SINGAPORE (Apr 26): Jefferies is maintaining Ascendas India Trust at “buy” with $1.20 target price as logistics could be a high-growth area to diversify into to offset any saturation in business park demand.

In a Wednesday report, analyst Krishna Guha says a-iTrust continues to deliver high single-digit DPU growth despite the recent backing up in yields and depreciation of SGD/INR exchange rate.

In 4Q18, a-iTrust reported a 8% rise in DPU to 1.65 cents. Growth was driven by contribution from new properties and positive rental reversions, which more than offset the impact of a higher number of units.

See: Ascendas India Trust reports 8% higher 4Q18 DPU of 1.65 cents as property income rises

Net property income grew 15% in 4Q18 or 23% for full year. Growth was driven by income from Victor, BlueRidge2, aVance4, Atria in The V, and Arshiya warehouses as well as positive rental reversions in Chennai and Hyderabad.

a-iTrust saw healthy portfolio occupancy and positive reversions. Committed portfolio occupancy was 95%. Occupancy at BlueRidge 2 improved to 81% with another 6.7% of space under advanced discussions. ITPC, Chennai continues to witness strong rental reversion with 17% growth in in-place rents while Hyderabad and Bangalore are growing at 7% and 1% respectively. Overall, in-place rents are growing 5% annually.

Meanwhile, office demand-supply metrics in various micro markets are improving, says Guha. According to CBRE, as of 1Q18, vacancy rates in Bangalore, Hyderabad and Chennai region are flat or declining although Pune is experiencing higher vacancy on the back of new supply.

Capital management by a-iTrust manager was prudent. Following a $100 million private placement in February, gearing is now 26.4%. For the full year, effective weighted average cost of debt is 6.3%. While the base rate is increasing, 86% is fixed rate debt and a-iTrust’s hedging policy is likely to mitigate the impact.

a-iTrust’s portfolio value grew 27.8% in INR terms from last year. Cap rates compressed another 75 bps to 9%. There were also some fair value gains in the recently acquired warehouse portfolio.

Guha says anecdotal evidence suggests transaction cap rates are 100 bps lower but this is likely driven by ample liquidity rather than robust fundamentals. As such, while there is room for further compression on a transactional basis, the portfolio is likely to be valued conservatively.

In the quarter, a-iTrust received in-principle approval to add 2.8 million sf in The V by redevelopment in multiple phases over the next 7 to 10 years. In phase 1, a net 1 million sf of space will be added at an expected development cost of $85-90 psf and yield of 15-17%. In addition, a-iTrust is currently constructing a new 500,000 sf building in ITPB.

“When these two developments are completed, the portfolio floor area will grow by 11% from 12.8 million sf to 14.2 million sf,” adds Guha.

As at 11.46am, units in a-iTrust are trading 1 cent higher at $1.02 giving it a FY18 DPU yield of 6.1 cents.