Ascendas REIT (AREIT SP) – Healthy operating metrics but DPU slightly below
• 2H21 DPU rose 2.4% YoY to 7.598 S cents
• Positive rental reversions of 2.9% in 4Q21 and 4.5% in FY21
• Aggregate leverage ratio of 35.9% with 79.4% of borrowings fixed/hedged
2H21 results slightly below our expectations – Ascendas REIT’s (AREIT) 2H21 gross revenue and NPI increased by 21.3% and 22.4% YoY to SGD640.5m and SGD475.2m, respectively, while DPU grew 2.4% to 7.598 S cents. Growth in NPI was driven by contribution from acquisitions and lower rental rebates, but partially offset by higher management fees and a larger unit base. For the full-year FY21, AREIT’s NPI rose 18.6% to SGD920.8m, while DPU grew 3.9% to 15.258 S cents, with the latter forming 96.8% of our forecast. We view this set of results as slightly below our expectations. Although management was entitled to performance fees given that DPU growth exceeded 2.5%, it voluntarily made a one-off waiver of its entitled performance fee to the extent of the effect of the rental rebates, given that these rebates would have artificially depressed FY20’s DPU.
Solid operating metrics – AREIT achieved another quarter of solid operating metrics, including broadbased positive rental reversions in 4Q21, which came in at +2.9% for the overall portfolio. For FY21, portfolio rental reversions were +4.5% (FY20: +3.8%), and this was led by US (+22.6%), UK (+6.2%) and Singapore (+2.9%). Within Singapore, rental reversions were positive across all segments with the exception of Integrated Development, Amenities & Retail (flat). As for portfolio occupancy rate, this improved 1.5 percentage points (ppt) QoQ to 93.2%. The increase seen in Singapore (+1.7 ppt to 90.2%), Australia (+1.7 ppt to 99.2%) and US (+3.1 ppt to 94.5%) was partially offset by the 1.5 ppt dip in UK/Europe to 96.7%. Demand in Singapore was driven largely by the Biomedical and Agri/Aquaculture, IT & Data Centres and Engineering industries.
Ample room for acquisitions and redevelopment projects – In terms of financial position, AREIT’s aggregate leverage ratio declined 1.5 ppt QoQ to 35.9%, leaving it with significant debt headroom of ~SGD4.8b before reaching the regulatory limit of 50%. 79.4% of its debt has been fixed, and based on AREIT’s sensitivity analysis, every 20 bps increase in interest rates is expected to have a negative DPU impact of 0.06 S cents (~0.4% of FY21 DPU). For acquisitions, management is seeing cap rates of 4- 7% in Europe and the US, and is open to acquiring assets in secondary locations as long as the specifications are good. Besides acquisitions, management will also explore AEI and redevelopment opportunities. There is the possibility that it may be able to convert a few of its light industrial properties in Singapore to data centre assets should it be able to obtain the licenses from the government. We adjust our DPU forecasts downwards, and also lower our terminal growth rate assumption from 2% to 1.75% given expectations of higher utility expenses ahead, coupled with a more moderated macro growth environment. Correspondingly, our fair value estimate declines from SGD3.83 to SGD3.63.
ESG Updates
AREIT ESG rating was lowered in May 2020. AREIT falls into the lower scoring range in the ‘Corporate Governance’ category as compared to its global peers, due to key areas of concern related to the board. However, AREIT scores well in the ‘Opportunities in Green Building’ category. It has made efforts on tenant engagement programmes with the aim of reducing its portfolio’s carbon footprint, and also making green building investments such as Green Mark certifications. According to AREIT, green financing (including green perpetual securities) accounted for ~18% of its total borrowings, as at 30 Jun 2021. It has a target for all its existing properties to achieve a minimum green rating by 2030. BUY. (Research Team)