Category: A-REIT
A-REIT – Maybank Kim Eng
Steady as she goes
- FY3/14 results in line with market expectations.
- AREIT still has SGD135.3m worth of development and asset enhancement works due for completion in 2Q14-4Q15, which should help buffer downside risks.
- Reiterate HOLD with a DDM-derived TP of SGD2.31.
Results in line with expectations
AREIT’s FY3/14 revenue grew 6.6% YoY to SGD613.6m, bolstered by rental income from The Galen, which was acquired at end-FY3/13, Nexus@one-north and A-REIT City@Jinqiao. Full-year DPU rose 3.6% YoY to 14.24 cts. Although AREIT achieved 14.8% positive rental reversion for leases renewed in FY3/14, management expects the trend to moderate in FY3/15E, with demand slowing and new industrial space supply coming up. About 21.3% of its property income is due for renewal this year. The all-in-financing cost for 4QFY3/14 averaged 2.7% (4QFY3/13: 3.3%) with an average term of debt of 3.3 years. According to AREIT’s interest rate sensitivity analysis, its DPU would decline ~1%, or 0.16 cts, for every 50bps increase in interest rate.
Buffered downside
AREIT still has SGD135.3m worth of development and asset enhancement works, which are scheduled for completion in 2Q14-4Q15. We believe this would help buffer the downside risks should property prices be recalibrated due to the impending hike in interest rates. Management also announced redevelopment works for C&P Logistics Hub and Techlink/Techview, costing SGD61.9m. The works will complete by 4Q15, adding another 25.9k sq m to its GFA. We adjust our FY3/16E-17E DPU marginally to factor in the enhancement works. We forecast 3.9% DPU CAGR for FY3/14-17E. Maintain HOLD with a DDM-derived target price of SGD2.31 (previously SGD2.30).
SREITs – CIMB
Who is the strongest of them all?
Given the strong fundamentals, we are of the view that the S-REIT market is well positioned against potential interest rate hikes. Though we maintain a Neutral view on the sector, we believe REIT such as FCT is more resilient than others and offer stable yields amid a rising interest rate environment.
Amid a rising interest rate environment, we examined the resilience of the S-REITs under our coverage through analysing their respective 1) gearing, 2) debt profile, 3) sensitivity of DPS to rising interest rates, and 4) current yield spreads. Our top pick remains FCT (TP: S$2.05) for its defensiveness and strong fundamentals. Our other favourites include AREIT and CDL-HT.
A well-positioned sector
Rising leverage ratios and interest rates are commonly deemed to be the key detrimental factors to the S-REIT market. Our interest rate sensitivity study revealed that the DPS for REITs could be negatively impacted by 1.8% in FY15 and 1.7% in FY16, if interest rates were to rise by 50bp p.a. over the next three years. On this basis, we are of the view that the DPS paid out by the S-REIT sector could still be sustainable amid a potential hike in interest rates going forward.
Stronger debt profile
Although the S-REIT sector leverage ratio at 33.4% is similar to the level before the global financial crisis of 2008, debt profiles are fundamentally stronger now in light of the 1) longer debt profile, 2) larger diversity of sources of funds, and 3) amount due to be renewed is less ‘lumpy’, accounting for less than 30% of the total debt (as a sector) due for refinancing in any one year – the risks for refinancing are relatively low, in our view.
Favour FCT
Although we remain Neutral on the S-REIT sector on the back of a rising interest rate environment, FCT remains our top pick for being the most defensive in terms of fundamentals. Similarly, AREIT has a strong defensive debt profile while CDL-HT currently offers the most attractive P/BV and biggest deviation from its historical yield spread.
A-REIT – CIMB
Positivity dampened
AREIT 3QFY14 revenue rose by 6.4% yoy while DPU fellby2.2% yoy.9MFY14DPUaccountedfor 77% of our FY14 forecast. As the industrial market in Singapore remains challenging and the rental market is expected to slow due to the high supply, we have lowered our FY14/15 revenue forecast by 1.4% and raise our risk-free rate by30bp to 3.7% to account for a higher interest rates environment. Maintain Hold rating with a slightly lower DDM-based (discount rate: 7.7%) target priceof S$2.36.
Stable set of results
Ascendas REIT (AREIT) recently reported 3QFY14 revenue of S$154.4m (+6.4% yoy) and DPU of 3.54Scts (-2.2% yoy) as a result of the dilution from the 160m unit placement in Mar 2013. The higher revenue was mainly attributed to the additional contribution from The Galen, Nexus@one-north and A-REIT City@Jinqiao, as well as the positive rental reversions on renewal. AREIT’s portfolio occupancy was 89.7% in 3QFY14, slightly lower than the 90.1% in 2QFY14 due to the addition of c.25,000 sq m from its newly acquired properties and completed AEIs.
Change in management fee structure
AREIT announced that it would change the structure of both its base and performance fees in favour of unitholders. Under the new structure, effective from FY14/15, base fees will be adjusted to 0.5% of deposited properties less derivative assets and investment properties under development. On the other hand, performance fees will ensure that unitholders will enjoy a minimum 2.5% growth in DPU if Tier 1 fees kick in or 5.0% if Tier 2 fees kick in (Figure 5).
Maintain Hold due to challenging market
We remain cautious on the outlook for the industrial property sector, particularly for the business and science parks, and the high specification segment. These segments comprise 54% of AREIT’s portfolio. The business and science parks are expected to add 219,000 sq m (58% pre-committed) to FY14 supply, while the latter segment will add 228,000 sq m (64% pre-committed). Thus, we lower our FY14/15 revenue forecast by 1.4% and raise our risk-free rate by 30bp to 3.7% to account for a higher interest rates environment. Maintain Hold with a slightly lower DDM-based target price of S$2.36.
A-REIT – OCBC
Maintaining stable outlook
- 3QFY14 DPU down 2.2% YoY
- Positive revisions of 9.7% achieved
- Aggregate leverage robust at 30.7%
3QFY14 results within expectations
Ascendas REIT (A-REIT) reported 3QFY14 NPI of S$108.6m and distributable income of S$85.1m, up 3.7% and 4.9% YoY respectively. The growth was mainly due to higher rental income from The Galen, contribution from Nexus@one-north and A-REIT City@Jinqiao, and tax-exempt finance lease income received from a tenant. DPU for the quarter eased 2.2% YoY to 3.54 S cents due to a larger unit base, but was within our expectations given that 9MFY14 DPU of 10.69 S cents formed 75.6% of our full-year DPU forecast (75.3% of consensus).
Leasing activities remained healthy
As management has previously guided, the portfolio occupancy fell marginally from 90.1% in Sep 2013 to 89.7% due to non-renewal of tenants and a 1.7% increase in NLA following the completion of asset enhancement initiatives (AEIs) at 1 Changi Business Park Ave 1 and Techplace II. Nevertheless, leasing demand remained in the positive territory in our view, as A-REIT has continued to reduce its lease expiries (5.3% of FY14 rental income left for renewal vs. 10.5% a quarter ago). In addition, positive rental reversion averaging 9.7% was still achieved for the quarter. While there could be further transitory occupancy pressure for the rest of FY14, A-REIT maintains that positive reversions are still expected, while upside in NPI is possible as the vacant spaces are leased out in due course.
Maintain BUY
A-REIT also proposed some changes to its fee structure – a move we view positively as it would reduce the fee payable to the REIT Manager in favour of unitholders with effect from FY15. In addition, A-REIT will make distributions on a semi-annual basis to align with the payout from its China properties (currently on semi-annual distribution) and reduce the volatility seen in its quarterly DPU. For the quarter, A-REIT announced one new AEI – S$44.6m rejuvenation work at The Alpha. Aggregate leverage is expected to remain healthy at 30.7% after funding the committed investments. We are keeping our FY14 forecasts unchanged as the results were within view. However, we trim our fair value from S$2.45 to S$2.40 on higher equity risk premium. Maintain BUY.
A-REIT – MayBank Kim Eng
Buffered for downside
- 3QFY3/14 results in line with market expectations.
- AREIT still has SGD93.6m worth of development and asset enhancement works, which are scheduled for completion in 1Q14-2Q15, serving as buffers for downside risk.
- Capital value still at risk. We see AREIT’s success closely intertwined with Singapore’s economic restructuring efforts. We reiterate HOLD with unchanged TP of SGD2.30.
Results in line with expectations
AREIT’s 9M revenue grew 6% YoY to SGD154m, constituting 76% of our and 74% of consensus estimates. The rise was attributable to rental income earned from The Galen, which was acquired at the end of FY3/13, rental income from Nexus@one-north, A-REIT City@Jinqiao and finance lease interest income received from a tenant. 9M DPU stayed flattish at 10.69 cents, forming 73% of our and 75% of market forecasts. AREIT achieved positive rental reversion in 3QFY3/14, averaging 9.7% across all segments of the portfolio. AREIT also announced a SGD11.1m asset enhancement work, The Alpha, with expected completion by Mar 2014.
Remain negative on industrial REITs
We see industrial REITs facing major downside risks from the impending hike in interest rates and possible recalibration of over-inflated property prices – both of which can drag NAV down. Other challenges include a fragile global macroeconomic outlook and ample supply in the pipeline. Iskandar Malaysia will also pose competition in the medium term, especially for lower value-added industrial activities within Singapore. We maintain HOLD with an unchanged DDM-derived target price of SGD2.30.