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Brokers' take: Analysts lift Ascendas Reit's TPs on structural tailwinds, stable occupancy

Neuros and Immunos in one-north - Ascendas Reit portfolio - CapitaLand website.jpg
Ascendas Reit's Singapore portfolio includes Neuros & Immunos, a pair of seven-storey buildings for research facility and ancillary office use in the one-north area.

ASCENDAS Real Estate Investment Trust's (A-Reit) diversified portfolio and potential accretive acquisitions are likely to help offset the uncertain outlook, although it will be weighed down in the near term by the further rental relief it provides to tenants.

This is according to analysts who have increased their target prices (TPs) for units of the real estate investment trust (Reit). CGS-CIMB raised its TP to S$3.12 from S$3.00 previously, Jefferies lifted the TP to S$3.80 from S$3.50, while DBS upped the TP to S$4.00, from S$3.45 previously.

Both Jefferies and DBS maintained their "buy" calls, while CGS-CIMB downgraded the counter to "hold" from "add".

Units of A-Reit were trading at S$3.52 as at 2.16pm on Friday, up S$0.09 or 2.6 per cent.

A-Reit on Thursday evening posted a resilient set of financial results for the first half of this year - even after including rental assistance to tenants - and it remains optimistic on its rental outlook going forward.

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DBS analysts Derek Tan and Dale Lai on Friday pointed out that the Reit's value lay in its diversity and exposure to multiple structural tailwinds, which will drive its earnings and capital values higher in the longer term.

They raised the stock's TP in anticipation that A-Reit will catch up with its large cap peers in terms of valuation.

"While investors have focused on acceleration in demand for logistics and data centres, most have largely ignored A-Reit's valuable business parks exposure, which would benefit from the future trend towards decentralised offices as more companies adopt flexible working arrangements," DBS wrote.

It also assumed the Reit will likely undertake about S$500 million in acquisitions by the end of FY20, and this will be a catalyst to reaccelerate its growth momentum.

"A-Reit's share price is trading within a virtuous cycle at an implied cost of capital that is conducive for accretive acquisitions," Mr Lai and Mr Tan said.

"We believe the next billion in deals will likely come from its Singapore business park properties in the one-north region, which its sponsor may be looking to divest and should be well received by investors."

In a report on Thursday, Jefferies analyst Krishna Guha noted that even though the trust's operating metrics are likely to deterioriate, its diversified portfolio and tenant base should help mitigate the impact of a "challenging" business outlook and "stretched" valuation.

The positive rent reversion in H1 was driven by large leases in business parks, which were "under-rented", as well as pandemic-related demand for the stockpiling and logistics of essential goods, according to Mr Guha.

Based on new leases signed, tenants from the logistics and supply chain management sector accounted for the largest proportion of new demand in the first half of this year.

However, the outlook is likely to soften once the pandemic-related demand slows down, said Mr Guha.

"While leasing activity has picked up, tenants are unwilling to move out to avoid fit-out and relocation expenses.

"Unless new demand comes from contract manufacturing in Singapore, occupancy is likely to weaken," he added.

Meanwhile, CGS-CIMB downgraded the stock because of A-Reit's recent share price rally and limited near-term upside, said analysts Lock Mun Yee and Eing Kar Mei in a report on Thursday night. However, they set a higher TP as they lowered their cost of equity on the counter.

Following the Reit's results announcement on Thursday, CGS-CIMB cut its distribution per unit estimates by 2.2 per cent for FY20 and by 2.6 per cent for FY22 to factor in "slight" changes in portfolio occupancy, partly offset by new contributions from A-Reit's new Sydney property.

CGS-CIMB noted A-Reit's stable portfolio occupancy of 91.5 per cent as at end-June and its positive rental reversion of 5.4 per cent for leases renewed in first six months of this year.

However, the research team foresees "some near-term drags" from tenant rent reliefs. A-Reit expects to extend around S$20 million of out-of-pocket rent reliefs due to the impact of the novel coronavirus pandemic, and about half of these have been released so far, largely to tenants in Singapore.

In Australia, the trust has suspended rent collection from retail and food and beverage tenants from April until they reopen, although these tenants account for less than 1 per cent of its Australia income. A-Reit also offered to waive and defer rents for two small and medium-sized enterprise tenants in Australia.

Jefferies' Mr Guha noted that besides the S$20 million in rent rebates, there were also S$10 million in property tax rebates passed on to tenants in H1 2020. In total, these amount to slightly over a month of portfolio gross rental income in Singapore and Australia.

A-Reit's management also expects more rental rebates in the second half of this year. "We expect, all in, two to three months of rent waiver may have to be provided, barring a second wave," Mr Guha wrote.

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