Ascendas REIT - OCBC Investment 2016-10-21: Growing its portfolio inorganically

Ascendas REIT - OCBC Investment 2016-10-21: Growing its portfolio inorganically ASCENDAS REAL ESTATE INV TRUST A17U.SI

Ascendas REIT - Growing its portfolio inorganically

  • 2QFY17 recurrent DPU grew 3.6% YoY.
  • Softer rental reversions in Singapore.
  • Improved gearing ratio.

2QFY17 results in-line with our expectations 

  • Ascendas REIT (A-REIT) reported its 2QFY17 results which met our expectations. Gross revenue jumped 12.5% YoY to S$205.4m. 
  • DPU fell 3.1% YoY to 4.03 S cents, but this was because 2QFY16’s DPU was boosted by a one-off S$6.5m (~0.271 cents/unit) distribution of taxable income from operations arising from a rollover adjustment related to a ruling by IRAS on the non-deductibility of certain upfront fees incurred in FY09/10 for certain credit facilities. If we exclude this, A-REIT’s 2QFY17 recurrent DPU would have grown by 3.6% YoY. 
  • On a 1HFY17 basis, A-REIT’s gross revenue increased 13.7% to S$413.0m and formed 49.4% of our full-year forecast. DPU of 7.912 S cents was down 1.1% (but recurrent DPU rose 2.4%) and constituted 51.0% of our FY17 projection.

Growing its portfolio inorganically 

  • Operationally, A-REIT registered positive rental reversions of 0.9% for its Singapore portfolio, as positive rental uplifts for its Business & Science Parks (+2.8%) and Light Industrial (+0.3%) segments were partially offset by Hi-Specs Industrial (-1.1%) and Logistics & Distribution Centres (-4.8%). 
  • Overall portfolio occupancy was 89.1% (+0.9 ppt QoQ). 
  • During the quarter, A- REIT announced its maiden business park acquisition in Sydney, Australia, and a forward purchase of a logistics property in Melbourne, Australia, for an aggregate purchase consideration of A$168.2m.

Maintain BUY 

  • We pare our FY16 and FY17 DPU forecasts by 1.6% and 5.0%, respectively, as we assume full conversion of A-REIT’s Exchangeable Collateralised Securities into new units. However, we also lower our cost of equity assumption from 7.5% to 7.2% to take into account A-REIT’s healthier balance sheet (gearing lowered from 37.0% to 34.2%), more diversified portfolio and reduced exposure to China, an emerging market. Consequently, our fair value estimate increases marginally from S$2.66 to S$2.67. 
  • Despite our lower DPU projections, A-REIT still offers investors an attractive distribution yield of 6.4% for FY17F and FY18F. It is also trading at a yield spread of 456 bps against the Singapore Government 10-year bond yield, which is ~0.3 standard deviation above the 5-year mean. 
  • Maintain BUY.

Wong Teck Ching Andy CFA OCBC Investment | http://www.ocbcresearch.com/ 2016-10-21
OCBC Investment SGX Stock Analyst Report BUY Maintain BUY 2.667 Up 2.660