1H22: Higher Rental Reversion, Occupancy And Utilities Expenses
AREIT achieved positive rental reversion of 13.2% in 2Q22, supported by growth momentum across all geographic regions. Portfolio occupancy improved 1.4ppt qoq to 94.0%, driven by Singapore and UK/Europe. Management plans to scale up in new economy assets, such as logistics properties. We have cut our DPU forecast by 7% due to higher utilities expenses. AREIT provides resilient 2022 distribution yield of 5.4%. Maintain BUY with a target price of S$3.45.
RESULTS
• Ascendas REIT (AREIT) reported DPU of 7.873 S cents for 1H22 (+2.8% yoy), which is below our expectations. Gross revenue increased 13.7% yoy due to acquisitions in Singapore, Australia, Europe, UK and the US.
• Positive rental reversion driven by Singapore, UK and US. AREIT achieved positive rental reversion of 9.4% in 1H22 (1Q22: 4.6% and 2Q22: 13.2%). In Singapore, business space and life sciences generated strong reversions of +19.9% in 2Q22, driven by biomedical and R&D activities. Logistics and industrial segments also saw healthy reversions of +7.5% and +4.4% respectively. Business parks in the US registered strong reversion of +15.3% in 2Q22, driven by Portland. Data centres in UK/Europe provided positive rental reversion of +11.7%. Management guided positive mid-single-digit rental reversion for 2022 (previous: low-single-digit).
• Occupancy on upward trend and above 90% for all geographic regions. Portfolio occupancy improved by 1.4ppt qoq to 94.0% in 2Q22. In Singapore, occupancy improved by 1.9ppt qoq to 91.9% due to higher occupancy at UBIX (improved 33.5ppt qoq to 51.5%) and a new tenant at 1 Changi South Lane. Occupancy in the US improved 1.3ppt qoq to 95.3% in 2Q22 with the seven newly-acquired logistics properties in Chicago fully occupied. In UK/Europe, occupancy improved 1.0ppt qoq to 97.7% after securing a new tenant for unit 13 Wellesbourne Distribution Park in the UK.
• NPI margin narrowed 3.5ppt yoy to 71.6% in 1H22. Property operating expenses increased 43.1% yoy in 1H22 due to higher utilities expenses. Utilities (landlord’s portion) accounted for 8% of operating expenses in 2021. AREIT renewed its supply contract for electricity in Singapore in Oct 21 and electricity tariffs are locked in till Dec 22. Management expects utilities expenses to increase 50-70% in 2022.
• Acquiring more logistics properties. In 1H22, AREIT completed the acquisitions of nine logistics properties in Australia and the US as well as one redevelopment project in Singapore with a total investment of S$261.6m. It acquired two newly-completed logistics properties in Sydney and Brisbane in Feb 22. It completed the acquisition of seven last mile logistics properties in Chicago in Jun 22. The redevelopment of 25 and 27 Ubi Road 4 was completed in Jan 22 at a cost of S$38.2m. The five-storey industrial building was renamed UBIX and has occupancy of 51.5%.
• Prudent capital management. AREIT’s aggregate leverage increased 0.8ppt qoq to 36.7% as of Jun 22. It has available debt headroom of S$4.6b before hitting MAS’ limit on aggregate leverage of 50%. All-in weighted average cost of debt was stable at 2.1% and interest coverage ratio is healthy at 5.7x. Average debt maturity was extended by 0.4 years to 3.9 years. 80% of its borrowings are hedged to fixed rates.
STOCK IMPACT
• Plotting steady growth. AREIT plans to expand in new economy assets. Many companies are building up their logistics capabilities to build resilience in their supply chains. The logistics industry is facing a structural change from just-in-time to just-in-case in supply chain management. AREIT is focusing on last mile infill locations near residential population centres where supply is limited. It serves a diverse range of third-party logistics players and distributors. Demand remains strong and occupancy for AREIT’s logistics space is close to 100%. AREIT has achieved positive rental reversion for logistics space at +7.5% in Singapore and +15.2% for Australia in 2Q22. Digitalisation of the economy will also lead to greater demand for business space and data centres.
• Investing in last mile logistics space in Kansas City. AREIT has completed the acquisition of 11 logistics properties located in Kansas City for S$207.8m (US$156.0m) in Nov 21. This is AREIT’s first foray into the US logistics market. The 11 logistics properties are located on freehold land and infill locations across Kansas City’s established submarkets of South Johnson County, North Johnson County, Eastern Jackson County and Northland. It has 200,000sqm of last mile logistics space offering convenient access to the mid-western population centres. The portfolio provides NPI yield of 5.1% for the first year.
• Investing in last mile logistics space in Chicago. AREIT has completed the acquisition of seven logistics properties located at infill sub-markets across Chicago for S$133.2m (US$99m) in Jun 22. The portfolio has long WALE of five years and is 100% occupied by 12 tenants. Chicago is an important rail hub and interchange for freight traffic between major railways. The portfolio provides NPI yield of 5.3% for the first year.
EARNINGS REVISION/RISK
• We cut our DPU forecast by 6.6% for 2022 and 6.7% for 2023 due to higher cost of utilities.
VALUATION/RECOMMENDATION
• Maintain BUY. Our target price of S$3.45 is based on DDM (cost of equity: 7.0%, terminal growth: 2.6%).
SHARE PRICE CATALYST
• Resiliency and growth from Business Parks, Life Sciences, Logistics and Data Centre segments.
• Contributions from development projects and AEIs.
