SINGAPORE (July 9): Ascendas REIT (A-REIT) remains one of the most defensive industrial REITs due to its diverse assets, and predominant exposure to the business parks sector, says RHB analyst Vijay Natarajan in a Thursday report.
The business parks sector is expected to stay resilient, he says.
In light of the Covid-19 outbreak, REITs are expected to provide mandatory one-month rent rebates to qualifying SME tenants under the Covid-19 bill. However, as less than 10% of the rental income are accounted for by industrial SMEs, Natarajan feels the impact of the rent rebate is likely to be “minimal”.
“AREIT estimates the rent waivers provided to tenants so far is less than $20million (less than 2% of FY20F revenue). It has also granted about $3 million of rent deferrals, covered by security deposits,” he says.
The overall impact of rent rebates for A-REIT’s Australia portfolio is guided by its manager to be at less than $0.5 million.
In the UK, the REIT has not offered any rent rebates, but have allowed some leases to make changes to their payment plans to monthly instalments, instead of quarterly.
In the US, the number of rebates granted were minimal; the REIT granted US$10,000 ($13,938.20) to a small cafe operator in Portland.
A-REIT has also enjoyed stable occupancy rates with positive rent reversions expected for FY20F.
In 1Q20, portfolio occupancy rose 0.8 percentage points q-o-q to 91.7%, driven by higher demand for SG logistic assets.
“Management continues to expect higher logistics demand across its markets, with COVID-19 accelerating e-commerce demand. We also see demand for its key business parks segment (45% of portfolio) remaining resilient as many cater to growth industries such as biomedical, infocomm technologies and healthcare,” says Natarajan.
In the same quarter, rent reversions stood healthy at 8% and management anticipates flattish rent reversion for the rest of year.
A-REIT acquired a 25% stake in Galaxis from Mitsui for $103 million, and Natarajan expects the REIT to acquire the remaining 75% stake from its sponsor in 2H20. This should be positive to the REIT’s distribution per unit (DPU), he says.
See: Ascendas REIT acquires 25% stake in business park property Galaxis for $102.9 mil
“Gearing stands comfortably at 36.2%, and even assuming full debt funding for the said acquisition, gearing is likely to stay at 38%. Management has guided that despite the recent increase in gearing limit to 50%, gearing is targeted at <40%,” he adds.
In terms of development assets, the REIT says there will be a delay in the completion of Grab’s headquarters to 1Q21 instead of 4Q20 as previously estimated.
Asset enhancements for The Capricorn and The Galen were completed in 1H20.
While Natarajan continues to “like” A-REIT its asset quality and management, he feels the REIT’s current valuation is not attractive enough (1.5x P/BV).
“We recommend investors accumulate on pullbacks,” he said.
Natarajan has maintained a “neutral” call on A-REIT with a target price of $3, which represents a 9% downside on the stock.
Units in Ascendas REIT closed 4 cents lower or 1.2% down, at $3.26 on Thursday.
