• 3QFY14 DPU down 2.2% YoY
• Positive revisions of 9.7% achieved
• Aggregate leverage robust at 30.7%

3QFY14 results within expectations

Ascendas REIT (A-REIT) reported 3QFY14 NPI of S$108.6m and distributable income of S$85.1m, up 3.7% and 4.9% YoY respectively. The growth was mainly due to higher rental income from The Galen, contribution from Nexus@one-north and AREIT City@Jinqiao, and tax-exempt finance lease income received from a tenant. DPU for the quarter eased 2.2% YoY to 3.54 S cents due to a larger unit base, but was within our expectations given that 9MFY14 DPU of 10.69 S cents formed 75.6% of our full-year DPU forecast (75.3% of consensus).

Leasing activities remained healthy

As management has previously guided, the portfolio occupancy fell marginally from 90.1% in Sep 2013 to 89.7% due to nonrenewal of tenants and a 1.7% increase in NLA following the completion of asset enhancement initiatives (AEIs) at 1 Changi Business Park Ave 1 and Techplace II. Nevertheless, leasing demand remained in the positive territory in our view, as A-REIT has continued to reduce its lease expiries (5.3% of FY14 rental income left for renewal vs. 10.5% a quarter ago). In addition, positive rental reversion averaging 9.7% was still achieved for the quarter. While there could be further transitory occupancy pressure for the rest of FY14, A-REIT maintains that positive reversions are still expected, while upside in NPI is possible as the vacant spaces are leased out in due course.

Maintain BUY

A-REIT also proposed some changes to its fee structure – a move we view positively as it would reduce the fee payable to the REIT Manager in favour of unitholders with effect from FY15. In addition, A-REIT will make distributions on a semi-annual basis to align with the payout from its China properties (currently on semi-annual distribution) and reduce the volatility seen in its quarterly DPU. For the quarter, A-REIT announced one new AEI - S$44.6m rejuvenation work at The Alpha. Aggregate leverage is expected to remain healthy at 30.7% after funding the committed investments. We are keeping our FY14 forecasts unchanged as the results were within view. However, we trim our fair value from S$2.45 to S$2.40 on higher equity risk premium. Maintain BUY.

Source: OCBC Research - 20 Jan 2014