Ascendas REIT (AREIT SP) - UOB Kay Hian 2017-10-31: 2QFY18 Awaiting Industrial Recovery

ASCENDAS REAL ESTATE INV TRUST A17U.SI

Ascendas REIT (AREIT SP) - 2QFY18 Awaiting Industrial Recovery

Ascendas REIT's results are in line with expectations. Although business park rents in city fringe have turned around, factory and warehouse space are still facing supply-side challenges in Singapore.
Management seeks prudent expansion opportunities outside Singapore, with Australia proving to be an interesting market with similar risk/reward attributes.

After the abrupt resignation of Mr Chia Nam Toon, AREIT is finding its next CEO.
Maintain BUY with an unchanged target price of S$2.97.

Results in line; maintain BUY with a target price of S$2.97, based on a two-stage dividend discount model (required rate of return: 6.4%, terminal growth rate: 1.8%).
2QFY18 DPU of 4.059 S cents was up 1.1% yoy. 2QFY18 gross revenue and NPI grew 5.1% and 5.3% respectively, due to higher contributions from newly-acquired properties in the past year (namely 12,14 and 16 Science Park Drive in Singapore, 197-201 Coward Street in Sydney, and 52 Fox Drive Dandenong South in Melbourne) and partially offset by divestment of A-REIT City @Jinqiao as well as decommissioning of 50 Kallang Avenue for asset enhancement works. The results are in line with expectations, coming in at 49.7% of full-year estimates.

Overall portfolio occupancy improved yoy and qoq to reach 92.0% in 2QFY18 (vs 2QFY17: 89.1%, 1QFY18: 91.6%).
The Singapore portfolio occupancy improved to 90.1% in 2QFY18 (vs 89.2% in 1QFY18), mainly due to improved occupancies from expansions and take-up at LogisTech (from 79% to 94%), 40 Penjuru Lane (from 95.1% to 97.5%) and 2 Senoko South Road (from 72.9% to 91.3%).
In Australia, occupancy declined slightly to 98.7% (vs 99.8% in 1QFY18)., due to a nonrenewal at 1A & 1B Raffles Glade in Sydney. A replacement lease has been secured for that space which will start in 3QFY18.

The Singapore portfolio had 3.1% reversion for leases renewed in multi-tenant buildings during 2QFY18, while no leases were renewed for the Australia portfolio. Management expects rent reversion to be flat, or subdued, in view of new supply of industrial properties coming on board (backed by the government’s vision to establish a stable and sustainable industrial property market in Singapore).
Gearing improved marginally to 33.1% during the quarter (1QFY18: 33.9%), providing about S$1b in headroom to make DPU-accretive acquisitions. Borrowing costs remained stable at 2.9% (1QFY18: 2.9%). About 8.1% and 15.4% of the leases by gross revenue are due in FY18 and FY19 respectively.

The S$90.3m acquisition for 100 Wickham Street acquisition in Queensland was completed on 25 Sep 17, while the divestment of 13 International Business Park and 10 Woodlands Link were completed at more than 10% above their book value on 24 Aug 17 and 12 Jul 17 respectively. Finally, new asset enhancement project included The Gemini (S$7.6m capex) was completed on 17 Aug 17.

As a Singapore-anchored REIT, management has recognised early the limitations that the Singapore market has in terms of size and more recent policies pertaining to new lease terms (only 30 years). In order to grow prudently, management continues to look at acquisition opportunities where risk and return are similar. From that perspective, Australia has been an interesting market.
In the last two years, AREIT has managed to grow its Australia portfolio to S$1.4b in assets (around 15% of overall portfolio). Although management has plans to increase the overseas exposure to 30%, it will also depend on how the landscape evolves over time.

On 20 Oct 17, Mr Chia Nam Toon resigned as CEO, citing personal reasons. The resignation has led to a succession process, with the internal and external candidates being reviewed for qualities, such as leadership, and the relevant technical expertise (familiarity with Singapore property market and REIT landscape).
AREIT has reassured investors that business is running as usual, helmed by an experienced and competent management team in place.

According to CBRE, although islandwide vacancy for business parks rose slightly from 3Q17 by 0.2ppt to 12.1%, business park rents across the city fringe edged up 0.9% to S$5.55 psf pm while that for the rest of island stayed flat at S$3.70 psf pm. Supply-side is supportive of fundamentals due to the relatively small business park projects in the pipeline, most of which is pre-committed.
Demand for business parks, however, has dampened partly due to tenants recentralising to the CBD with the correction in office rents. The pick-up in office rents eventually will spill over to the business park space.
Challenging outlook for factory and warehouse segments. Upper-floor factory rents saw the sharpest decline with a 5.2% drop from the previous year and 1.6% drop from the previous quarter, according to CBRE. Management noted that the industrial property sector continues to face headwinds from new supply which has resulted in higher islandwide vacancy rate of 11.4% in 3Q17.

Maintain BUY and target price of S$2.97, based on DDM (required rate of return: 6.4%, terminal growth: 1.8%).

Vikrant Pandey UOB Kay Hian | Loke Peihao UOB Kay Hian | http://research.uobkayhian.com/ 2017-10-31

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 2.970 Same 2.970