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Stability Key To AREIT, But Is Growth Forthcoming?
Tradeable, Tradeable Ideas | 23 April 2014
By: Raymond Leung
Articles (142) Profile
  1. Ascendas REIT (AREIT) released FY14 results that were largely in line with expectations.
  2. Debt profile remains an issue as more than half of its debt is pegged to a floating interest rate; interest expenses will rise when global interest rates rise.
  3. Influx of industrial properties could also bode ill winds as AREIT tries to use asset enhancement as a way of bettering the market.

Earlier this week, Ascendas REIT (AREIT) released their FY2014 results which were in line with expectations from analysts. Net property income grew 6.6 percent to $436 million due to higher rental reversion while the distributable amount increased by 11.9 percent.

The strong growth in distributable amount was attributed to the sale of 2 properties. For 4Q13, AREIT announced a DPU of $0.0355 which brought the total DPU for FY14 to $0.1424.

Based on the closing price of $2.36 (22/4/2014), the yield of the REIT stands at 6 percent for the year. AREIT is currently trading on “cum” dividend and will trade on “Ex” basis from 25 April.

In FY15, AREIT is expected to complete another divestment of a property located at 1 Kallang Place by 2Q15. As at 31 March 2014, the property was valued at $10.5 million and will be sold to Flextronics Manufacturing.

Last year, AREIT added 3 properties to its portfolio while completing six asset enhancements. The additional properties were added through the completion of two developments in Singapore while acquiring another property in Shanghai, China.

As a way to unlock more value in its current properties, AREIT’s manager initiated asset enhancements at these properties. The manager will expect higher rental reversion for the properties that have gone through these enhancements.

Debt level of AREIT was increased by 1.7 percent in FY14 but remains healthy at 30 percent. The debt level is expected to increase by another 1.2 percent in FY15.

Maturity of its debts are well spread with less than 20 percent of it due for refinancing in any single year. However, only 65.3 percent of its debts are hedged while the rest will be based on floating rates.

Source: Debt Maturity, Ascendas REIT, FY2013 Presentation

Source: Impact of Interest Hike, Ascendas REIT, FY2013 Presentation

Occupancy rate for the trust is not exceptionally high in comparison to the market data provided by the Urban Redevelopment Authority.

AREIT has an average lease expiry of 3.9 years with more than 60 percent being due in the period between FY15 to FY17. This is unfavorable for the trust as an increase in supply of industrial properties will be expected at FY16 and FY17.

Source: Lease Expiry, Ascendas REIT, FY2013 Presentation

The influx in supply of industrial properties in Singapore will likely increase the difficulty in finding tenants and pressure in rentals. In order to compete with these new properties, the manager has more asset enhancement initiatives in plans.

Barring any unforeseen circumstances, we believe that the upside of AREIT is limited as the trust is fairly priced. Pressure on the yield due to cost of debt and the increase in supply of industrial properties in the future are two important factors that investors should consider before making any investment decisions.

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Trained in fund management, Raymond is familiar with shares and various investment vehicles.

Please click here for more information about this author.

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