• 3QFY15 DPU inched up 1.4% YoY
• Expect positive rental reversions to continue
• Lower FV and downgrade to HOLD

3QFY15 DPU slightly below expectations

Ascendas REIT (A-REIT) reported its 3QFY15 results with topline meeting our expectations but DPU fell slightly short due to higher-thanexpected property operating expenses. Gross revenue rose 11.2% YoY to S$171.7m, underpinned by contribution from new acquisitions (Aperia and Hyflux Innovation Centre) and higher occupancy at Nexus@one-north and A-REIT City@Jinqiao. However, property operating expenses spiked up by 24.6% to S$57.1m due to higher property tax and other property expenses incurred following the conversion of certain properties from single-tenanted to multi-tenanted lease structures. As a result, DPU grew by a mild 1.4% YoY to 3.59 S cents. For 9MFY15, revenue increased 9.3% to S$499.7m and formed 75.3% of our FY15 forecast. DPU of 10.89 S cents translated into a growth of 1.9% and constituted 73.6% of our full-year projection.

Rental reversion trend remains positive

During 3QFY15, A-REIT managed to achieve positive rental reversions of 7.7% for leases which were renewed. This was driven largely by its Light Industrial (+13.0%) and HiSpecs Industrial (+11.1%) segments. We believe this trend would likely continue going forward, as the weighted average passing rent for most of A-REIT’s multi-tenanted space which are due for renewal in FY15 and FY16 are still below current spot rents. AREIT’s overall portfolio occupancy rebounded on a QoQ basis from 85.6% to 86.8%, meeting our expectations as we had highlighted in our 2QFY15 results note that its occupancy may trough soon.

Downgrade to HOLD

We trim our FY15 and FY16 DPU forecasts by 1.8% and 2.1%, respectively, as we input lower NPI margin assumptions in our model. This causes our DDM-derived fair value estimate to decline slightly from S$2.45 to S$2.42. A-REIT’s share price has performed well YTD, appreciating 5.9%. We believe valuations are now fair, with the stock trading at 1.24x FY15F P/B ratio. This is approximately half a standard deviation above its 5-year average forward P/B ratio of 1.20x. Hence, we downgrade A-REIT to HOLD.

Source: OCBC Research - 25 Jan 2015