SINGAPORE (Feb 3): Amid economic fluctuations and a decline in its FY2019 distribution per unit (DPU), Ascendas Real Estate Investment Trust (Ascendas REIT) looks a promising investment, analysts say.

Comprising 200 properties across Singapore, Australia, United Kingdom and the United States, Ascendas REIT has a net property value of $12.8 billion. These properties house business and science parks, suburban office spaces, logistics and distribution facilities and industrial buildings.

In FY2019, AREIT posted a DPU of 11.490 cents, some 3.3% lower than the 11.887 cents it logged in the corresponding nine month period a year ago. AREIT had changed its financial year end from end-March to end-December. As such, the current financial year is a nine-month period from April 1 to December 31 2019.

However, the lower DPU was largely due to an 8.9% increase in the number of applicable units in issue, following the rights issue in December 2019.

Total amount available for distribution to unitholders for FY2019 rose 5.2% to $375.4 million.

This was on the back of contributions from newly-acquired properties, as well as positive rental reversions for its Singapore properties.

See: Ascendas REIT posts 12.3% decline in 3Q DPU to 3.507 cents on enlarged base

“In FY2019, AREIT acquired $1.77 billion worth of properties – the highest on record since it listed 17 years ago,” shared Yeow Kit Peng, the REIT manager’s head of capital markets and investor relations, at Ascendas REIT’s results briefing on Friday.

In line with this, AREIT will explore more investment opportunities in the coming year.

“We will continue to invest in well-located properties that benefit from structural growth trends such as technology and e-commerce, and strengthen Ascendas REIT’s presence across its four development markets to optimise portfolio returns,” says William Tay, chief executive officer and executive director of the manager.

The group’s game plan includes expanding its portfolio in the UK, given that “it is the birthplace for business parks” – an area of strength for AREIT. Back home, they are in discussion with authorities to rejuvenate Science Park, with as high a plot ratio as possible.

To this end, analysts say that the REIT’s recent results are mostly in line with their expectations. “Its well-diversified portfolio is expected to stay resilient, despite uncertainty arising from US-China trade tensions,” RHB Group Research analyst Vijay Natarajan notes.

Zhao Yiyuan, an analyst at Soochow CSSD Capital Markets (SCCM), agrees. Zhao says the stronger rental reversions of 8.8% add credence to the REIT’s ability to generate higher DPU.

Business parks, a stable business

Investing in business parks has also borne fruit for AREIT.

Ascendas REIT’s 3QFY2019 gross revenue grew 5.9% to $239.7 million, bringing FY2019 gross revenue to $699.1 million, some 5.7% higher than a year ago.

The increase was driven by its acquisition of 30 business park properties – 28 in the US tech-intensive cities of San Diego, Raleigh and Portland, as well as two in Singapore.

This makes good business for the REIT, note UOB Kay Hian analysts Jonathan Koh and Loke Peihao.

Aside from this, the REIT has also enjoyed positive rental reversions on lease renewals at its existing assets. These include the renewal of leases by CareFusion Manufacturing and Nike in the US, which “have been achieved at higher signing rates”, notes Chua Su Tye, an analyst at Maybank Kim Eng Research.

“Management has successfully delivered on forward renewals, removing a major uncertainty for the deal. They also noted that the contributions so far remain in line with their forecasts,” says SCCM’s Zhao.

Back home, analysts say the renewals benefitted AREIT through +8.8% rental reversions. Tenants include engineering firms (30.2% occupancy by rental income), electronics (16.8%) and lifestyle and consumer sectors (15.7%).

Asset enhancements

Apart from acquisitions, AREIT has been investing heavily on rejuvenating its facilities – starting with The Capricorn and The Galen at Science park 2 for approximately $13 million. It is also slated to revamp iQuest @ IBP FOR $84.3 million.

“The move will enable [AREIT] to enhance its plot ratio to 2.4 from 1.4 and build larger floor plates with batter amenities to tackle the oversupply in the micro-market,” notes Natarajan.

Moreover, UOB’s Koh and Loke add that it will benefit from the new Jurong Regional Line and the “development of Jurong Lake District to become the largest regional economic gateway outside the business district”.

While AREIT is poised for growth challenges lie in the form of the possibility of Singapore entering a recession “due to the wider impact from the Wuhan coronavirus outbreak, trade tensions and fund flows out of the REIT sector,” Natarajan points out.

Even so, its diversified portfolio with an asset value between Singapore-to-overseas of 72:28, gives it room to stay resilient says UOB Koh and Loke.

UOB, SCCM and Maybank have “buy” calls on AREIT, with target prices at $3.35, $3.60, and $3.35, respectively.

Meanwhile, RHB maintains its “neutral” call with a target price of $3.10. However, Natarajan says this recommendation is on “valuation grounds” as the REIT is trading at price-to-book value of about 1.5 times.

“We recommend investors to buy on dips,” he adds.

As at 4.34pm, shares in AREIT are trading 1 cent lower at $3.14.