Ascendas REIT - CIMB Research 2017-04-26: Positioned for Growth

ASCENDAS REAL ESTATE INV TRUST A17U.SI

Ascendas REIT - Positioned for Growth

FY3/17 DPU of 15.74 Scts (+2.5% yoy) was in line with consensus and our expectations at 101% of our full-year forecast. 4QFY17 DPU was at 25%.
Portfolio occupancy remained flat qoq at 90.2%. AREIT achieved 3.1%/3.2% positive rental reversion for FY17/4QFY17.
Portfolio cap rate tightened 5bp yoy to 6.34%. NAV as at FY17 was S$2.06/unit.

AREIT has available debt headroom of S$1bn to reach 40% gearing. We think its gearing could drift upwards in the interim as it grows its AUM.
We maintain Hold with a higher DDM TP as the stock is trading above mean.

4QFY17 gross revenue grew by 2.4% yoy due to inorganic contributions from ONE@Changi City, the Coward St Business Park in Sydney and 12, 14 & 16 Science Park Drive (DNV/DSO) properties. NPI grew at a faster clip of 7.4% yoy due to lower property operating expenses. NPI margin for 4QFY17 was 73.7% (4QFY16: 70.3%).
With higher provision of performance fees in the prior period, distributable income increased by 26% yoy.
4QFY17 DPU grew by 2.5% yoy due to an expanded unit base.

Singapore occupancy improved by 50bp qoq to 88.6% due to the DNV/DSO properties and new take-ups at 40 Penjuru Lane and Pioneer Hub.
Australia occupancy fell by 120bp qoq to 96.36% due to the termination of a short-term licence space at 494-500 Great Western Highway, Sydney.
We understand that the manager is in talks with a prospective tenant to take up the vacant space.

AREIT achieved +3.1%/+3.2% average portfolio rental reversion for FY17/4QFY17. For the quarter, we note an 18.8% negative reversion for the logistics segment, underscoring the challenging environment. The manager expects flattish rental reversion for FY18.
16.6% of GRI will be due for renewal for FY18, with only 1% from STB.

AREIT’s AUM as at end-FY17 was S$9,874m. The portfolio cap rate tightened 5bp yoy to 6.34%.
We note that the REIT recorded net devaluation loss due to the reclassification of unamortised leasing fees and rent incentives as investment properties.

During the year, AREIT acquired over S$0.5bn of assets, comprising the DNV/DSO and Coward St properties. It also completed the forward purchase of Stage 4 Power Park Estate, Melbourne, in Apr 17 for S$26.5m. The property is 64% occupied.
The group also exited out of China and divested Four Acres.
Lastly, it undertook five AEI projects worth S$35.8m. As at Mar 17, there is one ongoing AEI and two re-development projects worth S$114.3m.

On the back of divestment proceeds, EFR and conversion of ECS, gearing improved to 33.8% (FY16: 37.3%). AREIT has available debt headroom of c.S$1bn to reach 40% gearing. We believe that it could let its gearing drift upwards to high-30s in the interim.
For FY18, we believe that AREIT could further deepen business park investments in both Singapore and Australia, and could also look at redeveloping Science Park as well as development opportunities in Australia (in light of cap rate compression).

While we deem that the group is in a great position to grow, valuations are not cheap (trading above mean), and the market could be pricing in forward accretive-acquisition assumptions to justify further upside. As such, we maintain Hold with a higher TP (S$2.59) as we roll forward our DDM valuation and lower our Singapore discount rate (in line with the sector).
We raise FY18-19 DPU by 1%.
Upside/downside risks hinge on Singapore/Australia industrials and acquisitions.

YEO Zhi Bin CIMB Research | LOCK Mun Yee CIMB Research | http://research.itradecimb.com/ 2017-04-26

CIMB Research SGX Stock Analyst Report HOLD Maintain HOLD 2.59 Up 2.310