Analysts at Maybank Securities, DBS Group Research and OCBC Investment Research are maintaining their “buy” calls on Ascendas REIT on the back of attractive valuations.
DBS analysts Dale Lai and Derek Tan notes Ascendas REIT currently offers an attractive 5.4% yield, which is among the highest compared to its other large cap industrial S-REIT peers.
“Having acquired more than $2.1bn assets in FY2021, Ascendas REIT is on track to deliver DPU growth of about 4.6% in FY2022,” they add.
Ascendas REIT reported an all-rounded set of 1HFY2022 results, with stronger portfolio occupancy rates, improved rental reversions, slightly lower aggregate leverage and growth in DPU. However, this is not without headwinds such as a bump in utility costs, says OCBC equity research team.
“1HFY2022 gross revenue rose 13.7% y-o-y to $666.5 million, but net property income (NPI) grew at a smaller magnitude of 7.0% y-o-y to $476.9 million due to a compression in NPI margin by 4.5 percentage points to 71.6%. This was in turn driven by higher utility expenses for its Singapore properties,” they add.
Ascendas REIT’s portfolio delivered a 13.2% rental reversion in 2QFY2022, with positive double-digit reversions at between 11.3% to 15.3% across its four markets. Singapore’s reversion improved to 13%, led by its business space and logistics segments.
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While this is an ‘exceptional quarter’, the management has raised reversion guidance to a positive mid single-digit, says Maybank analyst Chua Su Tye. “We are optimistic on the growth outlook, as Singapore’s industrial rents have bottomed, and Australia’s expiring leases are backed by strong logistics demand,” he adds.
The REIT also has a healthy balance sheet to support inorganic growth, say OCBC analysts. Ascendas REIT’s aggregate leverage ratio inched down 0.1 percentage point q-o-q to 36.7% while its weighted average all-in cost of debt remained stable q-o-q at 2.1%. 80% of its debt has been hedged with an average term of 3.7 years.
According to Ascendas REIT’s sensitivity analysis, every 100 basis points increase in interest rates is expected to have a pro forma impact of 30 cents, or 2% decline in its FY2021 DPU,
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“We understand that given the market conditions and rising interest rates, it may be increasingly challenging to deliver accretive acquisitions, especially as deals involving large portfolios that demand a premium in addition to the already very tight cap rates,” say Lai and Tan.
They highlight that Ascendas REIT continues to see opportunities in Singapore, Europe and the US, while spreads in Australia are currently unconducive for further acquisitions.
“While Ascendas REIT continues to carry out smaller acquisitions, it will be comfortable to fund these entirely with debt and allow gearing to inch up further. Any equity fund raising will only be considered if the acquisition is sizable and only if it is accretive to earnings.
“We expect Ascendas REIT’s overall portfolio to record organic earnings growth in the coming quarters supported by positive rental reversions and higher occupancy rates. Our estimates assume that organic growth will be more than sufficient to offset some of the potential headwinds in the suburban office segment,” they add, maintaining their target price of $3.65.
With $13.4 billion or 81% of AUM entrenched in new economy assets, Ascendas REIT remains the best S-REIT growth proxy in Maybank’s view. Chua maintains his target price at $3.50.
Mainly driven by an increase in its risk-free rate assumption from 2.5% to 3.25%, OCBC has raised its cost of equity assumption from 6.5% to 6.7%. Correspondingly, the analysts’ fair value estimate is lowered from $3.43 to $3.34.
As at 1.44pm, units in Ascendas REIT are trading 1 cent lower or 0.33% down at $3.01.
