Ascendas REIT - DBS Research 2018-04-24: Future Proofing Its Portfolio

Ascendas REIT - DBS Vickers 2018-04-24: Future Proofing Its Portfolio ASCENDAS REAL ESTATE INV TRUST A17U.SI

Ascendas REIT - Future Proofing Its Portfolio

  • Ascendas REIT FY18 DPU in line with estimates.
  • Improved portfolio metrics with firepower to grow; manager targets to deepen presence in core markets.
  • Exploring opportunities in other developed markets in the USA and Europe which offer attractive returns with similar risk profiles.
  • Target Price raised to S$3.00 as we roll forward valuations.



Maintain BUY, Target Price raised to S$3.00.

  • Ascendas REIT (A-REIT) remains one of the must-haves among Singapore REITs
  • Priced at a premium, A-REIT offers a steady c.1% growth in DPU backed by a solid portfolio with the ability to acquire creatively. 
  • Maintain BUY!


Where we differ - Conservative estimates but see upside bias if acquisitions materialise. 

  • FY18 DPU was in line and the momentum could surprise in FY19, and given the REIT’s leading operational scale in Singapore and its focus on the business park space (37% of earnings), which is in a strong position to capture the changing needs of doing business in the “New Economy”. 
  • In fact, we see ample opportunities for the Manager to deliver earnings surprises which include 
    1. the REIT’s ability to re-let close to 12% of vacant space in its portfolio, and 
    2. acquisitions which the street has not priced in.


Exploring new markets. 

  • The Manager also alluded to potentially diversifying into new markets in Europe and the USA, which in their view, are developed markets that offer similar risk profiles as its current stronghold in Singapore. 
  • While there are abundant opportunities available, the Manager remains disciplined in its investment approach, which we believe is to buy more “income producing” assets rather than speculative builds.


Valuation:

  • Our DCF-based Target Price is raised to S$3.00 as we roll forward valuations. 
  • Maintain BUY on the back of total potential returns of c.15%.


Key Risks to Our View:

  • Interest-rate risk. An increase in lending rates will negatively impact dividend distributions. However, A-REIT's strategy has been to actively manage its exposure and it currently has c.80% of its interest cost hedged with fixed rates.



WHAT’S NEW - Future Proofing its portfolio


Gross Revenues and net property income ended the year higher. 

  • A-REIT reported full year revenues that was 3.8% higher y-o-y at S$862.1m and net property income 3.0% higher at S$629.4m. While the REIT had 131 properties at the end and start of the financial year, higher revenues was achieved through active portfolio reconstitution where the Manager shifted the portfolio mix towards higher yield assets. 
  • The increase came from 3 properties acquired in Australia, which offset the 3 properties divested in Singapore. The completion of the asset enhancement at 50 Kallang Avenue and The Gemini also contributed to higher revenues.
  • Distributable income grew by 4.9% to S$468.0m, translating to a DPU growth 1.6% y-o-y to 15.988 Scts (4Q rose 1.5% y- o-y), in line with expectations.

Improving portfolio metrics: 

  • Portfolio occupancy rate improved to 91.5% (vs 90.2% in Mar’17, 91.1% in Dec’17). The steady take-up rates were mainly due to higher occupancies at Techpoint, 20 Tuas Avenue 6 and Xilin Districentre Building D. Demand for space came from a wide spectrum of industries consisting of Transport, Biomedical, Precision Engineering, etc. In Australia, occupancy levels remained strong at c.98.5%.
  • Rental reversions positive. While rental reversions for the year came in 0.8% higher y-o-y, 4Q18 reversions was 6.8% lower mainly due to a major lease expiry at the Hi-Tech segment (- 18.8% drop in rents) which was a showroom unit and likely to be one-off. The forward outlook for rental reversions appear to be brighter with the Manager seeing good demand and compressing leasing spreads (passing vs market levels).

Stable financial metrics. 

  • Balance sheet remains healthy with aggregate leverage remaining at a conservative 34.4%, with a well staggered debt expiry profile of 3.2 years. In the quarter, the REIT issued a new S$200m 7-year MTN at 3.14% (SOR + 70 bps) representing still strong demand for quality paper in the current environment.
  • While the expected hikes in interest rates will have an impact on distributions, we note that the REIT has close to 71.9% of the interest cost hedged into fixed rates. In fact, with topline expected to still generate growth in the coming years, we believe this will more than compensate the risk of rising interest rates. Every 0.5% hike in overall interest costs will decrease distributions by 1.1%.

Plans to “future proof portfolio”. 

  • New CEO, Mr. William Tay outlined his plan to drive value for A-REIT in the future which hinges on the REIT’s core values of creating value for unitholders through active asset management to reposition the assets to remain relevant to changing tenant needs while also looking to scale up and deepen its presence in its core markets of Singapore and Australia through value-accretive acquisitions. 
  • A-REIT’s gearing of 34.4% empowers the REIT with more than S$1bn in firepower to capture any opportunities.

New markets for growth. 

  • The Manager also alluded to potentially diversifying into new markets of Europe and the USA, which in their view, are developed markets that offer similar risk profiles as its current stronghold in Singapore. 
  • While there are abundant opportunities available, the Manager remains disciplined in their investment approach. The preference is to buy “income” in these new markets, which imply that the REIT will unlikely take on speculative ventures.





Derek TAN DBS Vickers | Carmen TAY DBS Vickers | Mervin SONG CFA DBS Vickers | http://www.dbsvickers.com/ 2018-04-24
SGX Stock Analyst Report BUY Maintain BUY 3.00 Up 2.850



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