Ascendas REIT (AREIT SP) – Solid rental reversions but higher utility costs a drag
• 1Q22 positive rental reversions of 4.6%
• Portfolio occupancy slightly lower at 92.6%
• Aggregate leverage ratio increased to 36.8% with 79.1% of borrowings hedged
1Q22 positive rental reversions of 4.6% but occupancy was slightly lower – AREIT provided a business update for 1Q22. No financial data was reported, but operationally, overall portfolio rental reversions came in healthy at 4.6% (4Q21: +2.9%). This was led by Australia (+16.5%), US (+14.0%) and Singapore (+3.9%). There were no lease renewals in UK/Europe. Portfolio occupancy fared slightly worse, declining by 0.6 percentage points (ppt) quarter-on-quarter (QoQ) to 92.6%. Occupancy was flat for UK/Europe (96.7%) but declined in Singapore (-0.2 ppt to 90.0%), US (-0.5 ppt to 94.0%) and Australia (-2.4 ppt to 96.8% due to two logistics properties in Brisbane and Melbourne). Regarding the topical issue of rising utility costs, we note that utilities contributed 23.8% of AREIT’s FY21 property operating expenses. However, AREIT’s share as the landlord accounted for ~8% of property operating expenses in FY21 as some costs can be recovered from tenants. It has currently locked in its electricity tariff rates until Jun 2022 and expects an increase of ~50-70% for its portion of utility costs in FY22. For its colocation data centres in Europe, AREIT procures renewable energy sources and its energy price is fixed with its vendor. We believe energy costs for non-vacant data halls can be passed through to tenants.
Reclassification of business segments shows Life Sciences accounting for 7% of AUM – AREIT reclassified its business operations into three key segments, namely Business Space, Logistics and Industrial and Data Centres. These accounted for 48%, 24% and 28% of its AUM of SGD16.4b, as at 31 Mar 2022, respectively. Under its Business Space segment, Life Sciences was reported as a new subsegment, and this formed 7% of AREIT’s overall AUM. According to AREIT, Life Science properties are business spaces with lab-ready specifications. Although contribution is relatively small, we believe this will be one key area of focus for management going forward.
Ample room for acquisitions and redevelopment projects – In terms of financial position, AREIT’s aggregate leverage ratio increased 0.9 ppt QoQ to 36.8%, while its weighted average all-in cost of debt declined from 2.2% (as at 31 Dec 2021) to 2.1%. 79.1% of AREIT’s debt has been hedged. According to AREIT’s sensitivity analysis, every 100 basis points increase in interest rates is expected to have a pro forma impact of 0.29 Singapore cents, or 1.9% decline in its FY21 distribution per unit (DPU). We lower our FY22 and FY23 DPU forecasts by 1.6% and 1.8%, respectively, on lower margin assumptions. After raising our cost of equity assumption from 6.4% to 6.5% due largely to a higher risk-free rate of 2.5%, our fair value estimate declines from SGD3.63 to SGD3.43.
ESG Updates
AREIT has an ESG rating, though this 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 ~20% of its total borrowings, as at 31 Mar 2022. It has set a long-term target for all its existing properties to achieve a minimum green rating by 2030. In the near-term, AREIT is aiming to power the common facilities’ electricity usage at Nucleos, Singapore with renewable energy by 2022, on top of its existing three properties at one-north and Singapore’s first Super Low Energy (SLE) industrial building, LogisTech. BUY. (Research Team)