ASCENDAS REAL ESTATE INV TRUST
ASCENDAS REIT
A17U.SI
Ascendas REIT (AREIT SP) - 4QFY16: Strategic Expansion Of Business Park Footprint
- Results in line with expectations.
- Despite positive rental reversions booked, management continues to guide for moderate rental reversions going forward, flagging the challenging leasing environment to contend with.
- Watch out for potential dilution (< 5%) in 4QFY16 DPU on book closure date should AREIT’s S$300m ECS be fully exercised.
- Maintain BUY with an unchanged target price of S$2.64.
RESULTS
• Results in line; maintain BUY with a target price of S$2.64.
- AREIT reported FY16 DPU of 15.357 S cents. The results were in line with expectations, coming in at 100.7% of our full-year estimates.
- 4QFY16 gross revenue and net property income grew 17.4% and 22.4% yoy respectively, on the back of the newly-acquired Australian portfolio, ONE@Changi and The Kendall.
- 4QFY16’s distributable income dipped by 0.2% yoy due to higher tax expenses.
- DPU of 3.41 S cents saw a decline of 8.1% yoy mainly due to performance fees payable to the REIT manager.
- Stripping that out would have led to a 1.3% yoy increase in 4FYQ16 DPU.
• Operational highlights.
- Overall portfolio occupancy dipped 1.6ppt qoq to reach 87.6% in 4QFY16 (3QFY16: 89.2%), on the expiry of a single tenant building in Singapore and completion of A-REIT Jiashan (0% occupied).
- Overall rental reversions saw positive growth of 5.1% in 4QFY16, (3QFY16: +7.3%) and 7.0% for the full year.
- Gearing remained stable at 37.2% during the quarter, (3QFY16: 37.3%).
- Borrowing costs also saw little change at 2.79% (3QFY16: 2.72%).
- About 19.4% and 20.5% of leases by gross revenue are due in FY17 and FY18 respectively.
• Potential dilution from Exchangeable Collateralised Securities (ECS) conversion.
- In 2010, AREIT issued S$300m in ECS to fund a collateral loan taken over 19 assets. The ECS are exchangeable by the ECS holders into new units at the adjusted exchange of S$2.0505 and are entitled to 4QFY16 distributions if exercised before book closure date on 13 May 16.
- AREIT has already received an Exchange Notice amounting to S$14m of the ECS, which translates to 6.8m new units. Assuming full conversion before book closure date at the conversion price, the additional 139.5m units to be issued would represent approximately 5% dilution in 4QFY16 DPU.
STOCK IMPACT
• Asset management update.
- Both the S$420m One@Changi City and A$79.2m (c.S$76.6m) Australian acquisition, 6-20 Clunies Ross Street, were completed on 1 Mar and 22 Feb 2016 respectively. The divestment of Four Acres Singapore (S$34m) was announced at a net gain of S$0.6m.
- New asset enhancement projects include AkzoNobel House (S$6.5m capex) and The Aries (S$4.7m capex), which should both see completion by 4Q16. The AEI at 2 Senoko, previous slated for completion in 1Q16, is now due in 2Q16, while Acer Building’s S$10.7m AEI and The Kendall’s S$1.6m façade uplift are still on track for 2Q16 and 3Q16 respectively.
• Challenging industrial sector outlook despite healthy reversions.
- Although rental reversions of 5.1% were seen this quarter, management has guided for moderate or near flattish reversions in the near term, remaining cautious on the sector outlook, citing the challenging leasing environment to contend with, and portfolio passing rents hovering near market rents.
- We note that JTC industrial property price and rental index declined by 2.5% and 2.7% qoq respectively in 1Q16. Of the 19.4% in leases due in FY17, 3.3% are single assets and the REIT manager is proactively working on the renewal of these leases (1 of the 7 assets already renewed, 3 likely to renew and 3 in negotiations).
• Portfolio expansion.
- Management has expressed that its focus will remain largely on Australia, and the possible expansion of its footprints in the geography. Domestically, new CEO Chia has not ruled out the redevelopment of Science Park 1 in conjunction with the Ascendas-Singbridge Group.
• Net revaluation loss of S$6.9m was booked
- Net revaluation loss of S$6.9m was booked, mainly attributable to a S$117m writedown of the Australian portfolio, as capitalisation of the portfolio acquisition cost, acquisition premium and higher stamp duty. This was offset by asset revaluation gains.
• Strategic expansion of business park footprint
- Strategic expansion of business park footprint as the segment remains a bright spot with no supply post 2016 and high pre-commitments. The completion of the One@Changi City acquisition has seen the business park share of AREIT’s total portfolio increase from 14% to 18% by asset value.
- According to CBRE, islandwide business park vacancy continued to remain relatively stable at 91.8% (4Q15: 91.2%), on the lack of notable new multi-user space. City fringe market rents have also stayed unchanged qoq at S$5.40 psf pm.
• As the micro-market registers muted supply and healthy pre-commitments.
- CBRE estimates 2016 business park pre-committed supply at 44% (no known notable supply after). We note that media reports in Feb 16 identified Johnson and Johnson possibly taking up 170,000 sf of space at business/science park Ascent as its first anchor tenant. The 387,500 sf (NLA) project by Ascendas-Singbridge is slated for completion in 2Q16.
- CBRE also purports signs of leasing interest from IT and pharmaceutical firms at the 1.1m sf (NLA) Mapletree Business City (MBC) Phase II (expected completion 2Q16).
EARNINGS REVISION/RISK
- We introduce our FY19 earnings estimates.
VALUATION/RECOMMENDATION
- Maintain BUY with an unchanged target price of S$2.64 based on DDM (required rate of return: 6.9%, terminal growth: 1.5%).
SHARE PRICE CATALYST
- Positive rental reversions, back-filling of vacant space (c.12%).
Vikrant Pandey
UOB Kay Hian
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Derek Chang
UOB Kay Hian
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http://research.uobkayhian.com/
2016-05-06
UOB Kay Hian
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