Singapore REITs - UOB Kay Hian 2016-10-21: 3Q16 Results Of AREIT (In Line), Suntec (Below) And ART (In Line)


REITs − Singapore - 3Q16 Results Of AREIT (In Line), Suntec (Below) And ART (In Line)

  • AREIT’s results came in within our expectations. Rental reversions remain positive, though at a slower pace. Maintain BUY on AREIT with an unchanged target price of S$2.84. 
  • Suntec REIT’s results came in below expectations due to lower contributions from Suntec City as retail and commercial rents continue to ease. Maintain HOLD on Suntec with a target of S$1.90. 
  • ART’s results came in within our expectations. Maintain BUY with a target of S$1.37. Maintain OVERWEIGHT.


  • Ascendas REIT (AREIT), Suntec REIT and Ascott REIT (ART) have reported their quarterly results.


Ascendas REIT (AREIT SP/BUY/S$2.43/Target:S$2.84)

Results in line with expectations. Maintain BUY with a target price of S$2.84

  • Results in line with expectations. Maintain BUY with a target price of S$2.84, based on a two-stage dividend discount model (required rate of return: 6.4%, terminal growth rate: 1.5%). 
  • 2QFY17 DPU of 4.03 S cents was down 3.1% yoy, due to last year’s one-off distribution from a tax writeback. Excluding this, 2QFY17 DPU was up 3.6% yoy. 
  • 2QFY17 saw gross revenue increase by 12.5% yoy from contributions by the acquisition of the Australian portfolio and ONE@Changi City while net property income expanded 23.1% yoy on lower property expenses (-9.9% yoy). The results came in within our expectations, with 1HFY17 DPU representing 50.5% of full-year forecast.

Slowing positive rental reversions in Singapore

  • Slowing positive rental reversions in Singapore, at +0.9% for 2QFY17 (1QFY17:+4.1%), as previously guided for. Management continues to anticipate zero to low-single reversions going forward, as average passing rents are near spot market rents. 
  • Singapore Hi-specs industrial and Logistics & Distribution centres saw a respective -1.1% and -4.8% in reversions in the quarter. These segments account for 32% and 36% of Singapore expiring leases due in FY17 and FY18 respectively. 
  • While witnessing slower renewals this year, AREIT intends to leverage on the group’s marketing strength in attracting new MNC leases.

Well-spread out lease expiry profile

  • Well-spread out lease expiry profile, with 10.5% of assets by rental income due for renewal in FY17, and 19.6% due in FY18. Of the seven Singapore single-user assets (1.7% of overall expiries) due in FY17, only two non-renewals are expected (two renewed, three likely to). 
  • Management also expects upside upon backfilling of the 12.1% vacant space in its Singapore portfolio.

AEI and capital recycling activities. 

  • The quarter saw commencement of a new AEI at 50 Kallang Avenue for S$45.2m to convert the property from a multi-tenant to a single- user asset. The redevelopment is slated for completion in 2Q17. 
  • AREIT also completed the divestment of Ascendas Z-link for S$154.9m (RMB760.0m), realising capital gains of about S$95.6m over the original cost of investment.

Strategic expansion of business park footprint as the micro-market registers muted supply and healthy pre-commitments. 

  • AREIT is likely to be a beneficiary of tight business park space, with CBRE estimating no known notable uncommitted supply going forward. CBRE also purports signs of leasing interest from IT and pharmaceutical firms (Pfizer and Service Source) at the 1.1m sf (NLA) Mapletree Business City (MBC) Phase II (expected completion 2Q16). APACMed has also signed up for space at Ascendas- Singbridge’s 387,500 sf (by NLA) project Ascent.

Acquisition strategy. 

  • Management’s preferred target geography remains Singapore. The REIT manager has not ruled out further expansion of its Australian footprint (13% of AUM), and has remained open to potential acquisitions in China.

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 bear a fixed coupon of 1.60% p.a and are exchangeable by the ECS holders into new units at the adjusted exchange of S$2.0142. As at Aug 16, about S$157m of the ECS have been converted into new units.

SUNTEC REIT (SUN SP/HOLD/S$1.73/Target: S$1.90)

Results marginally below expectations, maintain HOLD with DDM-based target price of S$1.90.

  • Results marginally below expectations, maintain HOLD with DDM-based target price of S$1.90 (required rate of return: 6.7%, terminal growth: 1.7%). 
  • Suntec REIT reported a 3Q16 DPU of 2.53 S cents, up 0.5% yoy. 
  • Excluding capital gains distribution, DPU would have been up 1.6% yoy. 3Q16 saw gross revenue and net property income register respective declines of 4.3% yoy and 2.1% yoy, due to absence of contributions from Park Mall, which was divested last year, as well as lower contributions from Suntec City. 
  • The results came in marginally below expectations, with 9M16 accounting for 72% of full-year estimates, due to lower contributions from Suntec City. 
  • We lower our FY16 DPU estimates by 1.3%, factoring in a decline in contributions from Suntec from lower rent assumptions. 
  • Contributions from Southgate and 177 Pacific Highway will mitigate the impact forward.

Bulk of expiring office and retail leases in 2016 forward renewed. 

  • Management’s proactive leasing strategy has left a paltry 0.4% in office leases by NLA due in 2016, with 12.2% office leases by NLA up for renewal in 2017. 
  • Despite the upcoming office supply glut, management remains confident of 2017’s office leasing outlook (334,931 sf due), pointing to its past track record when new competing space at next door South Beach and vacancies at Millenia Tower & Centennial Tower had hit the market. 
  • Expiring retail leases have also seen active renewal efforts, with 2.4% by NLA left in 2016 and 22.9% in 2017. Management’s strategy remains one of driving occupancy levels to sustain operating performance.

Continued pressure on retail rentals, but expected to stabilise going forward. 

  • Overall committed portfolio rents continued to decline in 3Q16, slipping 3.4% qoq to S$11.19 psf pm. Management observed the most weakness from fashion tenants. 
  • Management focus has been on driving shopper traffic and tenant sales tapping on multiple touchpoints and strengthening tenant mix with flagship shops and new to market concepts (eg: Xiaomi, Bed Bath N table). 
  • Management expects retail performance to start recovering in six months on the back of improving shopper traffic that is up 20% yoy to about 3.5m a month.

Nascent signs of office rental stabilisation. 

  • According to CBRE, Grade-A office rentals declined 2.1% qoq in 3Q16 to hit S$9.30 psf pm (18.4% decline from 1Q15's peak of S$11.40 psf pm). However, we note that the Grade-A rental decline on a qoq basis had slowed in 3Q16. 
  • In 3Q15-2Q16, Grade-A rents witnessed qoq declines ranging from 3.5- 4.8%. 
  • Singapore's largest office projects Marina One (1.9m sf) and Guoco Tower (0.89m sf) have been gaining momentum on the leasing front. Pre-leasing at Marina One stands at about 35.3% (including Julius Baer's reported take-up of 100,000 sf), while Guoco Tower is now 80% committed (tenants: Agoda, Danone and Straits Trading). 
  • Office leases were signed at S$8.78 psf pm during the quarter(2.3% qoq, -4.7% yoy)

Acquisition of Southgate Complex in Australia is expected to complete in Dec 16. 

  • While refraining from revealing estimated yield on cost figures, management nevertheless expects DPU accretion of about 1.2% post acquisition , and a 0.7% increase in PBT . We expect accretion to come from the use of debt. 
  • We estimate the acquisition cap rate to be in the 5.5%-5.8% range. 
  • Post acquisition, Australia is expected to account for about 6.6% of total portfolio value, from its current about 5.2%.

Ascott Residence Trust (ART SP/BUY/S$1.135/Target:S$1.37)

Results in line with expectations; maintain BUY with an unchanged target price of S$1.37

  • Results in line with expectations; maintain BUY with an unchanged target price of S$1.37, based on a two-stage dividend discount model (required rate of return: 7.7%, terminal growth rate: 1.7%). 
  • ART reported 3Q16 DPU of 2.35 S cents (+14% yoy). This was underpinned by foreign loan repayment from proceeds from Fortune Garden Apartments. 
  • 3Q16 gross revenue and gross profit increased 9% and 4% yoy respectively, primarily due to acquisitions in 2015 and 2016. On a same-store basis, 3Q16 gross profit declined 3% yoy.

Sector outlook.

  • In the UK (10% of AUM), operating performance remained stable post the Brexit referendum, with occupancy of above 80% underpinned by continued corporate demand. 
  • Management expects the surge in tourist arrivals to the UK to cushion the impact of softening corporate demand, noting that while average length of stay for corporates tends to be higher, leisure travellers are subject to higher room rates in the absence of corporate packages or deals.

Limited debt headroom implies asset recycling and equity fund raising. 

  • Given that debt headroom remains limited (gearing at 41%), equity fund raising to finance the potential acquisitions is quite likely. 
  • We also do not rule out capital recycling through potential divestments of non-core assets. This could likely include rental housing assets in Japan (six were divested last year), underperforming China assets or even assets in France with expiring master leases.

To support potential acquisitions. 

  • Management had previously highlighted the likelihood of footprint expansion in the US. 
  • In Europe, we note that the sponsor Ascott Ltd has been acquiring assets in Germany and Paris, which we reckon could require 6-9 months to see performance stabilise before potential injection of these assets into ART. 
  • Ascott Orchard Singapore, which Ascott REIT has entered into a forward contract to acquire upon completion, has recently obtained its temporary occupation permit in Oct 16 and is on track for delivery in 2017.

Master leases expiring end-17. 

  • Four of its 17 master-leased assets in France (10.8% of portfolio value) are up for renewal (for another nine years) by end-17. These represent 42.7% of 2015 master lease rental income and about 7% of total revenue. 
  • Management had previously stated that it will be entering negotiations to renew these leases in 1Q17. Given the recent volatility in Europe (Nov 15 terror attacks in Paris), we reckon terms entered into could be less favourable. 
  • As mentioned, we also opine a few of these French assets could be divested for capital recycling.

Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2016-10-21
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.840 Same 2.840
HOLD Maintain HOLD 1.90 Same 1.90
BUY Maintain BUY 1.37 Same 1.37