Ascendas Reit

DBS Group Research Equity, Oct 17

A-REIT'S Q2-14 results were in line, with gross revenues and net property income increasing by 6 per cent and 4 per cent respectively to S$151.7 million and S$107.1 million.

The higher rental income came mainly from (a) income contribution from the acquisition of The Galen and (b) portfolio growing organically by c3.7 per cent through higher reversionary growth of c11 per cent this quarter and steady occupancy rates on a same-store basis at 94.9 per cent. Weighted all-in interest cost declined to 2.74 per cent, but we expect it to head higher as the group rolls over its debt due in 2014.

Distributable income came in 9 per cent higher at S$86.4 million (including capital distribution relating to Z-Link), translating to a DPU of 3.60 Singapore cents (+2.0 per cent y-o-y).

The recent completion of the acquisition of A-Reit City @ Jinqiao and the completion of the development of Nexus@One North are expected to start contributing in H2-FY14.

While the former is supported by a S$13.5 million rental guarantee (as the property is currently 25.3 per cent pre-committed), the latter has achieved a respectable pre-commitment rate of 73.9 per cent (vs 58 per cent in Q1-13), with a further 7.5 per cent under negotiation.

Looking ahead, A-Reit will be renewing close to 10.5 per cent and 22.4 per cent of its income in FY14 (forecast) and FY15 (forecast) respectively, of which expiring rents are 11-41 per cent below current market levels. This is expected to be complemented by the progressive completion of various developments and asset enhancement projects.

A-Reit has a visible pipeline of projects amounting to S$136.9 million, out of which S$73 million remains unfunded.

Gearing is estimated to remain conservative at c31.5 per cent even after accounting for these developments. Acquisition driven growth is expected to be more selective given a competitive industrial market.

That said, opportunities to grow in the medium term are likely to come from its sponsor Ascendas Group's pipeline of largely Business Park assets, which is understood to be worth up to S$1 billion.

BUY maintained with a revised TP of S$2.37. We tweak our estimates higher by c1.4-2.0 per cent to account for higher than expected reversions and margins, resulting in a revised TP of S$2.37.

We continue to like A-Reit for its stability and attractive yields of c6.1-6.2 per cent.

BUY