Ascendas REIT - DBS Research 2017-01-25: Asset recycling strategies yield higher returns

ASCENDAS REAL ESTATE INV TRUST A17U.SI

Ascendas REIT - Asset recycling strategies yield higher returns

Ascendas REIT (A-REIT) offers attractive yields of close to > 6.5% to investors looking for steady returns in the current volatile market.
A low leverage of 35% supports any potential M&A activities.

We continue to like AREIT for its exposure in the Business Parks/Science Parks Space segment. The recent acquisition of three properties at a price of S$420m. The acquisition ticks most of the boxes – long lease tenure (16.5 years with annual escalations of 2.0%-2.5%), long unexpired land lease tenure (65.7 years), and offers investors a deeper exposure to a sector (R&D) that continues to grow.
The yield of 6.0% (all-in cost) appears low at first glance but we believe it reflects the properties’ relatively young age (2.0 years) and long land lease tenure. Accretion is projected to be marginal at 0.5% for FY18F.

A-REIT stands tall in the face of rising interest rates this year with a spread-out debt expiry profile of 3.8 years, implying that the REIT does not face any major refinancing in any one year.
The Manager has adopted a prudent interest rate risk management strategy with a weighted average cost of debt of 3.0% with > 80% hedged into fixed rates.

Our DCF-based TP is maintained at S$2.65 as a result of additional contribution from acquisitions.
Maintain BUY on the back of total potential returns of c.15%

An increase in lending rates will negatively impact dividend distributions. However, A-REIT's strategy has been to actively manage its exposure and it currently has > 80% of its interest cost hedged into fixed rates.

Derek TAN DBS Vickers | Mervin SONG CFA DBS Vickers | Singapore Research Team DBS Vickers | http://www.dbsvickers.com/ 2017-01-25

DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.650 Same 2.650