Ascendas Real Estate Investment Trust

SGX:A17U

Earnings Call Transcript 2019-Q2

[Kit Peng Yeow, executive]

Thanks for coming to A-REIT's 2Q FY '18/'19 results briefing. In the next 20 minutes or so, I will quickly run through the results, after which, there will be a Q&A session.

Gross revenue in 2Q rose 1.1% to $218 million. The key drivers were acquisitions in Australia and U.K. that were acquired in 2017, 2018. However, the contributions were partially offset by lower occupancy in Singapore.

Net property income declined 1% to $159 million due to a one-off reversal of a certain accrued public expense in the previous quarter, in 2Q. So total amount available for distribution fell by 3.1% to $115 million, mainly due to additional interest expense. DPU declined 4.2% to $0.03887, taking into account an enlarged number of Units in issue.

On investments, we acquired our first U.K. portfolio during the quarter. We also continued to scale up our investments in Australia. Operationally, we achieved positive rental reversion of 2.3% for leases that were renewed during the quarter. Portfolio occupancy rate was stable at 90.6%.

On capital market, we successfully raised $452 million in equity in anticipation of some new acquisitions in September. Leverage improved to 33.2%. The debt expiry profile was extended to 3.7 years, and we have a higher portion of our borrowings, 84.6%, fixed. Average interest cost was steady at 3%.

So now let's look into the details. Gross revenue increased by 1% to $218 million. And this is due to the new acquisitions in Australia and in U.K. The key contributors were 100 Wickham Street and 108 Wickham Street in Brisbane that were acquired in 2017 as well as the U.K. first portfolio comprising of 12 logistics properties that was acquired in August 2018. However, the increase was offset by lower contribution from Singapore. At the NPI level, there's a decline of 1%, mainly due to that one-off reversal expense of $2.5 million in 2Q in the previous year. FY '17/'18.

Total amount available for distribution declined 3.2% to $115 million due to higher interest expenses, And DPU declined 4.2%, taking into account the larger number of Units in issue. So if we were to compare 2Q versus 1Q, Q-on-Q, revenue is slightly higher by 0.7%, due mainly to the maiden contribution from the U.K. portfolio. NPI was flat, partly due to slightly higher operating expenses. Total amount available for distribution declined 1.9% due to additional interest expenses for new debt to fund acquisitions. And finally, DPU declined 2.9%, again, taking into account a enlarge number of Units in issue.

Distribution details. We adopt a semiannual distribution frequency. We have paid an advanced distribution of $0.0725 for the period of April to 17 of September due to the equity fund raise earlier this month. Therefore, for the period of 18 September to 30 September, there will be a distribution of $0.00639 that will be made. Some important dates here. Books closure is on 2nd November, distribution payment date is on 27 November.

Investments. We had a very active quarter and made significant progress in expanding into the U.K. market. So in August, we bought our first portfolio comprising of 12 logistics properties for about SGD 373 million. In September, we bought also 2 more properties in Australia amounting to $65 million. So besides Singapore, our long-term strategy is to build out our portfolio in Australia, U.K. and also into Europe.

So this is an overview of the first U.K. portfolio that we bought. The portfolio has strong attributes such as the long WALE of 14.5 years and good quality tenants. So this will help tight this industry over any uncertainty from the Brexit outcome.

This is a little bit of details on the 2 properties that we bought in Australia. Wayne Goss Drive is a logistic property in Brisbane. It is located along the Logan Motorway, which is the main east-west highway in South Brisbane. It sits on freehold land, postcost yield is 6.5%.

Cargo Business Park. It is strategically located near the Brisbane Airport and CBD. It is unique. It allows us to cater to customers who require a combination of warehousing, showroom and office space in the same building. It is 100% occupied. Postcost NPI yield is 7.4%.

We continue to recycle divestment. So we divested 41 Changi South, which is a light industrial building. The selling price is $13.6 million, which is 17% higher than the book value.

So very soon, after the second quarter, we further scale up our presence in the U.K. A second portfolio comprising of 26 logistics property was acquired for $459 million.

So here's the overview of the second U.K. portfolio, which complements the first U.K. portfolio that we bought. The second portfolio will increase our presence in the West Midlands area.

West Midlands is an important logistics hub, supported by large population north such as Birmingham, Leicester. It will also broaden our customer base to include renowned companies such as Aston Martin, Royal Mail Group.

On the capital markets front, we successfully raised $452 million of equity at about 25% premium to NAV. As a result, given decline to 33%, on the back of a rising interest rates environment, we have expanded the debt maturity profile to 3.7 years. We have also increased the proportion of borrowings, 84.6%, to be fixed. The previous quarter was about 72%. Interest cover is healthy at 5.3x, way above the bank covenant requirement. Interest costs remained steady at 3%.

Portfolio occupancy. From the left, you will see Singapore's occupancy. So occupancy rate declined to 87.1% in the second quarter. Australia's occupancy remained high at 98.5% and this is the U.K. portfolio which is 100% occupied. And as a result, sorry -- the portfolio occupancy is 90.6%.

A little color on Singapore occupancy. The decline in Singapore occupancy is mainly due to some customers downsizing the operations due to a downturn in their business. Some customers also moved into their own facility. Overall, some companies are still in the process of ongoing business consolidation and organizational rightsizing to improve their returns. And the trade tensions right between the U.S. and China has also led to more caution by businesses in terms of their expansion plans. Australia's occupancy is stable and remained high at 98.5%.

Industries that expanded or took up new space in our portfolio include precision engineering companies, F&B companies as well as packaging companies. Rental reversion for 2Q is shown on the first column. So Singapore achieved a 2.3% increase. We were able to increase -- we were able to renew leases at higher rents for all the clusters that you can see here, business parks, high specs, light lot and integrated development. And for the rest of the year, our guidance remains the same. We expect to see a slight improvement in rental reversion in FY '18/'19. WALE portfolio will improve to 4.3 years following the acquisition of the first U.K. acquisition -- portfolio.

On lease expiry for the remaining half of this financial year, only about 4.4%. Of course, revenue is due for renewal. And in Singapore, it would be about 5.1% of our gross revenue that we have to work on. In that number includes 1 SLB, which is a logistics property, and recently, we have renewed that 1 SLB for another 5 years.

Australia. Only 0.7% is due for renewal for the rest of the financial year. This comprise of 2 leases and 1 of which is likely to be renewed.

U.K. There's no leases coming up for renewals this year and the next 2 financial years.

AEI. On asset enhancements, 3 projects are underway. You have seen these projects before. They are on track and will complete early next year. We have plans to embark on more projects during the year.

So I will skip this section. You are familiar with our very diversified portfolio and tenant profile.

Finally, we would like to conclude by saying that the continuing uncertainty will pose challenges to the business environment. Slight slowdown in our business becomes probable. However, we are committed to continue our efforts to enhance our portfolio despite the challenging business environment.

So that concludes my presentation, and now I hand over the session to the panel. Please feel free to ask any questions. Thanks.