Friday 11 October 2013

Ascendas REIT

OCBC on 8 Oct 2013

We are positive that Ascendas REIT (A-REIT) will put up a firm showing in FY14, as it is likely to benefit not only from incremental rental income from The Galen and continued positive rental reversions, but also from the completion of its various investment projects. While the industrial property market was relatively static in 3Q13 amid uncertainty in the manufacturing economy, we understand that the demand in the high-tech and business park segments has continued to hold up well. Given A-REIT’s significant exposure in these sub-markets, we believe A-REIT is in better position to shield off any fatigue in the industrial rental market. Maintain BUY and S$2.45 fair value on A-REIT.

Upbeat on FY14 performance
We are positive that Ascendas REIT (A-REIT) will put up a firm showing in FY14, as it is likely to benefit not only from incremental rental income from The Galen and continued positive rental reversions, but also from the completion of its various investment projects. In mid-Jul, we note that A-REIT has completed the purchase of A-REIT City@Jinqiao in China for ~S$122.3m, with a rental guarantee of S$13.5m (yield-to-cost of 11.0%). In Sep, A-REIT also announced that the development of Nexus@one-north has obtained its temporary occupation permit, and that the building has achieved a 58.3% pre-commitment. According to a Sep-end report by property consultant DTZ, committed occupancy at the property was estimated to reach 75%. These new properties, together with conclusion of the asset enhancement initiatives at five of its portfolio properties in 2H13, are likely to boost A-REIT’s rental income in the months ahead.

In a brighter spot
While the industrial property market was relatively static in 3Q13 amid uncertainty in the manufacturing economy, we understand that the demand in the high-tech and business park segments has continued to hold up well. This was sustained by qualifying companies taking opportunities to co-locate or expand their operations and by tenants that were displaced from buildings due for redevelopment, according to DTZ. For 2013 and 2014, DTZ projects the business park rental rates to increase by 3.0% and 4.0% respectively. Given A-REIT’s significant exposure in these sub-markets (62% by asset value), we believe A-REIT is in better position to shield off any fatigue in the industrial rental market.

Maintain BUY
At an aggregate leverage of 28.6% as at 30 Jun, A-REIT also has one of the strongest financial positions within the industrial REIT space. ~68.1% of its interest rates are fixed/hedged, which should limit the impact of rising interest rates. With the recent redemption of its relatively expensive S$125m 5% fixed-rate notes, we would not be surprised that A-REIT also gains from interest savings. Maintain BUY and S$2.45 fair value on A-REIT.

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