Ascendas REIT (AREIT SP) - Maybank Kim Eng 2017-10-31: Another Steady Quarter

ASCENDAS REAL ESTATE INV TRUST A17U.SI

Ascendas REIT (AREIT SP) - Another Steady Quarter

Ascendas REIT (AREIT)’s 2Q18 was in line with our estimates, with DPU of SGD4.06cts, up 1.1% YoY and 0.2% QoQ. This was driven by its S’pore and Australia acquisitions and higher portfolio occupancy. Its S’pore assets achieved a +3.1% rental reversion, underpinned by positive reversions across all segments, with its integrated development, amenities & retail at +11.3%.

We expect AREIT’s recently-completed No.100 Wickham Street acquisition, its first in FY18, to further strengthen its Australian growth mandate.
We raised DPUs by 2-3% and DDM-based TP to SGD3.00. BUY.

The performance in 2Q18 was on the back of its 12, 14 & 16 Science Park Drive acquisition in S’pore, and 197-201 Coward Street (Sydney), and 52 Fox Drive, Dandenong South (Melbourne) in Australia. Its S’pore portfolio occupancy improved QoQ and YoY to 90.1%, with expansions and new take-ups at LogisTech (from 79.3% to 94.4%), 40 Penjuru Lane (95.1% to 97.5%) and 2 Senoko South Road (72.9% to 91.3%).
Australia occupancies dipped slightly, down QoQ from 99.8% to 98.7%. Management attributed this to a non-renewal lease at 1A &1B Raffles Glade (Sydney), which was backfilled with its new lease to contribute in 3Q18. S’pore saw a +3.1% rental reversion on its business & science parks (+3.4%), light industrial (+3.5%), and integrated development, amenities & retail (+11.3%).

Aggregate leverage fell QoQ from 33.9% to 33.1%, with all-in-borrowing costs stable at 2.9%, hedged borrowing ratio at 79.3% (from 72.2% at end-Jun 2017), and wtd. average debt maturity at 3.3 years.
AREIT has an estimated SGD1.0b in available debt headroom at 40% aggregate leverage in furthering its acquisition-led growth. We expect these to remain biased towards its key geographies, with Australia potentially contributing up to 30% of AUM over the longer term (from 15% currently).

We revised our model to include AREIT’s AUD83.8m (SGD90.3m) No. 100 Wickham Street (Queensland) acquisition, which closed on 25 Sep 2017, and two S’pore divestments completed during the quarter, which yielded SGD44.1m. Our DPUs are raised 2-3% and TP from SGD2.90 to SGD3.00.
We see limited operational risks with its recent CEO departure, as during the interim, leadership falls upon board member Mr Manohar Khiatani, JTC’s ex-CEO, to be supported by an experienced management team.

Earlier-than-expected pick-up in leasing demand driving improvement in occupancy.
Better-than-anticipated rental reversion trend.
Accretive acquisitions.

Prolonged slowdown in economic activity could reduce demand for industrial space, resulting in lower occupancy and rental rates.
Termination of long-term leases contributing to weaker portfolio tenant retention rate.
Sharper-than-expected rise in interest rates could increase cost of debt and negatively impact earnings, with higher cost of capital lowering valuations.

Chua Su Tye Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2017-10-31

Maybank Kim Eng SGX Stock Analyst Report BUY Maintain BUY 3.00 Up 2.900