Ascendas REIT

Ascendas REIT: (S$2.50) 2QFY16 core DPU in line on acquisitions and solid rental reversions

For 2QFY16, Ascendas REIT reported a stronger-than-expected DPU of 4.16¢ (+13.7% y/y) and distributable income of $100.2m (+14%), but was mainly due to a one-off $6.5m tax writeback (0.271¢/unit). Excluding this, DPU would have been largely in line with expectations.

Gross revenue rose 10.8% to $182.6m, underpinned by acquisition of Aperia and The Kendall, positive rental reversion of 9.1%, led by business parks (+13.2%), and higher occupancy at 40 Penjuru Lane, Aperia and A-REIT City @Jinqiao.

However, NPI grew at a slower pace of 8% to $123.8m, mainly weighed by swelling property services fees (+18.4%) and property taxes (+34.3%).

Overall portfolio occupancy inched 0.2ppt q/q to 89.0%, while weighted average lease to expiry shortened marginally to 3.6 years (1QFY16: 3.7 years).

Aggregate leverage was relatively unchanged at 34.6%, as both average cost of debt and average debt tenor were trimmed to 2.73% (1QFY16: 2.76%) and 3.6 years (1QFY16: 3.8 years) respectively.

As the REIT has locked in 72.1% of borrowings at fixed rates, it estimates a 50bps hike in interest rate will sap distributable income and DPU by $4m and 0.17¢ respectively.

During the quarter, the industrial landlord proposed a maiden acquisition of 26 logistics properties in Australia for A$1.013b, which is expected to be completed by 4Q15. This would increase aggregate leverage to 37.8% (post issue of $300m perpetual securities) and generate an NPI of 6% in the first year.

Meanwhile, BBR Building was divested for $13.9m, and yielded a capital gain of $6.8m.

On asset enhancement initiatives (AEIs), AREIT completed two AEIs worth $30.4m at Techlink & Techview and Honeywell building. The remaining $94.9m of on-going AEIs will likely be completed by 2Q16.

Moving forward, management guided that leases of up to 10.2% of property income are expiring in FY16 and there may be moderate upward reversions on renewal, given that average passing rental rates of these leases are lagging behind market spot rates.

Maybank-KE views the room for positive rental reversions and proposed acquisition of Australian portfolio as catalysts for DPU growth, but noted that business condition will remain challenging as it expects the industry supply glut to start fading only after 2016.

Consequently, the house maintains a Hold rating, but revised TP upwards by 9.6% to $2.28.

Ascendas REIT currently trades at 6.2% annualized yield and 1.2x P/B.

Latest broker rating:
UOBKH maintains Buy with TP of $2.68
OCBC maintains Buy with TP of $2.58
CIMB maintains Add with TP of $2.57
HSBC maintains Hold with TP of $2.50
Maybank-KE maintains Hold, raises TP to $2.28 from $2.08
Deutsche maintains Hold with TP of $2.25