A-REIT : OCBC
Slowing down
DPU growth slowed on fewer acquisitions. Ascendas REIT (AREIT) reported its 4Q07 results with revenue rising 16% YoY to S$74.0m and with its distribution per unit (DPU) at 3.3 cents (+13% YoY). FY DPU was 12.75 cents (+9% YoY) and in line with our forecast. While FY DPU grew it was less than half of the 22% achieved in FY06. The growth deceleration reflects the slower rate of acquisition.
No guidance for acquisition in FY08. Historically most of AREIT’s earnings growth has been on the back of acquisitions of domestic assets. In FY07, AREIT only acquired assets worth S$488m, well below that achieved in FY06 of S$656m and S$1,000m in FY05. AREIT has not given any guidance with respect to acquisitions in FY08, but it has a long-term target of S$400m per year. However, we see the current slower pace of acquisition and hence DPU growth as probably here to stay. Nevertheless, AREIT does have about S$148m worth of acquisitions previously announced but yet to complete. These assets are presently being constructed and S&P agreement is not expected to complete until the buildings are physical completed towards the end of FY08. So these acquisitions are unlikely to boost earnings meaningfully for AREIT in FY08.
Market competition is intensifying. The industrial market space is definitely getting more competitive. There are three industrial REIT players in the market, i.e. AREIT, Mapletree Logistics Trust and Cambridge Industrial Trust. A fourth player, MacarthurCook Industrial REIT, is to be listed today and JTC REIT could be listed in 2008. Growth strategies of these REITs vary very little, as they all adopt the same acquisition-led growth strategy. Hence we do not anticipate competitive pressures to buy assets to get any easier.
Maintain HOLD. The key worry is AREIT’s high price-to-book ratio of about 1.7 times. This implies that the market continues to anticipate strong growth. With the industrial REIT space getting very crowded, we see a high risk of market being disappointed. Hence AREIT has to either moderate expectation or alternatively propose a new approach to growth. Nevertheless, we have allowed for AREIT’s asset size to increase from its current S$3.3b to S$4.0bn over the next 2 years. On the target asset size basis, our fair value remains at S$2.31. We maintain our HOLD rating.