Ascendas REIT (AREIT SP) - Maybank Kim Eng 2017-04-26: REIT-urning To Growth Momentum

Ascendas REIT (AREIT SP) - Maybank Kim Eng 2017-04-26: REIT-urning to growth momentum ASCENDAS REAL ESTATE INV TRUST A17U.SI

Ascendas REIT (AREIT SP) - REIT-urning to growth momentum


Top sector pick 

  • We reiterate AREIT as our top Industrial REITs sector pick, given its well-entrenched business parks exposure, and momentum from its Australian diversification strategy, as evidenced by the YoY growth in revenue, NPI, and DPU of 2.4%, 7.4% and 13% for the Mar 2017 quarter. 
  • With SGD2.3b in debt headroom to support inorganic growth initiatives, we see upside to our 2.2% 3-year DPU CAGR earnings estimates. 
  • For now, with 18% total return to our DDM-based TP of SGD2.85, we maintain BUY.


4Q/FY17 results in line 

  • AREIT’s 4Q/FY17 results were in line with consensus and our estimates on the back of acquisitions in Australia and Singapore Science Park properties. 
  • Portfolio occupancy was 90.2%, flat QoQ, but improved from 87.6% a year ago, with rental reversion at +3.2% (+3.1% for full-year), and business parks (+5.2%), and integrated development (+9.2%) offsetting hi-specs (-3.4%) and logistics (-18.8%). 
  • New leases signed were attributed to biomedical sector tenants (30.5% of 4Q17 gross income, and transport and storage (26.2% of full-year).


Balance sheet strength backs inorganic growth 

  • Aggregate leverage was 33.8% at end-FY17 vs 31.8% at end-Dec 2016 and 37.3% at end-FY16, with all-in borrowing costs at 3.0%. 
  • Hedged borrowing ratio was 78.9% from 82.7% at end-Dec 2016, with weighted average debt maturity at 3.3 years. AREIT sees SGD2.1b in available debt headroom (at 45% aggregate leverage) to support further inorganic growth initiatives, which we believe will remain tilted towards its key market segments.


Maintain BUY and SGD2.85 TP 

  • We have fine-tuned our model, and introduced FY20 estimates. We forecast NPI contribution from AREIT’s business parks and hi-specs properties to outpace growth in its broader asset portfolio, given stronger supply-demand visibility, and see margin improvement on the back of weaker asset conversion pressures with just 1.0% and 1.6% of leases expiring till FY19 due to single-tenanted buildings (STBs). Our DPU forecasts remain largely unchanged. BUY.
  • Our TP of SGD2.85 is based on a DDM model. We utilize a DDM-based valuation methodology for REITs given the reliance on underlying asset cashflows as a significant return component. 
  • Key assumptions in our valuation for AREIT include a risk-free rate of 2.5%, and a market risk premium of 6.5% against our beta assumptions.


Swing Factors


Upside

  • Earlier-than-expected pick-up in leasing demand driving improvement in occupancy.
  • Better-than-anticipated rental reversion trend.
  • Accretive acquisitions.

Downside

  • 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.




Chua Su Tye Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-04-26
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 2.850 Same 2.850



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