Value from enhancements

• Commendable 1Q14 results – in line
  
• New acquisitions, development projects to underpin a steady growth momentum
  
• Acquisitions if any, will be a positive surprise
  
• Maintain BUY, TP lowered slightly to S$2.50
  

Highlights

Commendable 1Q14 results. A-REIT’s 1Q14 results were in line, with gross revenues and net property income growing 6% and 7% to S$150.9m and S$108.0m, respectively. This was largely due to the acquisition of The Galen, supported by an organic uplift in rents. Rental reversions remained positive at c9.6% compared to previously contracted rents while occupancy rates dipped slightly to 93.6% due to conversion of certain singletenanted properties into multi- tenanted properties. Weighted allin cost declined slightly to 3.09% (vs 3.32%) but is expected to remain stable going forward. Distributable income came in 11.3% higher at S$85.2m, translating to a DPU of 3.55 Scts for the quarter (+0.6% due to an enlarged share base).

Recent completions to contribute positively. to earnings. The recent completion of Unilever Four Aces Singapore (a built-tosuit facility) and the acquisition of A-REIT City @ Jinqiao are expected to start kicking in from 2Q14. We note that there is a S$13.5m rental guarantee on the latter, which will mitigate any earnings downside. A-REIT has commenced leasing of the space, which is currently 3% leased with a further 20% of the space under negotiation.

Developments, acquisitions to drive earnings growth in FY14-15F. A-REIT has an active good pipeline of development and asset enhancement projects (AEI), with an additional 3 AEIs at Techquest, LogisTech and Corporation Place unveiled, costing cS$25.4m and will complete in 2Q14. Together with its other developments, A-REIT has an additional S$190.8m in investments (new and uncompleted projects) that have yet to be funded. Growth momentum will pick up from end of FY14F as these projects are progressively completed from 2HCY13. Amongst the development projects, Nexus@one-north, the largest development project in its pipeline (completing in 3QCY13), is seeing improving take-up rates, with reported occupancy of close to 58%.

Recommendation

BUY with revised TP of S$2.50. Our TP is revised to S$2.50 as we raised our risk free rate assumption (2.6% vs 1.8%). We continue to like A-REIT for its stability and attractive yield of c6.1- 6.5%. Upside to earnings will be acquisitions, which the manager is currently reviewing.

.SI Refer to important disclosures
at the end of this report

UNDER-RATED INDUSTRIAL BLUE CHIP

• Value emerges amid recent sell-off
  
• DPU and book value to remain stable
  
• Completed investments to add to income
  

Valuations looking compelling now

We are turning positive on Ascendas REIT (A-REIT). Its unit price has fallen by 22.7% from its peak of S$2.86 on 15 Apr (FTSE ST REIT Index: -14.9%), due partly to concerns on an early tapering of US Federal Reserve’s quantitative easing programme and accompanying hike in interest rates. At present, A-REIT is trading at 1.14x P/B, even lower than some of its peers’ P/B ratios in the industrial REIT space, which are hovering around the 1.2x mark. In addition, A-REIT’s forward DPU yield of 7.2% is comparable to the subsector average yield of 7.5%. This is despite the fact that A-REIT is the largest Singapore-listed industrial landlord by market cap and portfolio size (102 properties diversified across all property types), which should trade at a premium to its counterparts in our view.

Limited impact on DPU and book value

Based on our analysis on interest rates, we believe that the impact on A-REIT’s DPU and book value is likely to be limited, as a considerable 74.8% of its total debt is fixed and the weighted average term of debt is a long 3.9 years. Specifically, we estimate that a 1ppt increase in interest costs may likely lead to a 1.5% drop in our FY13F DPU – still within our comfortable range. We also observe that the cap rates for A-REIT’s portfolio has been tracking around circa 6.6%-7.4%, or at a relatively tight spread of 80bps, over 2008-12 despite the credit crunch. Hence, we believe that A-REIT’s asset values are likely to remain largely stable even if the rates face upward pressures.

Upgrade to BUY

A-REIT’s DPU is backed by healthy leasing demand and rental rates (positive rental reversions likely to persist in FY14, albeit at slower pace). A number of A-REIT’s committed investments are also expected to complete within the year, and will contribute positively to its FY14 rental income. We revise our fair value from S$2.63 to S$2.45 to reflect current higher risk-free rates but upgrade A-REIT from Hold to BUY on attractive upside potential.

Limited Impact From 6 Pioneer Walk Sale

Ascendas REIT (AREIT) recently announced that it has entered into a conditional sale & purchase agreement with GKE Private Limited (GKE) for the sale of 6 Pioneer Walk (Goldin Logistics Hub) for SGD32m. We maintain our NEUTRAL view on AREIT, with an unchanged DDM-based (COE: 7.3%, TGR1.0%) TP of SGD2.76.

Attractive selling price. We viewed this sale positively as the selling price represented a 42.2% and 30.1% premium over the original purchase price and book value of SGD22.5m and SGD24.6m respectively. As of 31 March 2013, 6 Pioneer Walk is currently a two-storey ramp-up warehouse with an adjoining office and 40 car park lots, and has a remaining land tenure of 23 years .

Minimal impact on earnings. With the sale, AREIT’s gross revenue and net profit interest (NPI) are expected to be reduced by SGD1.9m and SGD1.6m respectively. In relation to the trust’s earnings, this translates to a mere drop of c.0.3% in its gross revenue and NPI.

Use of proceeds from divestment. According to Management, the deployment of proceeds from this divestment has not been finalized. They may be used to repay AREIT’s existing debt or for general corporate and working capital purposes, and/or to distribute to unit holders.

Retain NEUTRAL outlook. As this sale is expected to have minimal impact on AREIT’s earnings and outlook, we are maintaining our NEUTRAL rating on this counter, with an unchanged TP of SGD2.76 on the back of: i) the lack of new sizeable potential acquisition targets, ii) the stock’s near-term dilution of c.7% as a result of the recent capital-raising exercise, and iii) the demanding valuation it is currently trading at (1.34x P/B and FY14’s forecasted dividend yield of 5.2%) vs the market cap weighted industrial REITs yield of 5.5%.

Valuations hitting a new peak

• 4Q13 results in line
  
• Developments, acquisitions to drive earnings growth in FY14-15F
  
• HOLD, TP raised to S$2.60
  

Highlights & Our views

Stable operational performance. A-REIT’s 4Q13 results were in line, with topline and net property income growth of 8.2% and 5.2% to S$145.4m and S$100.1m, respectively. This was largely due to contributions from its new investments, supported by an organic 2.7% uplift in its portfolio rents. Rental reversions remained robust, at c.14.5% (14% for FY13) due to low passing rents while occupancy rates were stable at c94%. Distributable income came in c5.5% lower after accounting for performance fees of S$68.8m. DPU for the quarter was 3.06 Scts. Rental reversions in the coming year are expected to remain decent due to positive spread between passing and market rents, which currently stands at c9-35%.

Developments, acquisitions to drive earnings growth in FY14-15F. A-REIT continues to keep an active pipeline of development and asset enhancement projects (AEI). As of Dec’12, the trust has an additional S$201.5m in investments (new and uncompleted projects) that have yet to be funded. We see opportunities to extract further growth from its existing assets, especially from various AEIs. In addition, contribution from recently acquired “The Galen” property will start contributing in the coming quarters. Phased completions of its various development and AEI projects in the subsequent quarters will see growth momentum picking up from end of FY14F. Our estimates have been updated for the recent placement and acquisitions and in addition, we have assumed an additional S$150m of acquisitions @ 6.5% yield by the end of FY14F.

Recommendation

Valuations hitting a new peak, HOLD, TP raised to S$2.60. Given its size, liquidity and established track record, we believe AREIT will continue to benefit from the liquidity-driven inflows into the S-REIT sector. The counter typically trades at a premium to S-REIT peers but is now at an historical high, which we believe is fair. Our TP is raised to S$2.60 due to higher acquisition assumptions and slightly lower discount rates. However, given that the total return is <10% to our TP, our call remains a HOLD.

Building for the long-term

4QFY3/13 was another positive quarter as AREIT executed its growth strategy well, aided by a portfolio of quality assets and past investments. With steady DPU growth and a defensive balance sheet, AREIT should benefit from the recent resurgence in demand for yields.

At 22% and 98% of our FY13 forecast, respectively, 4Q13 and FY13 DPU broadly met our and consensus forecasts, with the slight variance resulting from a performance fee. We nudge up our DPUs and DDM-based target price as we factor in the results and a lower discount rate of 6.4%. Maintain Outperform on the catalysts of accretive AEI and developments.

A steady quarter

AREIT put up a steady performance in 4QFY13. FY13 DPU was up 1.3% yoy and would have risen 3.6% if not for a one-off performance fee. Yoy growth came from an 11% rise in NPI as higher property taxes and other property expenses eroded part of a 14% revenue increase. The portfolio remained healthy with weighted average reversions of 14.5% in 4Q, just shy of 3Q’s 18.5% as portfolio occupancy remained a fairly healthy 94.0% despite increased conversion of single-tenanted buildings to multi-tenanted ones. Current market rents remain 9-35% higher than passing rents due for renewal in FY13/14, which coupled with AEIs to upgrade older assets, should position AREIT well for rental reversions.

Disciplined on acquisitions

Management continues to eye only quality assets for acquisition. Given elevated asset values, it believes that its competitive advantage lies in developments, aided by its fairly light balance sheet (30% asset leverage after committed investments). AREIT is also warming up to overseas acquisitions in Iskandar and China, with increased inclination towards developments to ensure asset quality. It announced a new BTS development of DBS Asia Hub Phase 2 in 4Q and continues to make leasing headway on past investments.

Maintain Outperform

With a quality asset portfolio, in-built growth as past investments come onstream and defensive capital management, AREIT should benefit from the recent hunt for yield.