Ascendas REIT - Confident Of Further Positive Rental Reversions
Ascendas REIT's 1H22 results highlights:
Higher revenues from acquisitions and completed developments.
- Ascendas REIT (SGX:A17U)'s 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 ~23% of OPEX, and ~17% is recoverable from tenants.
- .NPI margins fell from ~74.3% to ~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 cents in line with projections.
13.2% positive rental reversions in 2Q22.
Portfolio occupancy improved further to 94.0%.
Capital management metrics maintained, but could see financing costs edge up.
S$566m worth of ongoing projects to drive income growth.
- Despite Ascendas REIT’s NPI margins weakening due to higher operating costs, stemming from cost inflation and higher utilities, Ascendas REIT has been able to offset this through organic income growth and contribution from past acquisitions.
- Like many of its peers, Ascendas REIT’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 Ascendas REIT.
- Although inflation and higher operating costs continue to eat into margins, Ascendas REIT is confident that the bulk of the impact has already been felt, and margins should remain stable for the rest of FY22F. Ascendas REIT 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 Ascendas REIT's loans are hedged to fixed rates, minimising the impact on financing costs. A sensitivity analysis conducted by Ascendas REIT shows that every 100bps increase in interest rates will lead to a ~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. Ascendas REIT will continue to hunt for acquisitions within the markets they operate in, but deals are expected to be smaller in size.
- 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. As such, we will be maintaining our BUY recommendation on Ascendas REIT with a target price of S$3.65.
Above is the excerpt from report by DBS Group Research.
Clients of DBS may access the full report in PDF @ https://www.dbs.com/insightsdirect/.
Dale LAI DBS Group Research | Derek TAN DBS Research | https://www.dbs.com/insightsdirect/ 2022-08-03 2022-08-03
Previous report by DBS Research:
2021-03-18 Ascendas REIT - Powering Ahead With Entry Into Europe’s FLAP Markets
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