Ascendas REIT (AREIT SP) - Maybank Kim Eng 2017-07-28: Steady As She Goes

Ascendas REIT (AREIT SP) - Maybank Kim Eng 2017-07-28: Steady As She Goes ASCENDAS REAL ESTATE INV TRUST A17U.SI

Ascendas REIT (AREIT SP) - Steady As She Goes


1Q18 in line, best-leveraged to sector recovery 

  • AREIT’s 1Q18 results were in line with our estimates, with DPU of SGD4.05cts up 4.3% YoY and 5.3% QoQ. This was driven by its Singapore and Australia acquisitions and higher portfolio occupancy, while strength in its business parks and integrated development underpinned a +1.7% rental reversion against softer sector fundamentals. 
  • We have kept our forecasts largely unchanged. 
  • AREIT remains the best-leveraged industrial REIT play into a sector recovery, as the tapering-off of new supply in 2017 should benefit its well-entrenched business parks and hi-spec industrial properties. 
  • With debt headroom estimated at 14-27% of its market cap, we see DPU upside from potential acquisitions. Reiterate BUY with unchanged DDM-based TP of SGD2.90.


Operating improvements, acquisition traction 

  • Revenue and NPI rose 2.7% and +2.6% YoY respectively, on the back of its Singapore (Science Park Drive) and Australia (197-201 Coward St in Sydney, 52 Fox Drive in Melbourne) acquisitions. 
  • Portfolio occupancy at 91.6% was up QoQ and YoY (from 90.2%, 88.2% respectively), on new leases at 50 Kallang Avenue (100% following its AEI), 40 Penjuru Lane (95.1%), and Pioneer Hub (99.3%). 
  • As mentioned, AREIT saw +1.7% rental reversion, mainly from its Singapore business parks (+3.7%) and the Aperia integrated development (+13.3%), which offset the weaker light industrial (-4.0%) and logistics (-2.0%) segments. The transport & storage sector contributed to new leases in Singapore (39.8% of gross income).


BS strength backs further acquisition growth upside 

  • Aggregate leverage was 33.9% (vs 33.8% in 4Q17), with all-in-borrowing costs down (from 3.0% last quarter) to 2.9%, hedged borrowing ratio at 72.2% (from 78.9% at end-Mar 2017), and wt. average debt maturity at 3.3 years. 
  • We estimate AREIT has SGD1.1b/2.1b in available debt headroom (at 40%/45% aggregate leverage) to make further acquisition in to driving growth. This is both from its SGD1b sponsor assets and key overseas market segments, where fundamentals remain strong but yields are seeing compression due to keen investor appetite.


Forecasts, SGD2.90 TP largely unchanged, BUY 

  • We fine-tuned our estimates, and forecast the growth in NPI contribution from AREIT’s business parks and hi-specs properties will outpace its broader asset portfolio, given better supply-demand visibility. 
  • Also, we see margin improvement due to less asset conversion pressure with just 1.1% and 0.6% of leases expiring till FY19 due to single-tenanted buildings. 
  • Our DPU forecasts are largely unchanged. BUY.


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/ 2017-07-28
Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 2.900 Same 2.900



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