean 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 United States and China and (2) around 2.8 million square metres of new supply (of which around 60% is light industrial properties) is expected to be added from now until 2020, which represents around 5.7% of the existing supply. Given that only around 9% of AREIT’s portfolio consists of light industrial properties, where most of the new supplies are coming from, we expect minimal negative impact to the trust. Meanwhile, it is worth noting that around 54% of the total new supplies has been precommitted, supporting our view of a limited risk of oversupply in the long term. As a result, we expect higher rental growth rates and occupancy from fiscal 2022 onwards.

AREIT has been actively managing its portfolio. In fiscal 2019, the trust acquired two U.K. portfolios of logistics properties, four Australian properties, redeveloped 20 Tuas Avenue 1, did asset-enhancement initiatives in five of its Singapore properties and sold two Singapore properties. In the third quarter of fiscal 2019, the trust entered into a build-to-suit business park development for Grab, a leading online-to-offline mobile platform in Southeast Asia that is involved in providing ride-hailing, food delivery, and mobile payment services. This business park development is expected to be completed by the third quarter of fiscal 2021 and is expected to generate a net property income yield of 6.4%. The trust is redeveloping 25 and 27 Ubi Road 4 by demolishing two light industrial buildings to build a single high-specification building. This redevelopment will cost SGD 35 million and is expected to be completed by the first quarter of fiscal 2022. This should increase 25 and 27 Ubi Road 4’s net property income by more than 50% as rental rates for high-specification buildings are generally more than 50% higher than light industrial buildings. There will also be an increase in net lettable area after the redevelopment. In addition, the trust is undergoing asset-enhancement initiatives for three of its Singapore properties.

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. Management has said it will continue to look into properties with redevelopment or asset-enhancement potential in Singapore and overseas expansion opportunities in Australia, the United Kingdom, and possibly Europe, given its U.K. footprint.