Ascendas REIT: Confident of further positive rental reversions
- Positive rental reversions in four markets where AREIT operates led to strong overall positive reversion of 13.2%
- Take up remains strong; portfolio occupancy rate improved to 94.0%
- Tenants from the biomedical, life sciences, R&D, and logistics sectors to continue driving rents and occupancy rates
- Maintain BUY with TP of S$3.65
- 1H22 revenues increased 13.7% y-o-y to S$666.5m due mainly to contributions from acquisitions in the past year
- 11 data centres in Europe (March 2021)
- 75% interest in Galaxis (June 2021)
- 11 logistics properties in Kansas City (November 2021)
- 7 logistics properties in Chicago (June 2022)
- Completion of Grab HQ (July 2021)
- Several other development completions in Singapore and Australia
- Higher revenues were partially offset by divestments
- 1314 Ferntree Gully Road, Melbourne (June 2021)
- 82 Noosa Street and 62 Stradbroke Street, Brisbane (July 2021)
- 1H22 NPI increased 7.0% y-o-y to S$476.9m in tandem with higher revenues
- Partially offset by higher utilities expenses from Singapore properties
- Utilities made up c.23% of OPEX, and c.17% is recoverable from tenants
- NPI margins fell from c.74.3% to c.70.3% y-o-y mainly due to higher utilities cost for Singapore properties
- Expect margins to remain close to current levels as utility contracts have been locked in until December 2022
(+) 1H22 DPU of 7.873 Scts in line with projections
- Announced DPU of 7.873 Scts. for 1H22; in line with projections
- Forms more than 49% of our FY22 DPU estimates
- 2H22 DPU expected to inch up due to full half-year contribution from the 7 logistics properties in Chicago, and higher income contribution from UBIX
(+) 13.2% positive rental reversions in 2Q22
- Strong positive rental reversions of 13.2% in 2Q22; positive rental reversions across all markets
- Singapore: 13.2% - mainly driven by Business Space and Life Sciences, and Logistics
- Australia: 15.2% - driven by Logistics
- US: 15.3% - driven by Business Space
- UK: 11.7% - driven by data centres
- Expect FY22 average reversions to be in the positive mid-single-digit range
- Improvement from previous quarter’s guidance of a positive low single-digit reversion for the year
- Still seeing strong demand and expansion enquiries from tenants from a myriad of sectors
- Biomedical, R&D, Life Sciences, and logistics
(+) Portfolio occupancy improved further to 94.0%
- Higher occupancies across Singapore, the US and UK/Europe
- Singapore portfolio occupancy increased from 90.0% to 91.9% q-o-q
- Mainly due to higher occupancies at 1 Changi South Lane and UBIX (51.5% just 6 months after TOP)
- c.10.2% of portfolio GRI is due for renewal for the rest of FY22
- Expect to maintain high occupancy rates and continued positive rental reversions
- Only segment expected to face some headwinds is the suburban office space due to structural shift to more work-from-home flexibility
- Some tenants expected to return some space or consolidate their office space requirements
- Singapore: International Business Park and Changi Business Park
- US: suburban offices in San Francisco
(+/-) Capital management metrics maintained, but could see financing costs edge up
- All-in financing costs maintained at 2.1% as bulk of expiring loans were refinanced early
- 80% of loans are hedged to fixed rates
- Rising interest rates could potentially lead to a 10-20 bps increase in all-in financing costs by year-end
- Gearing inched up to 36.7%, mainly due to acquisitions in Chicago
(+) S$566m worth of ongoing projects to drive income growth
- In addition to higher contribution expected from UBIX that recently reached TOP, a further S$566m of ongoing projects are expected to drive revenues growth in the next two years
- Major development/redevelopment projects include MQX4 in Sydney (1Q23), and 1 Science Park Drive redevelopment in Singapore (2Q25)
- Just announced AEI works at The Alpha in Singapore Science Park 2
- AEI to refurbish the property and add new facilities
- Still has unutilised GFA at the property, but will consider adding on an annex building on a vacant plot of land, rather than redeveloping the whole property
Our thoughts
Despite AREIT’s NPI margins weakening due to higher operating costs, stemming from cost inflation and higher utilities, AREIT has been able to offset this through organic income growth and contribution from past acquisitions. Like many of its peers, AREIT’s strong organic earnings growth was contributed by positive rental reversion of 13.2% in 2Q22. Improved occupancies within its portfolio, and increasing occupancy at the recently completed UBIX will also drive further organic growth for AREIT.
Although inflation and higher operating costs continue to eat into margins, AREIT is confident that the bulk of the impact has already been felt, and margins should remain stable for the rest of FY22F. AREIT will also progressively work on increasing service charges in 4Q22F as it tackles higher operating costs. In terms on managing rising interest rates, 80% of its loans are hedged to fixed rates, minimising the impact on financing costs. A sensitivity analysis conducted by AREIT shows that every 100bps increase in interest rates will lead to a c.2.0% decline in distributable income.
We understand that given the market conditions and rising interest rates, it may be increasingly challenging to deliver accretive acquistions, especially as deals involving large portfolios that demand a premium in addition to the already very tight cap rates. AREIT will continue to hunt for acquisitions within the markets they operate in, but deals are expected to be smaller in size.
AREIT continues to see opportunities in Singapore, Europe, and the US, while spreads in Australia are currently unconducive for further acquisitions. While AREIT 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 AREIT’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. As such, we will be maintaining our BUY recommendation with a TP of S$3.65.
FY Dec | 1H2021 | 2H2021 | 1H2022 | % chg yoy | % chg hoh |
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Gross revenue | 586 | 641 | 667 | 13.7 | 4.1 |
Property expenses | (140) | (165) | (190) | 35.0 | 14.7 |
Net Property Income | 446 | 475 | 477 | 7.0 | 0.4 |
Other Operating expenses | (45.7) | (55.2) | (51.0) | 11.6 | (7.7) |
Other Non Opg (Exp)/Inc | 45.4 | 51.8 | 89.4 | 96.9 | 72.6 |
Associates & JV Inc | 3.19 | 0.12 | 0.16 | (94.9) | 40.9 |
Net Interest (Exp)/Inc | (81.9) | (77.0) | (80.0) | 2.4 | (3.9) |
Exceptional Gain/(Loss) | 7.22 | 275 | 0.0 | - | - |
Net Income | 374 | 670 | 436 | 16.5 | (35.0) |
Tax | (21.0) | (65.4) | (31.8) | 51.0 | (51.5) |
Minority Interest | 0.0 | 0.0 | 0.0 | - | - |
Net Income after Tax | 353 | 604 | 404 | 14.5 | (33.2) |
Total Return | 353 | 604 | 404 | 14.5 | (33.2) |
Non-tax deductible Items | (41.8) | (285) | (73.1) | 74.8 | (74.4) |
Net Inc available for Dist. | 311 | 319 | 331 | 6.3 | 3.7 |
Ratio (%) |
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Net Prop Inc Margin | 76.0 | 74.2 | 71.6 |
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Dist. Payout Ratio | 100.0 | 100.0 | 100.0 |
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