Ascendas REIT - CIMB Research 2016-10-21: Stable 2QFY17; factoring in full conversion of ECS

Ascendas REIT - CIMB Research 2016-10-21: Stable 2QFY17; factoring in full conversion of ECS ASCENDAS REAL ESTATE INV TRUST A17U.SI

Ascendas REIT - Stable 2QFY17; factoring in full conversion of ECS

  • 1HFY17 DPU of 7.9 Scts (-1% yoy) was in line with our and consensus expectations at 51% of our FY17F. 2Q17 DPU of 4.03 Scts (-3% yoy) was at 26%.
  • Portfolio occupancy improved to 89.1%. Singapore rental reversions were softer at +0.9%.
  • AREIT deepened its reach in Australia with total investments of S$174.3m. It also divested Ascendas Z-link for S$154.9m.
  • Going forward, we expect the REIT to reposition its older Singapore properties.
  • Downgrade from Add to Hold as overhang from ECS could cap near-term share price performance.

2QFY17 boosted by NPI margin expansion 

  • Excluding the one-off distribution in 2QFY16 – in relation to the non-deductibility of certain upfront financing fees from prior years – 2QFY17 DPU grew 3.6% yoy to 4.03 Scts. 
  • Growth was mainly boosted by the acquisition of the Australian portfolio and ONE@Changi City. 
  • 2Q17 revenue increased 12.5% yoy and NPI grew 23% yoy on lower utilities and property tax expenses. 
  • Consequently, 1HFY17 NPI margin expanded to 73.1% (1HFY16: 68.3%).

Portfolio occupancy improved to 89.1% 

  • AREIT’s portfolio occupancy improved to 89.1% (1QFY17: 88.2%) due mainly to Australia. 
  • Australian occupancy improved 3.3% pts qoq to 94.2%, thanks to a new takeup at 494-500 Great Western Highway. The property was vacated in the prior quarter by Linfox. 
  • Singapore occupancy was down by 40bp qoq to 87.9% due to non-renewals at 40 Penjuru Lane and Pioneer Hub. These two properties are logistics assets which face the most supply pressure among the other industrial sub-assets in Singapore.

Singapore rental reversions were softer at +0.9% 

  • Weighted average rental reversion in Singapore were softer at +0.9%, Business and Science Parks achieved +2.8% rental reversion but Hi-Specs Industrial experienced - 1.1% rental reversion (tenants traded down in a softer market) while logistics assets experienced -4.8% reversion. 
  • About 12% of Singapore’s GRI is up for renewal in 2HFY17. Of which, 2% of the GRI relates to seven STBs (single-tenant buildings). Two have been renewed, three are likely to renew and the remaining two are not likely.

Deepening its reach in Australia 

  • AREIT has further deepened its reach in Australia with the acquisition of its first business park in the country (187-201 Coward Street) for S$148.6m and the forward purchase of a logistics property (Stage 4, Power Park Estate) for S$25.7m. Posttransaction costs, both acquisitions are expected to generate an initial NPI yield of 6.5%.
  • They were partially funded by the S$150m rights issue. It has also divested Ascendas ZLink in China for S$154.9m and brought down gearing to 34.2% (1Q17: 37%).

Expect further repositioning of older Singapore assets 

  • Going forward, we expect AREIT to selectively expand its Australia portfolio and rejuvenate and reposition its older Singapore properties. The REIT embarked on a new AEI at 50 Kallang Avenue for S$45.2m to convert the property to an MTB.

Factoring in full conversion of the ECS; downgrade to Hold 

  • While AREIT’s portfolio has been stable, we think that overhang from the Exchangeable Collateralised Securities (ECS) could cap share price performance in the near-term. To date, S$183.25m of ECS has been exchanged to 90.6m new units. 
  • With ECS in-the-money and expiry in Jan 17 (exchange price of c.S$2.02/unit), we believe that the remaining amount would be converted to new units. This explains our DPU cuts and resulting drop in our DDM target price (from S$2.61 to S$2.47). With this, we downgrade to Hold from Add.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2016-10-21
CIMB Research SGX Stock Analyst Report HOLD Downgrade ADD 2.47 Down 2.610