Ascendas REIT - DBS Research 2017-07-28: The Chanel Bag Of REITs

Ascendas REIT - DBS Vickers 2017-07-28: The Chanel Bag Of REITs ASCENDAS REAL ESTATE INV TRUST A17U.SI

Ascendas REIT - The Chanel Bag Of REITs

  • AREIT's 1Q18 DPU came in strongly.
  • Occupancy rate bottoming out; rental reversions stable.
  • Pricing in S$200m in acquisitions; low gearing to prompt manager to actively manage its leverage 
  • BUY call maintained with higher TP of S$2.85.



What’s New 


Ascendas REIT (A-REIT) is like a “Chanel Bag” among Singapore’s REITs. 

  • Priced at a premium but still desirable to many. 1QFY18F DPU of 4.05 scts (4.3% y-o-y) is commendable, thanks to its diversified and sizeable portfolio. 
  • One of the few REITs that offer strong earnings visibility, as well as ability and propensity to acquire assertively. Maintain BUY! 

Summary: 1Q17 DPU of 4.05 Scts slightly ahead.

  • Ascendas REIT (A-REIT) reported a good set of results, posting growth of 4.3% in 1Q18 DPU to 4.049 scts, which represents close to 25% of our forecasts.
  • Gross revenues and net property income increased by 2.7% and 2.6% y-o-y to S$213.3m and S$153.4m, respectively. This was mainly driven by the contributions from acquisitions completed in the last financial year – DNV/DSO (Feb’17) and 3 properties in Australia. These properties more than compensate for the loss of income contribution from the sale of its 2 properties in China as well as the decommissioning of 50 Kallang Avenue for asset enhancement works.
  • Distributable income is up 10.9% at S$118.5m, which includes a tax adjustment of close to S$5.9m from the previous year; stripping that out, distributable income would have increased a more modest 6%, which is commendable in itself.
  • Gearing remains low at 33.6%, with strong financial metrics. All-in interest cost fell to 2.9% (from 3.0%).

Operational performance remains strong 

  • Portfolio occupancy remained stable at 91.6%, which is a marginal improvement y-o-y and q-o-q.
  • Singapore: In Singapore, A-REIT’s “same store” occupancy rate was at 88.8% and 85.5% for its multi-tenanted buildings (MTB), 0.6ppt and 0.3ppt higher than a quarter ago. Rental reversions were a positive 1.1%, with Business Park (+3.7%) and Integrated facilities (13.3%) reporting strong results while the leases for its HiSpecs (-0.7%), Light Industrial (-4.0%) and Logistics (- 2.0%) remained weak due to pressures from excessive supply in the industrial space in Singapore.
  • Australia: Its Australian portfolio was substantially full with long leases (weighted average lease expiry of 5.5 years), implying strong earnings visibility. Rental reversions for leases that expired was a positive 3.5%.


Outlook 

  • Looking ahead, while we see dissipating supply risk in the industrial sector, we expect rental reversions to remain mixed, and at best flat, for close to 12% of its income expiring in the rest of FY18F. 
  • We note that expiring rents across its Singapore portfolio are either at/above market transaction levels, implying that organic growth will continue to remain modest.
  • Rental escalations from its Australian portfolio (c.3.0%) will continue to offer stable growth in distributions in the medium term.


Pricing in acquisitions, raising TP of S$2.85/unit.

  • Acquisitions will be a key driver of growth and we believe that A-REIT, trading at an implied cap rate of 5.6%, can deliver value-accretive acquisitions to drive DPU growth in the future.
  • Supporting the REIT’s inorganic growth ambitions will be a lowly-geared balance sheet of 33.6%. while an equity issuance at current levels could help support more meaningful deals.
  • We have priced in S$200m (nil previously) in our acquisition forecasts (@6.0% cap rate).
  • Our TP is raised to S$2.85/unit. Maintain BUY, given a total return of 11%.


Where we differ. 


Conservative estimates but see upside bias if acquisitions are executed upon. 

  • 1Q18 DPU remains strong and momentum could surprise, and given the REIT’s leading operational scale in Singapore and its focus on the business park space (37% of earnings), we believe that it is in a strong position to deliver stable returns. In fact, we see ample opportunities that the Manager can deliver earnings surprise on the back of 
    1. the REIT’s ability to re-let close to 12% of vacant space in its portfolio, and 
    2. acquisitions which the street has not priced in.

Gearing up to acquire; potential fund raising to strengthen the balance sheet. 

  • The Manager remains on the lookout for acquisitions in Singapore and Australia to complement a fairly flattish rental outlook. 
  • While A-REIT’s low gearing of c.35% offers ample headroom, the strong share price performance (implied yield of c.5.9%) means that new equity could also be issued to fund any meaningful acquisition opportunities.



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 with fixed rates.




Derek TAN DBS Vickers | Singapore Research Team DBS Vickers | Mervin SONG CFA DBS Vickers | http://www.dbsvickers.com/ 2017-07-28
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.85 Up 2.780



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