Ascendas REIT - CIMB Research 2017-01-25: All the right moves

ASCENDAS REAL ESTATE INV TRUST A17U.SI

Ascendas REIT - All the right moves

9MFY3/17 DPU of 11.89 Scts (-0.5% yoy) was slightly ahead of our expectation and consensus at 79% of our full-year forecast. 3QFY17 was at 27%.
Portfolio occupancy improved 1.1% qoq to 90.2%. Singapore achieved +3% weighted average rental reversion.
As at end-Dec 16, aggregate leverage was reduced to 31.8% (end-2QFY17: 34.2%), though we expect it to increase to c.35% at end-FY17.

We think that Ascendas REIT (AREIT) has been making all the right moves, with the exit from China and deepening its reach in Singapore and Australia.
After a YTD 6% run-up in share price, we maintain Hold with a higher DDM target price (S$2.31).

AREIT achieved a 3QFY17 DPU of 3.99 Scts, up 1.2% yoy. The favourable yoy effect was partly due to the provision of S$8.4m performance fees in the same quarter last year, partially offset by the higher interest expense in 3QFY17.
The yoy improvement was also due to contributions from the acquisition of the Australian portfolio and ONE@Changi City, partially offset by the divestment of A-REIT City @Jinqiao, Ascendas Z-Link and Four Acres Singapore.

Portfolio occupancy improved 1.1% pts qoq to 90.2%. Singapore occupancy rose by 20bp qoq to 88.1%, mainly due to new take-ups at 40 Penjuru Lane and Pioneer Hub.
Australia occupancy rose 3.3% pts qoq to 97.5% as the manager leased some of the vacant space at 62 Stradbroke Street in Brisbane in the quarter. Singapore achieved +3% weighted average rental reversion. We continue to expect modest rental reversion.
6% of portfolio GRI is up for renewal for the remainder of FY17; 19.1% is due in FY18.

As at end-Dec 16, aggregate leverage has declined to 31.8% with divestment proceeds from A-REIT City @ Jinqiao (divested for S$221.6m) and exchangeable collateralised securities (ECS) conversion into units.
We expect gearing to increase to c.35% at end-FY17 when the acquisition of 12, 14 and 16 Science Park Drive (price tag of S$420m) is expected to be completed.
Also, we note that the exchange period for the ECS ended on 17 Jan, and the S$300m ECS has been fully converted into units.

We think that AREIT has been making all the right moves, with the exit from China (which we view as non-core) and extending of its market leadership in Singapore business parks. In particular, the three science park buildings offer long WALEs and low tenancy risks.
Lastly, AREIT has deepened its reach in Australia with the acquisition of its first business park in the country for S$149m in Sep 16.
It is also redeveloping two projects (20 Tuas Ave 1 and 50 Kallang Ave) and one AEI worth a total of S$114.3m.

We raise our FY17-19F DPU by 2.9-3.4% on higher NPI margins and lower financial expenses (the reason for the outperformance). Accordingly, our DDM target price is also lifted. However, given the YTD 6% run-up in share price, we maintain Hold on the stock.
Upside/downside risks hinge on favourable/unfavourable acquisitions and better leasing demand in Singapore. We estimate that AREIT has debt headroom of S$0.8bn to reach 40% gearing.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2017-01-25

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 2.31 Up 2.250