A-REIT – MS

Occupancy Stabilizing

Quick Comment: Ascendas Real Estate Investment Trust’s (A-reit) 9M09 NPI and distributable income are 79% and 80% of our full-year estimates, respectively, and with only 2.1% of the portfolio due for renewal in FY10 and rental and occupancy declines moderating, we see upside risks to our estimates. We maintain our Equal-weight rating for A-reit and see limited upside from current levels as a recovery in industrial rents typically lags the economic cycle. Valuations are not particularly attractive, in our view, at 1.3x P/B, flattish DPU growth expected in the next two years, and a dividend yield of 6.3%. We would turn more positive if further acquisitions or built-to-suit properties were to be announced. With leverage at only 31.2% at December 2009, we believe A-reit is sufficiently well capitalized to take advantage of opportunities should they arise.

Occupancy better than expected; upside risk to forecasts: MTB occupancy fell to 93.1% in 3Q09 from 93.3% in 2Q09, and while occupancy continues to decline, the rate of decline appears to have been
arrested. (Exhibit 4) Upcoming industrial supply of ~1.3mn sq m in 2010 remains a concern, but demand from the recovering economy is likely to support occupancy levels.

Rental decline also slowing: Industrial rents are showing surprising resilience given the weak economic environment in 2009. With economic activity likely to improve (MS GDP forecast of 5% for FY10 and FY11), declines in rents are likely to slow. Our main concern lies with FY12 renewals, as rents due for renewal are close to spot and further decline in rents will lead to negative rental reversions in FY12.

Completed built-to suit for Singtel in 3Q09; started on Phase 2 of CBP for Citibank: A-reit completed the construction of the built-to-suit property for Singtel in F3Q10, one quarter ahead of our expectations. With only CBP Ph2 remaining, we believe scope for inorganic growth is limited unless further deals are announced.