Ascendas REIT - In an enviable position (OCBC)

Maintain BUY

Previous Rating: BUY

Current Price: S$2.04

Fair Value: S$2.23

Good performance expected to continue. Ascendas REIT (A-REIT) had exceeded our expectations for its 2QFY12 results, despite our previous forecasts of a healthy growth in operating performance. Going into 2012, we maintain our prognosis that A-REIT will continue to deliver, thanks to its well-diversified portfolio, and contributions from completed development projects and acquisitions. The group currently holds 94 properties, with a good mix of long and short term leases (48:52) and strong weighted average lease to expiry of ~4.3 years. It also has a pipeline of developments and asset enhancements which are expected to complete in the first quarter of 2012 (e.g. FedEx Singapore Regional Hub, FoodAxis@Senoko). This provides A-REIT with the stability and driver for continued growth in its distributable income.

Occupancy likely to remain resilient. Occupancy rates for 2QFY12 had also held up well, with multi-tenanted building occupancy at 93.0% and overall portfolio occupancy at 96.4%. This represents an improvement in occupancy rates from 92.5% and 96.2% seen in 1QFY12 respectively. While a multitude of factors, including (1) the PMI indicating a contraction in manufacturing for four consecutive months in Oct, (2) softer pace of increase in URA rental indices in 3Q11 and (3) modest GDP growth projection of 1-3% in 2012 by MTI, point to slower growth in economic activity going forward, we believe the impact on A-REIT is likely to be limited. In fact, our check on its historical performance showed that A-REIT had never registered rates below 90.5% and 95.3% for quarterly multitenanted and portfolio occupancy, respectively, over the past five fiscal years (which encompasses the global financial crisis). Thus, we do not expect A-REIT to experience a sharp decline in occupancy in the coming quarters, barring unforeseen circumstances.

Limited credit and cash call risk. As at 30 Sep, A-REIT's aggregate leverage was at 31.5%, a healthy level in our view. Even after funding for all committed investments of ~S$255m (which will see leverage rise to 34.5%), the group still has debt headroom of ~S$555m before reaching the 40% mark. This relatively low leverage places A-REIT in a comfortable position to fund potential investment opportunities and to withstand any negative capital revaluation. According to Moody's recent report on S-REITs, A-REIT's leverage would still come within allowable parameters, and its rating would be safe from downgrade even with a 20% downward revaluation of assets (extreme scenario, in our view). Hence, we also see limited credit and cash call risk at this juncture. Maintain BUY and S$2.23 fair value.