• Gross revenue and DPU were within expectation
• Acquisition of the second UK portfolio was completed on Oct. 4, subsequent to 2Q19
• Maintain Accumulate; new target price of $2.78 (previous $2.82)

The Positives

+ Positive rental reversions across all segments in Singapore. Rental reversions ranged between +0.3% and 3.0% across the five segments. There were no renewals signed in Australia and UK.

+ Long WALE of 14.5 years for the UK portfolio mitigates uncertainty of Brexit. The earliest lease expiry in the UK portfolio is in FY22. A-REIT’s total portfolio weighted average lease expiry (WALE) is 4.3 years.

+ Higher proportion of borrowings are on fixed rate, thus mitigating interest rate risk.6% of borrowings are on fixed rate, compared to 72.4% in the previous quarter. Meanwhile, all-in debt cost which has risen 10bps QoQ to 3.0%. Average debt maturity has improved QoQ from 3.7 years to 3.2 years.

The Negatives

– Lower Singapore occupancy, mainly due to non-renewals at logistics properties. Singapore portfolio is lower QoQ from 88.1% to 87.1%. The addition of the first UK portfolio (100% occupied) helped to lift A-REIT’s total portfolio occupancy marginally by 0.1pps to 90.6%. Australia occupancy was marginally lower QoQ by 0.1pps to 98.5%.

– Expect aggregate leverage to increase due to the second UK portfolio. Current leverage of 33.2% is lower than previous quarter’s 35.7% due to the Private Placement. However, we estimate leverage to rise to 36.4% by the end of FY19, due to the acquisition of the second UK portfolio that was completed on Oct. 4.

Outlook

The outlook is mixed. Singapore occupancy likely to continue being under pressure, as existing supply has to be absorbed. Total portfolio faces 4.4% of expiry by gross rental income in 2H FY19, almost entirely in Singapore. The asset type that is most exposed to renewal risk is Logistics & Distribution Centres (37% of Singapore expiries). Portfolio’s distributable income will grow from the recent acquisitions. However, DPU for the next three quarters is expected to be lower YoY, due to the effect of the Private Placement.

Maintain Accumulate; new target price of $2.78 (previously $2.82)

Lower target price as we temper our expectation on rental growth for the Singapore portfolio. Nonetheless, we expect the yield of ~6% to remain stable and our target price gives an implied 1.30 times FY19e forward P/NAV multiple.