Ascendas REIT - DBS Research 2018-01-26: Well-oiled machine continues to churn stable returns

Ascendas REIT - DBS Vickers 2018-01-26: Well-oiled machine continues to churn stable returns ASCENDAS REAL ESTATE INV TRUST A17U.SI

Ascendas REIT - Well-oiled machine continues to churn stable returns

  • Ascendas REIT's 3QFY18 DPU in line with expectations
  • Stable operating metrics; rental reversions remain positive
  • New CEO appointed from internal candidates
  • Maintain BUY, Target Price S$2.85

What’s New

3QFY18 DPU of 3.97 Scts in line. 

  • Ascendas REIT's 3Q18 gross revenues and net property income rose by 4.1% and 1.7% to S$217.3m and S$157.6m respectively. 
  • Higher revenues were largely due to acquisition of DNV/DSO in Singapore, 52 Fox Drive in Dandenong South in Melbourne, 100 Wickham Street in Queensland, and 197-201 Coward Street in Sydney. Contribution from these properties more than offset the divestment of two properties in China and two properties in Singapore. 
  • Net property income grew by a slower pace of 1.2% due to higher expenses incurred from an expanded portfolio while higher annual values resulted in higher taxes. DPU declined 0.6% y-o-y to 3.97 Scts due to higher unit base and one-off tax refund the prior year.

Stable operating metrics 

  • Ascendas REIT's portfolio occupancy rates remained higher y-o-y at 91.1% but was a slight dip on quarter. This mainly came from lower occupancy rates in Singapore at 88.8% (vs 90.1% in Sept’17) while Australia remained resilient at 98.5%. 
  • The REIT continues to attract demand from a wide spectrum of industries but we note that a majority of new demand was from firms in the Transport and Storage, Biomedical, and IT sectors.

Sustained rental reversion of 3.0%; ahead of “flattish guidance” 

  • Ascendas REIT's portfolio rental reversions for the quarter were higher at 3.1% (Singapore at +5.8%, ranging between 6.6% for business parks and 5.8% for Hi-Specs while Logistics facilities saw a 2.3% drop). Australian portfolio saw a 1.0% fall in reversions. 
  • Overall portfolio reversion was stable q-o-q, a positive sign in our view given the expectations that reversions could turn down or flattish. 
  • Portfolio weighted average lease expiry stands at 4.2 years with the REIT in negotiations to renew leases expiring in FY19.

Comfortable gearing level. 

  • Ascendas REIT's gearing inched higher to 35.2% but remains comfortable owing to debt funded acquisitions. Cost of funds remained stable at 2.9%. The REIT has a weighted average debt maturity of 2.8 years. 
  • Close to 70.5% of the REIT’s debt has been hedged into fixed rates, mitigating the impact of potential interest rate hikes on distributions.

New CEO. 

  • New CEO appointed. Internal candidates highlights the strong bench strength in Ascendas-Singbridge Group. Mr. William Tay has been appointed as the new CEO of A-REIT. 
  • Mr. Tay is currently the Deputy CEO of Singapore & South East Asia and CEO of Korea and has been with the group for more than 10 years.

Derek TAN DBS Vickers | Mervin SONG CFA DBS Vickers | http://www.dbsvickers.com/ 2018-01-26
DBS Vickers SGX Stock Analyst Report BUY Maintain BUY 2.850 Same 2.850