Ascendas REIT - Asset recycling strategies yield higher returns
- Steady DPU growth.
- Upside from acquisitions and planned development works.
- Low gearing arms the REIT for more growth.
Maintain BUY, TP maintained at S$2.65.
- Ascendas REIT (A-REIT) offers attractive yields of close to > 6.5% to investors looking for steady returns in the current volatile market.
- A low leverage of 35% supports any potential M&A activities.
Acquisition that ticks the right boxes.
- We continue to like AREIT for its exposure in the Business Parks/Science Parks Space segment. The recent acquisition of three properties at a price of S$420m. The acquisition ticks most of the boxes – long lease tenure (16.5 years with annual escalations of 2.0%-2.5%), long unexpired land lease tenure (65.7 years), and offers investors a deeper exposure to a sector (R&D) that continues to grow.
- The yield of 6.0% (all-in cost) appears low at first glance but we believe it reflects the properties’ relatively young age (2.0 years) and long land lease tenure. Accretion is projected to be marginal at 0.5% for FY18F.
Conservative capital management.
- A-REIT stands tall in the face of rising interest rates this year with a spread-out debt expiry profile of 3.8 years, implying that the REIT does not face any major refinancing in any one year.
- The Manager has adopted a prudent interest rate risk management strategy with a weighted average cost of debt of 3.0% with > 80% hedged into fixed rates.
- Our DCF-based TP is maintained at S$2.65 as a result of additional contribution from acquisitions.
- Maintain BUY on the back of total potential returns of c.15%
Key Risks to Our View: Interest rate risk.
- An increase in lending rates will negatively impact dividend distributions. However, A-REIT's strategy has been to actively manage its exposure and it currently has > 80% of its interest cost hedged into fixed rates.