Ascendas REIT

OCBC on 11 Sept 2012

Ascendas REIT (A-REIT) has been actively involved in capital recycling activities YTD in a bid to optimize its portfolio yield. Following the proposed sale of 6 Pioneer Walk in Jun, we note that A-REIT had on 24 Aug announced the divestment of another property, Block 5006 Techplace II, for S$38m. Based on our estimates, the proceeds may likely relieve its interest burden going forward and may potentially add 0.01 S cents to its FY14F DPU. For the rest of FY13, we believe A-REIT will deliver a stable set of performance, supported by full-year contributions from its past investments. However, we are maintaining our cautious view on its significant exposure (34% by valuation) to the business/science park segment, which has been seeing downward pressure on occupancy and rental rates. On a positive note, we understand that the current market rents are 16-35% higher than the average passing rents for the areas due for renewal. As such, we believe A-REIT will still put in a stable set of results. We maintain our HOLD rating on A-REIT with a revised fair value of S$2.28 (S$2.27 previously).

Divestment of Block 5006 Techplace II
Ascendas REIT (A-REIT) has been actively involved in capital recycling activities YTD in a bid to optimize its portfolio yield. Following the proposed sale of 6 Pioneer Walk in Jun, we note that A-REIT had on 24 Aug announced the divestment of another property, Block 5006 Techplace II, for S$38m. According to management, the proforma impact on A-REIT’s FY12 NPI and DPU would be approximately S$1.46m and 0.01 S cents respectively, assuming the divestment was completed on 1 Apr 2011. However, based on our estimates, the proceeds are likely to relieve its interest burden and may potentially add 0.01 S cents to its FY14F DPU.

Maintain caution on business/science park segment
For the rest of FY13, we believe A-REIT will deliver a stable set of performance, supported by full-year contributions from its past investments. We are only cautious on its significant exposure (34% by valuation) to the business/science park segment. According to CBRE’s latest Real Estate Research Report, the occupancy rate for this segment had declined for three consecutive quarters to reach 91.7% in 2Q12, while its rents had declined four straight quarters to hit S$3.70 psf/month. For the rest of 2012, CBRE projects the downward pressure on occupancy and rents to continue, with a 6% correction in rents expected for 2H12. Hence, we are maintaining caution on A-REIT’s business/science park space. On a positive note, we understand that the current market rents are 16-35% higher than the average passing rents for the areas due for renewal. As such, we believe A-REIT will still put in a stable set of results.

Maintain HOLD
We are tweaking our estimates for FY13-14 to reflect the divestment. Our fair value is now revised to S$2.28 from S$2.27 previously. However, at current price level, we believe A-REIT’s P/B ratio is not very compelling at 1.25x. Its FY13F DPU yield of 5.9% is also lower than the industrial REIT subsector average of 7.2%. Maintain HOLD.