While Ascendas REIT’s (A-REIT) 1H20 results have come in slightly below OCBC Investment Research’s (OIR) expectations, the brokerage’s research team says it continues to “like” the REIT’s geographically-diverse portfolio and asset class mix.
The team has maintained its “buy” recommendation on the REIT with a higher target price of $3.92, from $3.52 previously.
However, the team has lowered its distribution per unit (DPU) forecast by 3.3% on rental waivers to tenants. It has also increased its FY21F DPU forecast marginally by 0.1% due to A-REIT’s recent proposed Sydney acquisition.
A-REIT, on July 23, announced a 10.8% y-o-y decline in its DPU to 7.27 cents, which came up to around 45.8% of OIR’s FY20F forecast. The lower DPU was due to an enlarged unit base and the presence of a one-off distribution of some $7.8 million in 1H19.
See: Ascendas REIT posts 10.8% drop in 1H20 DPU to 7.27 cents
Around 46% of A-REIT’s portfolio valuation as at June 30 is contributed by its business and science park or suburban office. Another 25% is contributed by its logistics and distribution centre, while 16% comes from its high-specifications industrial and data centres.
“We see room for inorganic growth opportunities ahead given A-REIT’s healthy aggregate leverage ratio of 36.1%. Furthermore, we believe equity funding conditions are also more favourable for A-REIT as compared to its last US Business Park portfolio acquisition in Nov last year,” says the team in a July 24 report.
“This is because there are fewer S-REITs that are likely to come to the market for equity fund raising exercises (less competition), while liquidity is ample (institutional funds waiting on the side-lines) and A-REIT is trading at a tighter yield than in Nov 2019 (more conducive to make DPU accretive acquisitions),” they add.
DBS Group Research analysts Derek Tan and Dale Lai have raised their target price for A-REIT to $4 from $3.45 previously as they expect A-REIT to catch up with its large-cap peers in terms of valuation.
In a July 24 report, Tan and Lai believe that A-REIT’s diverse portfolio and exposure to multiple “structural tailwinds” will drive earnings and capital values in the long term, something they feel, investors have neglected.
“The REIT remains in a virtuous cycle of growth and we see a boost from potential accretive acquisitions,” they say.
“While investors have focused on acceleration in demand for logistics (27% of AUM) and data centres (5%), most have largely ignored A-REIT’s valuable business parks exposure (43% of AUM - 32% in SG, 11% in the US ) which would benefit from the future trend towards decentralised offices as more companies adopt flexible working arrangements,” they add.
Looking ahead, the analysts recognise that A-REIT’s leading position within the business parks, hi-spec industrial properties, and logistics sectors, will enable the REIT to capture a wider spectrum of industries.
Conversely, CGS-CIMB analysts Lock Mun Yee and Eing Kar Mei have downgraded their call to "hold" on the REIT on the recent share price rally and limited near-term upside. They have also priced the stock at a higher fair value of $3.12, from $3 previously, as they lower their cost of equity on the stock.
While the analysts recognise A-REIT's stable portfolio occupancy of 91.5%, Lock and Eing also foresee near-term "drags" from rent reliefs to its tenants.
Following the REIT's results, Lock and Eing have reduced their DPU estimates for FY20-22F by 2.2-2.6% to factor in "slight changes" in its portfolio occupancy.
As at 4.14pm, units in Ascendas REIT are changing hands 3 cents higher or 0.9% up, at $3.46.
