Ascendas REIT (AREIT SP) - UOB Kay Hian 2018-01-26: 3Q17 Results In-line

Ascendas REIT (AREIT SP) - UOB Kay Hian 2018-01-26: 3Q17 Results In-line ASCENDAS REAL ESTATE INV TRUST A17U.SI

Ascendas REIT (AREIT SP) - 3Q17 Results In-line

  • Ascendas REIT’s results were in line with our expectations. 
  • Overall rental reversions came in at 3.1%, with the Singapore portfolio seeing a 5.8% reversion for leases renewed in multi-tenant buildings. 
  • Maintain BUY with a target price of S$3.05.

Ascendas REIT (AREIT SP/ Rating: BUY / Target Price :S$3.05)

Results in line with expectations; maintain BUY

  • Results in line with expectations; maintain BUY with an unchanged target price of S$3.05, based on DDM (required rate of return: 6.4%, terminal growth: 2.0%). 
  • 3QFY18 DPU of 3.970 S cents was down marginally by 0.6% yoy. 3QFY18 gross revenue grew 4.1%, mainly due to new acquisitions of DNV/DSO in Singapore, 52 Fox Drive, Dandenong South in Melbourne, 100 Wickham Street in Brisbane and 108 Wickham Street in Brisbane and completion of redevelopment works at 50 Kallang (since Jul 17). But these were partially offset by the divestment of A-REIT City @ Jinqiao in China as well as 10 Woodlands Link and No.13 International Business Park in Singapore. 
  • Excluding effects of adjustment to property taxes in 3QFY17, net property income would have increased by 4.7%. 
  • The results were in line with expectations, with 9MFY18 DPU coming in at 74.1% of our full-year estimate.

Overall portfolio occupancy declined to 91.1% (vs 92.0% in 2QFY18).

  • The Singapore portfolio occupancy declined to 88.8% (vs 90.1% in 2QFY18), due to lower occupancies at 40 Penjuru Lane, Techpoint and The Alpha. Management is already negotiations with prospective tenants for these vacant spaces. 
  • The Australian portfolio occupancy declined slightly to 98.5% (vs 98.7% in 3QFY18), due to the termination of a licence space at 162 Australis Drive in Melbourne.

Acquisition of 108 Wickham St for A$106.2m (S$109m) is expected to be yield- accretive. 

  • 108 Wickham St has an NPI yield of 6.1% (post transaction costs), and pro-forma DPU yields are estimated at 0.17% for FY17, assuming a funding structure of 40% debt and 60% equity. 
  • The property is freehold, fully occupied, with a NLA of 128,230sf, has a built-in annual rental escalation of between 3-4%, and WALE of 6.7 years. Key tenants include ARUP (a MNC professional and consultancy firm), and the State of Queensland (Department of Health). 
  • 108 Wickham St is AREIT’s third suburban office in Australia, and also located next to its recently acquired suburban office property, 100 Wickham Street.

Positive overall rental reversions of 3.1%. 

  • The Singapore portfolio had a 5.8% reversion for leases renewed in multi-tenant buildings in 3QFY18. Going forward, management expects rent reversion to be flat, or subdued, in view of new supply of industrial properties coming on board as well as lower anticipated demand. 
  • Meanwhile, the Australia portfolio saw negative rent reversions of 1.0%.

Gearing increased marginally to 35.2%

  • Gearing increased marginally to 35.2% during the quarter (2QFY18: 33.1%), providing debt headroom of S$0.8b to make DPU accretive acquisitions. 
  • 70.5% of the borrowings are on fixed rate loans, which in our view provides stability in terms of interest expenses going forward.

AREIT helmed by new CEO. 

  • Within months of Mr Chia Nam Toon’s resignation, the board has appointed Mr William Tay Wee Leong as its new CEO. Mr Tay brings with him strong real estate and investment management expertise, which were honed over the course of leading and growing cross-border teams, regional investments and projects with the Ascendas-Singbridge Group. 
  • As a very experienced internal candidate with good track record, we believe Mr Tay will continue to manage AREIT’s growth seamlessly.

Declining industrial rents for Singapore, amid weak demand. 

  • Industrial rents weakened across the board on a qoq and yoy basis, with the sharpest decline in upper floor factory rents (-4.6% yoy and -4.6% qoq), according to CBRE. They noted tenants relocating from older buildings to newer developments, taking advantage of the prevailing competitive rents. 
  • Overall demand for industrial space remained sluggish, as industrialists continued to hold back on expansion due to increased use of automation and JTC's restrictions on subletting. Only certain sub-sectors like high-tech (with requirements to house assembly facilities and clean rooms) and automobile (with plans to grow regional distribution channels of automobile parts) were showing appetite for expansion.

Vikrant Pandey UOB Kay Hian | Loke Peihao UOB Kay Hian | http://research.uobkayhian.com/ 2018-01-26
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 3.050 Same 3.050