• 2QFY17 recurrent DPU grew 3.6% YoY
• Softer rental reversions in Singapore
• Improved gearing ratio

2QFY17 results in-line with our expectations

Ascendas REIT (A-REIT) reported its 2QFY17 results which met our expectations. Gross revenue jumped 12.5% YoY to S$205.4m. DPU fell 3.1% YoY to 4.03 S cents, but this was because 2QFY16’s DPU was boosted by a one-off S$6.5m (~0.271 cents/unit) distribution of taxable income from operations arising from a rollover adjustment related to a ruling by IRAS on the non-deductibility of certain upfront fees incurred in FY09/10 for certain credit facilities.

If we exclude this, A-REIT’s 2QFY17 recurrent DPU would have grown by 3.6% YoY. On a 1HFY17 basis, A-REIT’s gross revenue increased 13.7% to S$413.0m and formed 49.4% of our full-year forecast. DPU of 7.912 S cents was down 1.1% (but recurrent DPU rose 2.4%) and constituted 51.0% of our FY17 projection.

Growing its portfolio inorganically

Operationally, A-REIT registered positive rental reversions of 0.9% for its Singapore portfolio, as positive rental uplifts for its Business & Science Parks (+2.8%) and Light Industrial (+0.3%) segments were partially offset by Hi-Specs Industrial (-1.1%) and Logistics & Distribution Centres (-4.8%). Overall portfolio occupancy was 89.1% (+0.9 ppt QoQ). During the quarter, AREIT announced its maiden business park acquisition in Sydney, Australia, and a forward purchase of a logistics property in Melbourne, Australia, for an aggregate purchase consideration of A$168.2m.

Maintain BUY

We pare our FY16 and FY17 DPU forecasts by 1.6% and 5.0%, respectively, as we assume full conversion of A-REIT’s Exchangeable Collateralised Securities into new units. However, we also lower our cost of equity assumption from 7.5% to 7.2% to take into account A-REIT’s healthier balance sheet (gearing lowered from 37.0% to 34.2%), more diversified portfolio and reduced exposure to China, an emerging market.

Consequently, our fair value estimate increases marginally from S$2.66 to S$2.67. Despite our lower DPU projections, A-REIT still offers investors an attractive distribution yield of 6.4% for FY17F and FY18F. It is also trading at a yield spread of 456 bps against the Singapore Government 10-year bond yield, which is ~0.3 standard deviation above the 5-year mean. Maintain BUY.

Source: OCBC Research - 21 Oct 2016