Valuations looking compelling now
We are turning positive on Ascendas REIT (AREIT). Its unit price has fallen by 22.7% from its peak of S$2.86 on 15 Apr (FTSE ST REIT Index: -14.9%), due partly to concerns on an early tapering of US Federal Reserve’s quantitative easing programme and accompanying hike in interest rates. At present, A-REIT is trading at 1.14x P/B, even lower than some of its peers’ P/B ratios in the industrial REIT space, which are hovering around the 1.2x mark. In addition, A-REIT’s forward DPU yield of 7.2% is comparable to the subsector average yield of 7.5%. This is despite the fact that A-REIT is the largest Singapore-listed industrial landlord by market cap and portfolio size (102 properties diversified across all property types), which should trade at a premium to its counterparts in our view.
Limited impact on DPU and book value
Based on our analysis on interest rates, we believe that the impact on A-REIT’s DPU and book value is likely to be limited, as a considerable 74.8% of its total debt is fixed and the weighted average term of debt is a long 3.9 years. Specifically, we estimate that a 1ppt increase in interest costs may likely lead to a 1.5% drop in our FY13F DPU – still within our comfortable range. We also observe that the cap rates for A-REIT’s portfolio has been tracking around circa 6.6%-7.4%, or at a relatively tight spread of 80bps, over 2008-12 despite the credit crunch. Hence, we believe that A-REIT’s asset values are likely to remain largely stable even if the rates face upward pressures.
Upgrade to BUY
A-REIT’s DPU is backed by healthy leasing demand and
rental rates (positive rental reversions likely to persist in FY14, albeit at slower pace). A number of A-REIT’s committed investments are also expected to complete within the year, and will contribute positively to its FY14 rental income. We revise our fair value from S$2.63 to S$2.45 to reflect current higher risk-free rates but upgrade A-REIT from Hold to BUY on attractive upside potential.
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