Ascendas REIT - Heading Towards An Inflection Point
- Stable 4Q17 results.
- Operational metrics improving with potential upside from its ability to re-let close to 12% vacant space in its portfolio.
- Low gearing provides dry powder for acquisitions.
Maintain BUY, TP maintained at S$2.65.
- We continue to like Ascendas REIT (A-REIT) for its solid yield of close to 6.2% with upside from potential acquisitions yet-to-be priced in, supported by a conservative leverage level of c.34%.
- The ability of the Manager to drive value and growth through various market cycles is a testament of the portfolio’s resilience.
Stable results with improved balance sheets.
- A-REIT reported results that were slightly ahead of estimates.
- Gross revenues and net property income grew by 2.4% y-o-y and 7.4% in 4Q17, driven mainly by completed acquisitions in Singapore and Australia. This was supported by
- still positive portfolio rental reversions of 3.1% in FY17, and
- improving occupancy rates which bodes well for the REIT in the medium term.
- The ability of the REIT to re-let close to 12% of vacant space in its portfolio will provide potential upside to earnings and re-rate the stock.
Conservative capital management provides strong financial flexibility.
- The Manager remains on the lookout for acquisitions in Singapore and Australia to complement a fairly flattish rental outlook. A-REIT’s low gearing of c.33.4% in FY17F empowers the REIT to undertake more acquisition opportunities when they come available.
- Our DCF-based TP is maintained at S$2.65.
- 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 c > 80% of its interest cost hedged into fixed rates.