Ascendas Real Estate - 2QFY16 results ahead on write backs, muted rental reversion outlook

AREIT reported 2QFY16 DPU of 4.16cts (+13.7%YoY, +8.3% QoQ), bringing 1H DPU to 8.0cts, 52% of our FY forecast of 15.52cts. However, this was boosted by S$6.5m (0.27cts/sh) in tax write backs arising from upfront financing fee. Excluding the impact, 1H results would have represented 50% of our FY forecast. Management expects approximately S$3m in additional write backs at a later date. 2Q revenue and NPI rose 10.8% and 8.0% respectively, as contributions from the Aperia, the Kendall and recent AEI completions were offset by higher utilities and property tax expenses.

Operating dynamics holding up, but rental reversions continue to moderate
Portfolio occupancy rose to 89% vs 88.8% in 1Q, with MTB occupancy now at 85%. Rental reversions averaged 9.1%, up from 6.6% in 1Q on account of Business Park reversions, which rose 13.2%. Logistics reversions averaged 4.8% in 2Q, Light Industrial 5.5% and Hi-Spec Industrial 2%, all slightly below 3oU TGXGTUKQPU We believe that the outlook for rental reversions remains challenging, with passing FY16/17 rents broadly on par with current market rents. AREIT has 10 single tenanted buildings up for renewal in FY16, of which 1 has been converted to multi-tenant, 1 divested, and 1 redeveloped. 4 have renewed already with 3 under negotiation. In FY17, AREIT will have 6 STBs up for renewal, of which 1 (c.12k sqm) will be converted to MTB use, and the balance under negotiation.

Capital management remains prudent
Following the acquisition of its Australian portfolio, aggregate leverage is expected to rise to 37.8% from 34.6% currently. The acquisition is expected to complete in 4Q15, and has issued S$300m in 4.75% perpetuities to fund the acquisition. Following the FX hedge, the perpetuities are expected to yield c.5% in AUD terms. AREIT has also fixed 72.1% of its interest rate exposure, with a weighted all-in cost of 2.73%.

Technical Analysis
Daily Chart
Maintain Hold, S$2.25 target price
We maintain our Hold recommendation, with valuations fair at 1.16xP/B, vs. its long term average of 1.3x and FY16 yield of 6.3%, implying a 386bps spread over the 10-yr bond, 48bps narrower than its historical average of 434bps. (Read Report)

Read Related Reports
1) Ascendas REIT - Stable outlook by CIMB Research, published on 23 October 2015

2) Ascendas REIT - 1H FY16 in line; strong business park reversions of 13% by Credit Suisse Asia Pacific Equity Research, published on 23 October 2015

3) Ascendas REIT - Beat Expectations by Maybank Kim Eng Research, published on 23 October 2015

4) Ascendas REIT - Sturdy results; one-off boost to DPU‏ by OCBC Investment Research, published on 23 October 2015

5) Ascendas REIT - Stellar Quarterly Results by RHB Research, published on 23 October 2015

6) Ascendas REIT - Slowly improving by Daiwa Capital Markets, published on 22 October 2015

7) Ascendas REIT - Hold: In line with expectations by HSBC Global Research, published on 22 October 2015

Source : Deutsche Bank Markets Research

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