Analysts are mostly upbeat on Ascendas REIT (A-REIT) due to its stable portfolio and its series of acquisitions and disposals.
To be sure, the analysts PhillipCapital and UOB Kay Hian have maintained their “buy” recommendations on the REIT with higher target prices, while RHB Group Research has kept its "neutral" call with an unchanged target price of $3.20.
To RHB analyst Vijay Natarajan, the REIT's share price has underperformed compared to the S-REIT's sector of +1% and the industrial REIT average of -0.2%.
"We believe [this] is due to a combination of market indigestion from recent fund raising exercises, coupled with weaker operational data (1Q). With the lack of strong near-term catalysts and not-so-cheap valuation (1.3 times price-to-book value or P/BV), we are closely monitoring the REIT for operational improvements in the coming quarters before considering a potential upgrade," he writes in a June 22 report.
In the 1QFY2021 ended March, the REIT's Singapore portfolio occupancy dipped 1.5 percentage points q-o-q to 86.9% and has been on the decline since end-2019 on the back of non-renewals as industrial land supply remains relatively high, notes Natarajan.
Its portfolio occupancy rates for the US and Australia slipped 0.4 percentage points to 92.5% and 2.5 percentage points to 94.9% respectively, while demand for UK logistic assets saw a 1.1 percentage point increase to 98.6% in the 1QFY2021.
'On the positive side, rents are holding up relatively well, with [the REIT's] Singapore portfolio registering rent reversion of +2.9% (overall +3%), aided by higher renewal rents for logistics and
business park assets. However, there are bright spots emerging across all its markets (Singapore, the US, UK and Australia) with increased vaccination rates and good control of Covid-19 that have resulted in a brighter economic outlook," he writes.
Conversely, PhillipCapital’s Natalie Ong has raised A-REIT’s target price to $3.65 from $3.64 previously, while UOB Kay Hian’s Jonathan Koh has upped his estimate to $3.83 from $3.82 previously.
Ong has also adjusted her distribution per unit (DPU) estimates for the FY2021 and FY2022 by -0.5% and +0.8% to reflect its acquisition of Galaxis in May, as well as the disposal of three Australian logistics properties in June.
“Stock catalysts are expected from acquisitions and redevelopment. We forecast DPU growth of 9.2% for FY2021 as acquisitions and redevelopment/AEI start contributing,” writes Ong in a June 21 report.
On May 4, the REIT acquired the remaining 75% stake in Galaxis from CapitaLand, 13 months after its initial 25% acquisition in Galaxis from MBK Real Estate Asia.
The agreed property value of $720 million on a 100% basis represents a 2% discount to the market value of Galaxis and a 14.3% appreciation since A-REIT’s initial investment.
The REIT has since raised some $420 million from private placements and will issue an additional $83 million worth of new units as part of its payment to CapitaLand for the remaining 75% stake.
The issue will increase its share base by 4.2%.
On June 3, the REIT announced that it was divesting three of its Australian logistics assets – two in Brisbane and one in Melbourne – for $104.5 million and $24.2 million respectively.
The assets were 100% occupied as at Dec 31, 2020. The divestment will reduce the REIT’s pro-forma net property income (NPI) and distribution per unit (DPU) by $5.1 million and 0.075 cents respectively upon its completion in the 3QFY2021.
Looking ahead, Ong expects demand to remain “muted” as companies exercise caution in the current economic climate. That said, this is mitigated by tenants avoiding relocation costs, leading to higher retention rates for the REIT.
“The Electronics and Biomedical industries accounted for 29.3% and 34.0% of new demand in 1QFY2021, helping to prop up demand for light-industrial/high-spec and business parks respectively. Singapore/Australia/US/UK will account for 13.9%/3.0%/4.0%/2.4% of FY21e lease expiries by gross rental income (GRI). The bulk of the Singapore expiries will be from tenants located in business parks (43%) and logistics assets (25%),” notes Ong.
To this end, Ong has forecast a 9.2% growth for A-REIT’s DPU for the FY2021, upon the new contributions from acquisitions and redevelopment, as well as asset enhancement initiatives (AEIs).
“A-REIT remains our top pick for the sector in view of its scale and diversification. The REIT also continues to future-proof its portfolio by increasing its exposure to growth sectors of the economy: knowledge economies, technology and e-commerce,” she says.
For UOB Kay Hian’s Koh, the potential redevelopment of Science Park 1 could provide a return on investment (ROI) of about 7.5%, assuming construction costs around $350 per sq ft, with average rents at $5.50 per sq ft per month and an occupancy rate of 95%.
The redevelopment will start with the TÜV SÜD PSB Building. The lease with TÜV SÜD, a German testing, inspection and certification specialist, has expired and the tenant had relocated to the International Business Park in early 2021.
The building contributed gross revenue of some $4.2 million in FY2020, translating to rental of around $1.52 per sq ft per month.
The enhancement to A-REIT’s FY2022 distributable income of the property ranges from 1.5% to 4.6%, depending on the plot ratio approved by the authorities.
Apart from the TÜV SÜD PSB Building, A-REIT also owns other older buildings such as Cintech I to IV.
To Koh, the REIT could jointly redevelop Science Park I with its sponsor CapitaLand.
After factoring the remaining 75% acquisition of Galaxis and the divestment of its Australian properties, Koh says he has raised his DPU forecast for the FY2022 by 0.4%.
Units in A-REIT closed 1 cent higher or 0.3% up at $2.93 on June 21, or 1.3 P/NAV, according to PhillipCapital’s estimates.
