Ascendas REIT - Well-Positioned For Future Growth
- Maintain BUY, with a DDM-based TP of SGD2.73 (from SGD2.65, 7% upside).
- Despite the headwinds facing the industrial segment, Ascendas REIT is the best proxy among the big-cap REIT stocks due to its upbeat business parks segment. Thus, we expect positive rental reversions to continue.
- We also like its recent strategic move to hive off its China properties and increase its exposure to the Australian property market. With a comfortable gearing of 33.8%, there is more room for further acquisition-led growth.
- This is our Top Pick for the S-REIT sector.
Rental reversions to stay positive.
- Despite challenges facing the industrial segment, we expect Ascendas REIT to book positive rental reversions of 2-5% for FY18 (Mar).
- About 16.6% of its leases (as a percentage of gross income) are due for renewal this year, with the bulk coming from Singapore. Of these, 43% of the expiring leases are in the business and science park segments – which we are positive on. We expect these to mitigate the negative rental reversions expected in the logistics and warehouse segments.
- For 4QFY17 and FY17, its rental reversions were at +3.2% and +3.1% respectively.
Tail-end of its single-tenant to multi-tenant buildings conversion cycle.
- Only 3.2% of its Singapore assets are single-tenant user buildings that are up for renewal in the next three years. As we increasingly believe the REIT’s Singapore portfolio is at the tail-end of the conversion cycle, we do not expect this to drag EBIT margins and rental rates.
- Management noted that most of its assets already comply with JTC’s requirement (effective 2018) of an anchor tenant occupying 70% of the building’s space. It is actively working with tenants of the remaining few non-compliant assets to be in line with the requirement.
Slight pick-up in industrial demand.
- Overall, the outlook for the industrial segment remains cautious but management expects to see a slight pick-up in demand, especially from multi-national corporations expanding in Singapore. However, with the supply of industrial space staying high (except for the business park segment), rental rates are likely to remain under pressure.
- In 4QFY17, key sources of new demand for its assets in Singapore came mainly from the biomedical and IT sectors.
Acquisitions still focused in Singapore.
- Its near-term focus would be more on re-developing and enhancing assets to boost returns. Management still sees some acquisition opportunities in Singapore despite the weak environment.
- In Australia, yields have narrowed in key cities, making accretive acquisitions slightly more difficult. In FY17, its acquisitions were worth SGD565.6m in Singapore and Australia, and it divested all three of its China assets for SGD407.6m.
- Currently Singapore accounts for 86% of its portfolio value, and Australia, the remainder.
- A comfortable gearing level of 33.8% offers > SGD1bn in debt headroom for acquisitions (assuming a comfortable gearing of 40%).
Maintain BUY with a higher TP of SGD2.73.
- We nudge up our FY18F-19F DPU by 1%, factoring in higher occupancy rates for its business park space.
- Our DDM-derived TP is based on a CoE of 7.5% and terminal growth of 1.5%.
- The stock currently offers FY18F-19F yields of 6.3%/6.4% respectively.