Ascendas Reit

DBS Group Research, Jan 21

A-REIT's Q3 2014 results were in line with our expectations. Topline and net property income grew 6.4 per cent and 3.7 per cent to S$154.4 million and S$108.5 million respectively. This was largely due to contributions from its properties, namely Nexus@one-north and A-Reit City@Jinqiao, supported by organic portfolio growth. Rental reversions remained robust and continued to see an uplift of about 9.7 per cent, owing to low passing rents.

Occupancy rates saw a slight dip to 89.7 per cent (83.6 per cent for multi-tenanted properties). Meanwhile, distributable income came in 4.9 per cent higher at S$85.1 million, but DPU dipped 3.54 Singapore cents owing to a larger share base and nil contribution from its China investments (half-year repatriations).

A-Reit continues to offer a steady growth profile over FY2014/15 due to: (i) uplift coming from 21.6 per cent of its income to be renewed in FY2015 which are 14 to 41 per cent below current market levels; (ii) an active pipeline of development and asset enhancement projects (AEI). As of December 2013, A-Reit had a pipeline of S$148 million (S$59 million yet to be funded) worth of ongoing asset enhancements and development projects.

The phased completion of its various development and AEI projects in the subsequent quarters will mean that its growth is likely to see a more significant increase come FY2015. In addition, we understand that A-Reit is likely to acquire the remaining stake in Aperia, a development project in Kallang, by the middle of 2014. We estimate the trust will have sufficient debt- funded capacity to fund these initiatives and should see gearing settle at 34 per cent, which is within management's optimal gearing level.

A-Reit proposed a reduction in its manager's fees, through: (i) a re-calculation of its determination of its base fee, and (ii) a new tiered performance fee structure that ensures payment only upon a DPU growth 2.5 per cent. This new structure aligns itself in favour with unitholders and is estimated to result in an 1.1 per cent uplift in our forward estimates. In addition, A-Reit will change its distribution frequency to semi-annual basis.

We continue to like A-Reit's steady earnings growth profile which is visible and achievable, while maintaining a conservative gearing profile of less than 35 per cent, in our view. Maintain "buy", with target price at S$2.44 based on discounted cash flow.

BUY