A-REIT – CIMB

Stable within an out-of-favour sector

AREIT’s 1QFY3/15 revenue rose 8.1% while DPU increased 2.5% yoy. 1QFY15 DPU was in line at 24% of our full-year forecast. As the industrial market in Singapore remains challenging on the back of tight governmental policy, we maintain our Hold rating, with an unchanged DDM-based (discount rate: 7.7%) target price of S$2.40.

Stable operations

Ascendas REIT’s (AREIT) 1QFY15 earnings were in line with estimates, with revenue and distributable income both accounting for 24% of our full-year estimates. Positive rental reversion of 11.8% was achieved during the quarter. AREIT’s portfolio occupancy dipped slightly to 88.1% (from 89.6% in 4QFY14) as the leases of two single-tenanted buildings expired during the quarter. Since then, one of the properties has achieved an occupancy rate of 61.2% while the other fully pre-committed. With these leases, overall occupancy will climb back to 90.1%.

Strong balance sheet

During the quarter, AREIT acquired the Hyflux Innovation Centre for S$191.2m, completed its asset enhancement works at 5 Toh Guan Road East, divested 1 Kallang Place for S$12.6m, and fully refinanced its CMBS due in 2014. As a result, leverage ratio stayed strong at 31.6% (vs. 30.0% in 4QFY14) while debt maturity extended from 3.3 years to 3.7 years. All-in borrowing costs remained steady at 2.7%. As at end-1QFY14, c.70% of total debt is hedged under a fixed rate for an average of 3.5 years.

Maintain Hold

Of the leases due to expire in FY15, the spread between existing rates to average market rates is estimated to vary between <2.8% and c.15%. On this basis, we believe AREIT can achieve management’s guidance of a positive mid to high single-digit rental reversion for these leases, which account for 15.4% of its revenue. However, with JTC further tightening its subletting rule recently, we believe this sector is not attractive at the moment. Maintain Hold.