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.

Good acquisition but limited impact

AREIT announced the proposed acquisition of HIC for a purchase consideration of S$191.2m. Although we view this acquisition positively, the impact on DPU is small, estimated at 0.8%-1.6% in FY15 and FY16, respectively. Maintain Hold with a slightly higher DDM-based (discount rate of 7.6%) target price of S$2.40 as we adjust earnings slightly higher.

What Happened

Ascendas REIT (AREIT) announced the proposed acquisition of Hyflux Innovation Centre (HIC) for a purchase consideration of S$191.2m. The property is located at Kallang Industrial Estate and is within three minutes walk to Boon Keng MRT station. The asset comprises a 10-storey high-specification building with a basement and surface car park. HIC has a GFA of 467,520 sq ft, and a current occupancy of 83.9% with a tenure of 30 + 28 years 10 months from Feb 10. Upon completion of the acquisition on 30 Jun 14, 50% of the property’s GFA will be leased back to the vendor and Hydrochem Pte Ltd for 15 years, with an annual rental step-up pegged to CPI. In addition, rental support for the remaining vacant space will be provided by the vendor for three years.

What We Think

We view this acquisition positively as it is expected to generate an NPI of 6.98% in the first year and boost DPU by 0.8%-1.6% in FY15-FY16, respectively. In addition, income support for the unoccupied space for three years will ensure income stability while the manager seeks potential tenants. Based on our estimation, income will be supported at c.S$4psf/mth, a level which is slightly higher than the average S$3.0-3.5 psf/mth for high-spec. industrial buildings. However, given the prime location of this property we believe a passing rent of S$4 psf/mth is sustainable. In terms of funding, given a leverage ratio (as at 31 Mar 14) of 29.5%, we believe AREIT will finance this acquisition mostly, if not entirely, by debt. Upon completion of the acquisition, AREIT’s leverage ratio is expected to creep up slightly to a very manageable level of 31.4%.

What You Should Do

Maintain Hold rating with a slightly higher DDM-based TP of S$2.40 despite our positive view on the acquisition as the impact on DPU is immaterial.

Room to manoeuvre

• 4QFYMar14 results in line
  
• Organic growth underpinned by positive rental reversions; Aperia acquisition on track in 1QFY15
  
• Maintain BUY, TP raised to S$2.47
  

Highlights

4Q14 results in line. A-REIT’s 4Q14 DPU of 3.55 Scts (+5.3% y-o-y) brings DPU for the full year to 14.2 Scts, within our estimates. 4Q14 topline and net property income came in 8% and 12% higher y-o-y at S$156.5m and S$112.3m, respectively. This was largely due to contributions from an expanded portfolio (105 properties v 102 properties a year ago), supported by organic growth of c.1.9% y-o-y. Rental reversions remained robust, with an uplift of c. 14.8% owing due to low passing rents. Occupancy rates remained stable at 89.6%. Distributable income was 22% higher at S$85.2m (inclusive of tax imcome from prior periods/capital distribution) due to (i) payment of performance fee of S$6.9m in 4Q13 but nil in 4Q14 and (ii) lower interest expenses.

NAV higher by c.1.5% to S$1.98. This was brought about by revaluation gains from A-REIT City @ Jinqiao and slight compression in portfolio cap rates to 6.57% (vs 6.6% in FY13).

Our views

Steady organic growth to compensate for margin pressure. We expect A-REIT to continue reporting positive rental reversions from the renewal of c. 21.6% of its income in FY15, however uplifts in rents are expected to be more moderate in the mid to high single digit range. We believe this will more than compensate for expected hikes in operating costs (utilities/maintenance contracts) and nil vacancy refunds going forward from the tax authorities. As a result, net property income margins are expected to remain flattish.

Visible pipeline and proposed acquisition of Aperia in 1QFY15 to drive growth. A-REIT’s potential to grow inorganically is strong through (i) an active pipeline of development and committed asset enhancement projects (AEI) worth S$106.5m (added new development projects – C&P Logistics Hub and Techlink and Techview); and (ii) proposed acquisition of Aperia in 1Q15. Management gave an update that Aperia property is on track to achieve TOP by 1Q15 and is 40% pre-committed at this point. The Manager is expected to acquire the remaining stake from the vendor. We estimate the trust will have sufficient debt-headroom to fund these initiatives and should see gearing settle at c34%.

Recommendation

Maintain BUY, TP raised to S$2.47. A-REIT’s is expected to offer steady and resilient earnings. TP is raised to S$2.47 as we roll forward our valuation base. Maintain BUY for a total return of c. 12%.

As steady as it gets

AREIT’s 4QFY3/14 revenue rose by 7.7% and DPU by 16.0% yoy. FY14 DPU was in line at 101% of our FY14 forecast. As the industrial market in Singapore remains challenging on the back of relatively high supply, we maintain our Hold rating with an unchanged DDM-based (discount rate: 7.7%) target price of S$2.36.

Strong portfolio…

Ascendas REIT (AREIT) reported 4QFY14 revenue of S$156.5m (+7.7% yoy) and DPU of 3.55 Scts (+16.0% yoy). The strong growth was mainly attributed to the new income contribution from The Galen, Nexus@One-North, A-REIT City@Jinqiao and Four Acres Singapore. Together, these new assets account for c.70% of the total growth, while other factors such as positive rental reversions due to renewals also contributed to the strong growth. AREIT’s portfolio occupancy held steady at 89.6% in 4QFY14, lower than the 94.0% in 4QFY13 due to the addition of c.114,500 sq m of NLA from its new properties. The cap rates for the period compressed slightly to 6.57% (vs. 6.6% in FY13), while the portfolio revaluation gained by S$131.1m.

… and balance sheet

The leverage ratio increased slightly to 30.0% from 28.3% in 4QFY13. This is expected to grow to 31.2% after funding the committed investments. To date, c.65% of the total debt due this year has been financed at a competitive rate. Currently, all-in borrowing costs remain steady at 2.7% (and is expected to creep up to c.2.8% after the refinancing of loans due this year), while c.65% of total debt are hedged under a fixed rate for an average of 3.5 years.

We maintain a Hold rating

We remain mildly cautious on its outlook with c.21.3% of total leases (as a percentage of AREIT’s property income) set to expire in FY14/15, coupled with rising operating expenses and a relatively large supply of industrial space. Having said that, any short-term drop in vacancy is expected to be mitigated by positive rental reversions. We expect it to achieve mid-to-high single digits for the renewed leases in the coming year. We maintain a Hold rating with an unchanged target price of S$2.36.

Expecting further upside

• 4QFY14 DPU up 16.0% YoY
  
• Positive revision of 14.8% achieved
  
• Aggregate leverage robust at 30.0%
  

Closing FY14 on positive note

Ascendas REIT (A-REIT) delivered a firm set of 4QFY14 results last evening. NPI grew by 12.2% YoY to S$112.3m, driven mainly by contribution from The Galen, Four Acres Singapore, Nexus@one-north and A-REIT City@Jinqiao. We note that no performance fee was payable for the quarter (versus S$7.0m fees registered in previous year), while a S$4.9m gain was clocked for the divestment of Block 5006 at Techplace II. In addition, A-REIT gained from distribution of income relating to its Ascendas Z-Link property in China. As a result, distributable amount and DPU increased by 23.9% and 16.0% YoY to S$85.3m and 3.55 S cents, respectively. This brings the full-year DPU to 14.24 S cents (+3.6%), largely in line with our projection of 14.13 S cents (consensus: 14.2 S cents).

Portfolio performance remained sturdy

We understand from management that there was a slowdown in leasing activity for the business/science park segment, while performance within the other property segments was generally stable. However, rents have been holding up well. Despite the impending increase in supply of industrial space in 2014, A-REIT expects the demand to remain healthy on the back of a tentative global recovery. As at 31 Mar, portfolio occupancy held steady at 89.6% (3Q: 89.7%). For FY14, positive rental reversion averaging 14.8% was also achieved. Going forward, A-REIT guided that positive reversion in the mid-to-high single digit is still anticipated, given that passing rents are below market rates.

Maintain BUY

A-REIT also announced two new asset enhancement initiatives (AEIs) this quarter, with the objective of maximising the plot ratio and improving the marketability of the properties. To date, total cost of committed AEIs amounted to S$106.5m. We also note that the acquisition of Kallang Ave development (~40% space committed) may happen soon as TOP is expected in 2QCY14.

We roll our valuation to FY15, while tweaking our assumptions to factor in potentially higher operating costs. Our fair value now increases to S$2.45 from S$2.40 previously. Maintain BUY.