Ascendas REIT: A-Grade REIT, but limited upside at current price level (OCBC)

Diversified portfolio. Ascendas REIT (A-REIT) is one of the more defensive names in the industrial REITs space. As a market leader, the group holds a diversified portfolio of 93 properties in Singapore, and houses a tenant base of ~990 customers. YTD, A-REIT has continued to make a number of acquisitions, developments and asset enhancement initiatives. We expect these investments, together with other potential opportunities, to continue to drive rental and hence DPU growth when they are completed.

No immediate refinancing needs. Based on last reported total borrowings of S$1.56b, we estimate A-REIT has ~S$1b of additional debt headroom before it reaches an aggregate leverage of 40%. This provides the group more than enough ammunition for further acquisitions. Moreover, it is in the process of finalizing the rolling over a S$200m committed revolving credit facility due in Nov to 2016. With that, A-REIT would have no major refinancing needs until 2013.

Market outlook still positive. In its 1QFY12 results, A-REIT anticipated the global growth to moderate in 2H11, with forward-looking indicators such as Purchasing Managers' Indices pointing to slower pace of economic activity. We voiced our concern in our recent discussion with management that this may have a negative impact on its operating performance. However, A-REIT shared with us that it was still business as usual for most of its accounts, and there have been no significant signs of downsizing or scaleback in expansion. In fact, management revealed that the majority of its leases have passing rents that are below the existing market rents. As the group has 10% of its revenue due for renewal, it could potentially achieve positive rental rate reversions for majority of these leases for the rest of 2011 and even 2012, should the economy do not deteriorate drastically.

Maintain HOLD rating. We now value A-REIT using a Dividend Discount Model, in line with the current industry practice. We derive a fair value of S$2.17, implying a P/B of 1.21. This is in line with its 5-year historical median of 1.25. At current price level, however, A-REIT is trading at a premium to the average S-REIT P/B of 0.9. While we think this is justified given its market leadership in the industrial REITs segment, we note that its FY12-13F DPU yields of 5.9-6.2% are not particularly attractive, which also pale in comparison to the sector average of over 7%. In view of these factors and limited upside to our fair value, we maintain our HOLD rating.