Ascendas REIT (AREIT SP) - Built for the Future
Initiate at BUY, top sector pick
- AREIT is best leveraged to the government’s pro-growth economic programmes, with its portfolio geared towards business parks and high-specs factories. A push into Australia since late-2015 has diversified growth engines and enhanced earnings visibility.
- Looking ahead we see further momentum from inorganic growth initiatives driving upside to our DPU forecasts and valuations.
- We see 12% upside to our DDM-based TP of SGD2.85, with 6% dividend yield driving an 18% total return. Initiate with BUY.
Portfolio geared towards SG’s pro-growth efforts
- AREIT offers prominent exposure to Singapore’s business parks and hi-specs factories (~54% of portfolio), which are geared towards the government’s push for higher value-add businesses.
- This is further entrenched by its recent SGD420m acquisition of the Science Park Drive properties, with WALE extension (from 3.7 years to 4.4 years) and strong tenant quality enhancing cashflow visibility.
Further momentum in overseas push
- AREIT has immediately scaled up in Australia with its acquisition of 26 logistics assets in Sep 2015, its most aggressive overseas expansion. The properties, on freehold land tenures with fixed annual rent escalations, help drive earnings visibility and play to the strengths of AREIT’s risk profile.
- Looking ahead, we see further momentum in this inorganic growth lever, with management guiding for overseas assets to comprise 20-30% of its portfolio, from 14% currently.
Capital recycling initiatives to drive yield upside
- A-REIT has strengthened its balance sheet on the back of proactive portfolio reorganisation initiatives (divestment of its final China asset and ECS conversion).
- With gearing at 31.8%, average debt maturity of 3.9 years, and estimated SGD2.3b in debt capacity, we expect management will endeavour to recycle capital into higher-yielding and newer assets.
- Earlier-than-expected pick-up in leasing demand driving improvement in occupancy.
- Better-than-anticipated rental reversion trend.
- Accretive acquisitions.
- Prolonged slowdown in economic activity could reduce demand for industrial space, resulting in lower occupancy and rental rates.
- Termination of long-term leases contributing to weaker portfolio tenant retention rate.
- Sharper-than-expected rise in interest rates could increase cost of debt and negatively impact earnings, with higher cost of capital lowering valuations.