Ascendas REIT - All the right moves
- 9MFY3/17 DPU of 11.89 Scts (-0.5% yoy) was slightly ahead of our expectation and consensus at 79% of our full-year forecast. 3QFY17 was at 27%.
- Portfolio occupancy improved 1.1% qoq to 90.2%. Singapore achieved +3% weighted average rental reversion.
- As at end-Dec 16, aggregate leverage was reduced to 31.8% (end-2QFY17: 34.2%), though we expect it to increase to c.35% at end-FY17.
- We think that Ascendas REIT (AREIT) has been making all the right moves, with the exit from China and deepening its reach in Singapore and Australia.
- After a YTD 6% run-up in share price, we maintain Hold with a higher DDM target price (S$2.31).
3QFY17 results summary
- AREIT achieved a 3QFY17 DPU of 3.99 Scts, up 1.2% yoy. The favourable yoy effect was partly due to the provision of S$8.4m performance fees in the same quarter last year, partially offset by the higher interest expense in 3QFY17.
- The yoy improvement was also due to contributions from the acquisition of the Australian portfolio and ONE@Changi City, partially offset by the divestment of A-REIT City @Jinqiao, Ascendas Z-Link and Four Acres Singapore.
- Portfolio occupancy improved 1.1% pts qoq to 90.2%. Singapore occupancy rose by 20bp qoq to 88.1%, mainly due to new take-ups at 40 Penjuru Lane and Pioneer Hub.
- Australia occupancy rose 3.3% pts qoq to 97.5% as the manager leased some of the vacant space at 62 Stradbroke Street in Brisbane in the quarter. Singapore achieved +3% weighted average rental reversion. We continue to expect modest rental reversion.
- 6% of portfolio GRI is up for renewal for the remainder of FY17; 19.1% is due in FY18.
- As at end-Dec 16, aggregate leverage has declined to 31.8% with divestment proceeds from A-REIT City @ Jinqiao (divested for S$221.6m) and exchangeable collateralised securities (ECS) conversion into units.
- We expect gearing to increase to c.35% at end-FY17 when the acquisition of 12, 14 and 16 Science Park Drive (price tag of S$420m) is expected to be completed.
- Also, we note that the exchange period for the ECS ended on 17 Jan, and the S$300m ECS has been fully converted into units.
All the right moves
- We think that AREIT has been making all the right moves, with the exit from China (which we view as non-core) and extending of its market leadership in Singapore business parks. In particular, the three science park buildings offer long WALEs and low tenancy risks.
- Lastly, AREIT has deepened its reach in Australia with the acquisition of its first business park in the country for S$149m in Sep 16.
- It is also redeveloping two projects (20 Tuas Ave 1 and 50 Kallang Ave) and one AEI worth a total of S$114.3m.
Maintain Hold after recent run-up
- We raise our FY17-19F DPU by 2.9-3.4% on higher NPI margins and lower financial expenses (the reason for the outperformance). Accordingly, our DDM target price is also lifted. However, given the YTD 6% run-up in share price, we maintain Hold on the stock.
- Upside/downside risks hinge on favourable/unfavourable acquisitions and better leasing demand in Singapore. We estimate that AREIT has debt headroom of S$0.8bn to reach 40% gearing.